S 1232 Session 109 (1991-1992)
S 1232 General Bill, By Hayes, Bryan, Leventis, M.T. Rose and H.S. Stilwell
A Bill to amend Chapter 3 of Title 36, Code of Laws of South Carolina, 1976,
relating to the Uniform Commercial Code regarding negotiable instruments, so
as to revise the article in its entirety; to amend Chapter 4 of Title 36,
relating to bank deposits and collections, so as to conform to the changes in
Chapter 3; to amend Sections 36-1-201, as amended, and 36-1-207, relating to
general provisions of the Uniform Commercial Code, so as to conform to the
changes in Chapter 3; and to amend Section 36-2-511, relating to tender of
payment in sales chapter, so as to conform to the changes in Chapter 3.
01/28/92 Senate Introduced and read first time SJ-9
01/28/92 Senate Referred to Committee on Judiciary SJ-9
03/12/92 Senate Recalled from Committee on Judiciary SJ-5
03/12/92 Senate Committed to Committee on Banking and Insurance SJ-6
A BILL
TO AMEND CHAPTER 3 OF TITLE 36, CODE OF LAWS
OF SOUTH CAROLINA, 1976, RELATING TO THE
UNIFORM COMMERCIAL CODE REGARDING
NEGOTIABLE INSTRUMENTS, SO AS TO REVISE THE
ARTICLE IN ITS ENTIRETY; TO AMEND CHAPTER 4 OF
TITLE 36, RELATING TO BANK DEPOSITS AND
COLLECTIONS, SO AS TO CONFORM TO THE CHANGES
IN CHAPTER 3; TO AMEND SECTIONS 36-1-201, AS
AMENDED, AND 36-1-207, RELATING TO GENERAL
PROVISIONS OF THE UNIFORM COMMERCIAL CODE,
SO AS TO CONFORM TO THE CHANGES IN CHAPTER 3;
AND TO AMEND SECTION 36-2-511, RELATING TO
TENDER OF PAYMENT IN SALES CHAPTER, SO AS TO
CONFORM TO THE CHANGES IN CHAPTER 3.
Be it enacted by the General Assembly of the State of South
Carolina:
SECTION 1. Article 3 of Title 36 of the 1976 Code is
amended to read:
"CHAPTER 3
Commercial Code - Commercial Paper
Part 1
Short Title, Form and Interpretation
Section 36-3-101. This chapter shall be known and may be
cited as Uniform Commercial Code Commercial Paper.
Section 36-3-102. (1) In this chapter unless the context
otherwise requires
(a) `Issue' means the first delivery of an instrument to a
holder or a remitter.
(b) An `order' is a direction to pay and must be more than
an authorization or request. It must identify the person to pay
with reasonable certainty. It may be addressed to one or more
such persons jointly or in the alternative but not in succession.
(c) A `promise' is an undertaking to pay and must be
more than an acknowledgment of an obligation.
(d) `Secondary party' means a drawer or endorser.
(e) `Instrument' means a negotiable instrument.
(2) Other definitions applying to this chapter and the
sections in which they appear are:
`Acceptance.' Section 36-3-410.
`Accommodation party.' Section 36-3-415.
`Alteration.' Section 36-3-407.
`Certificate of deposit.' Section 36-3-104.
`Certification.' Section 36-3-411.
`Check.' Section 36-3-104.
`Definite time.' Section 36-3-109.
`Dishonor.' Section 36-3-507.
`Draft.' Section 36-3-104.
`Holder in due course.' Section 36-3-302.
`Negotiation.' Section 36-3-202.
`Note.' Section 36-3-104.
`Notice of dishonor.' Section 36-3-508.
`On demand.' Section 36-3-108.
`Presentment.' Section 36-3-504.
`Protest.' Section 36-3-509.
`Restrictive indorsement.' Section 36-3-205.
`Signature.' Section 36-3-401.
(3) The following definitions in other chapters apply to this
chapter:
`Account.' Section 36-4-104.
`Banking day.' Section 36-4-104.
`Clearing house.' Section 36-4-104.
`Collecting bank.' Section 36-4-105.
`Customer.' Section 36-4-104.
`Depositary bank.' Section 36-3-105.
`Documentary draft.' Section 36-4-104.
`Intermediary bank.' Section 36-4-105.
`Item.' Section 36-4-104.
`Midnight deadline.' Section 36-4-104.
`Payor bank.' Section 36-4-105.
(4) In addition Chapter 1 of Title 36 contains general
definitions and principles of construction and interpretation
applicable throughout this chapter.
Section 36-3-103. (1) This chapter does not apply to money,
documents of title or investment securities.
(2) The provisions of this chapter are subject to the
provisions of the chapter on bank deposits and collections
(Chapter 4) and secured transactions (Chapter 9).
Section 36-3-104. (1) Any writing to be a negotiable
instrument within this chapter must
(a) be signed by the maker or drawer; and
(b) contain an unconditional promise or order to pay a
sum certain in money and no other promise, order, obligation
or power given by the maker or drawer except as authorized by
this chapter; and
(c) be payable on demand or at a definite time; and
(d) be payable to order or to bearer.
(2) A writing which complies with the requirements of this
section is
(a) a `draft' (`bill of exchange') if it is an order;
(b) a `check' if it is a draft drawn on a bank and payable
on demand;
(c) a `certificate of deposit' if it is an acknowledgment by
a bank of receipt of money with an engagement to repay it;
(d) a `note' if it is a promise other than a certificate of
deposit.
(3) As used in other chapters of this act, and as the context
may require, the terms `draft,' `check,' `certificate of deposit'
and `note' may refer to instruments which are not negotiable
within this chapter as well as to instruments which are so
negotiable.
Section 36-3-105. (1) A promise or order otherwise
unconditional is not made conditional by the fact that the
instrument
(a) is subject to implied or constructive conditions; or
(b) states its consideration, whether performed or
promised, or the transaction which gave rise to the instrument,
or that the promise or order is made or the instrument matures
in accordance with or `as per' such transaction; or
(c) refers to or states that it arises out of a separate
agreement or refers to a separate agreement for rights as to
prepayment or acceleration; or
(d) states that it is drawn under a letter of credit; or
(e) states that it is secured, whether by mortgage,
reservation of title or otherwise; or
(f) indicates a particular account to be debited or any
other fund or source from which reimbursement is expected; or
(g) is limited to payment out of a particular fund or the
proceeds of a particular source, if the instrument is issued by a
government or governmental agency or unit; or
(h) is limited to payment out of the entire assets of a
partnership, unincorporated association, trust or estate by or on
behalf of which the instrument is issued.
(2) A promise or order is not unconditional if the instrument
(a) states that it is subject to or governed by any other
agreement; or
(b) states that it is to be paid only out of a particular fund
or source except as provided in this section.
Section 36-3-106. (1) The sum payable is a sum certain
even though it is to be paid
(a) with stated interest or by stated installments; or
(b) with stated different rates of interest before and after
default or a specified date; or
(c) with a stated discount or addition if paid before or
after the date fixed for payment; or
(d) with exchange or less exchange, whether at a fixed
rate or at the current rate; or
(e) with costs of collection or an attorney's fee or both
upon default.
(2) Nothing in this section shall validate any term which is
otherwise illegal.
Section 36-3-107. (1) An instrument is payable in money if
the medium of exchange in which it is payable is money at the
time the instrument is made. An instrument payable in
`currency` or 'current funds' is payable in money.
(2) A promise or order to pay a sum stated in a foreign
currency is for a sum certain in money and, unless a different
medium of payment is specified in the instrument, may be
satisfied by payment of that number of dollars which the stated
foreign currency will purchase at the buying sight rate for that
currency on the day on which the instrument is payable or, if
payable on demand, on the day of demand. If such an
instrument specifies a foreign currency as the medium of
payment the instrument is payable in that currency.
Section 36-3-108. Instruments payable on demand include
those payable at sight or on presentation and those in which no
time for payment is stated.
Section 36-3-109. (1) An instrument is payable at a definite
time if by its terms it is payable
(a) on or before a stated date or at a fixed period after a
stated date; or
(b) at a fixed period after sight; or
(c) at a definite time subject to any acceleration; or
(d) at a definite time subject to extension at the option of
the holder, or to extension to a further definite time at the
option of the maker or acceptor or automatically upon or after
a specified act or event.
(2) An instrument which by its terms is otherwise payable
only upon an act or event uncertain as to time of occurrence is
not payable at a definite time even though the act or event has
occurred.
Section 36-3-110. (1) An instrument is payable to order
when by its terms it is payable to the order or assigns of any
person therein specified with reasonable certainty, or to him or
his order, or when it is conspicuously designated on its face as
'exchange' or the like and names a payee. It may be payable to
the order of
(a) the maker or drawer; or
(b) the drawee; or
(c) a payee who is not maker, drawer or drawee; or
(d) two or more payees together or in the alternative; or
(e) an estate, trust or fund, in which case it is payable to
the order of the representative of such estate, trust or fund or his
successors; or
(f) an office, or an officer by his title as such in which
case it is payable to the principal but the incumbent of the
office or his successors may act as if he or they were the holder;
or
(g) a partnership or unincorporated association, in which
case it is payable to the partnership or association and may be
indorsed or transferred by any person thereto authorized.
(2) An instrument not payable to order is not made so
payable by such words as `payable upon return of this
instrument properly indorsed.'
(3) An instrument made payable both to order and to bearer
is payable to order unless the bearer words are handwritten or
typewritten.
Section 36-3-111. An instrument is payable to bearer when
by its terms it is payable to
(a) bearer or the order of bearer; or
(b) a specified person or bearer; or
(c) `cash' or the order of `cash,' or any other indication
which does not purport to designate a specific payee.
Section 36-3-112. (1) The negotiability of an instrument is
not affected by
(a) the omission of a statement of any consideration or of
the place where the instrument is drawn or payable; or
(b) a statement that collateral has been given to secure
obligations either on the instrument or otherwise of an obligor
on the instrument or that in case of default on those obligations
the holder may realize on or dispose of the collateral; or
(c) a promise or power to maintain or protect collateral or
to give additional collateral; or
(d) a term authorizing a confession of judgment on the
instrument if it is not paid when due; or
(e) a term purporting to waive the benefit of any law
intended for the advantage or protection of any obligor; or
(f) a term in a draft providing that the payee by indorsing
or cashing it acknowledges full satisfaction of an obligation of
the drawer; or
(g) a statement in a draft drawn in a set of parts (Section
36-3-801) to the effect that the order is effective only if no
other part has been honored.
(2) Nothing in this section shall validate any term which is
otherwise illegal.
Section 36-3-113. An instrument otherwise negotiable is
within this chapter even though it is under a seal.
Section 36-3-114. (1) The negotiability of an instrument is
not affected by the fact that it is undated, antedated or
postdated.
(2) Where an instrument is antedated or postdated the time
when it is payable is determined by the stated date if the
instrument is payable on demand or at a fixed period after date.
(3) Where the instrument or any signature thereon is dated,
the date is presumed to be correct.
Section 36-3-115. (1) When a paper whose contents at the
time of signing show that it is intended to become an
instrument is signed while still incomplete in any necessary
respect it cannot be enforced until completed, but when it is
completed in accordance with authority given it is effective as
completed.
(2) If the completion is unauthorized the rules as to material
alteration apply (Section 36-3-407), even though the paper was
not delivered by the maker or drawer; but the burden of
establishing that any completion is unauthorized is on the party
so asserting.
Section 36-3-116. An instrument payable to the order of
two or more persons
(a) if in the alternative is payable to any one of them and
may be negotiated, discharged or enforced by any of them who
has possession of it;
(b) if not in the alternative is payable to all of them and may
be negotiated, discharged or enforced only by all of them.
Section 36-3-117. An instrument made payable to a named
person with the addition of words describing him
(a) as agent or officer of a specified person is payable to his
principal but the agent or officer may act as if he were the
holder;
(b) as any other fiduciary for a specified person or purpose
is payable to the payee and may be negotiated, discharged or
enforced by him;
(c) in any other manner is payable to the payee
unconditionally and the additional words are without effect on
subsequent parties.
Section 36-3-118. The following rules apply to every
instrument:
(a) Where there is doubt whether the instrument is a draft or
a note the holder may treat it as either. A draft drawn on the
drawer is effective as a note.
(b) Handwritten terms control typewritten and printed terms,
and typewritten control printed.
(c) Words control figures except that if the words are
ambiguous figures control.
(d) Unless otherwise specified a provision for interest means
interest at the judgment rate at the place of payment from the
date of the instrument, or if it is undated from the date of issue.
(e) Unless the instrument otherwise specifies two or more
persons who sign as maker, acceptor or drawer or indorser and
as a part of the same transaction are jointly and severally liable
even though the instrument contains such words as `I promise
to pay.'
(f) Unless otherwise specified consent to extension
authorizes a single extension for not longer than the original
period. A consent to extension, expressed in the instrument, is
binding on secondary parties and accommodation makers. A
holder may not exercise his option to extend an instrument over
the objection of a maker or acceptor or other party who in
accordance with Section 36-3-604 tenders full payment when
the instrument is due.
Section 36-3-119. (1) As between the obligor and his
immediate obligee or any transferee the terms of an instrument
may be modified or affected by any other written agreement
executed as a part of the same transaction, except that a holder
in due course is not affected by any limitation of his rights
arising out of the separate written agreement if he had no notice
of the limitation when he took the instrument.
(2) A separate agreement does not affect the negotiability of
an instrument.
Section 36-3-120. An instrument which states that it is
`payable through' a bank or the like designates that bank as a
collecting bank to make presentment but does not of itself
authorize the bank to pay the instrument.
Section 36-3-121. A note or acceptance which states that it
is payable at a bank is not of itself an order or authorization to
the bank to pay it.
Section 36-3-122. (1) A cause of action against a maker or
an acceptor accrues
(a) in the case of a time instrument on the day after
maturity;
(b) in the case of a demand instrument upon its date or, if
no date is stated, on the date of issue.
(2) A cause of action against the obligor of a demand or time
certificate of deposit accrues upon demand, but demand on a
time certificate may not be made until on or after the date of
maturity.
(3) A cause of action against a drawer of a draft or an
indorser of an instrument accrues upon demand following
dishonor of the instrument. Notice of dishonor is a demand.
(4) Unless an instrument provides otherwise, interest runs at
the rate provided by law for a judgment
(a) in the case of a maker, acceptor or other primary
obligor of a demand instrument, from the date of demand;
(b) in all other cases from the date of accrual of the cause
of action.
Section 36-3-201. (1) Transfer of an instrument vests in the
transferee such rights as the transferor has therein, except that
a transferee who has himself been a party to any fraud or
illegality affecting the instrument or who as a prior holder had
notice of a defense or claim against it cannot improve his
position by taking from a later holder in due course.
(2) A transfer of a security interest in an instrument vests the
foregoing rights in the transferee to the extent of the interest
transferred.
(3) Unless otherwise agreed any transfer for value of an
instrument not then payable to bearer gives the transferee the
specifically enforceable right to have the unqualified
indorsement of the transferor. Negotiation takes effect only
when the indorsement is made and until that time there is no
presumption that the transferee is the owner.
Section 36-3-202. (1) Negotiation is the transfer of an
instrument in such form that the transferee becomes a holder.
If the instrument is payable to order it is negotiated by delivery
with any necessary indorsement; if payable to bearer it is
negotiated by delivery.
(2) An indorsement must be written by or on behalf of the
holder and on the instrument or on a paper so firmly affixed
thereto as to become a part thereof.
(3) An indorsement is effective for negotiation only when it
conveys the entire instrument or any unpaid residue. If it
purports to be of less it operates only as a partial assignment.
(4) Words of assignment, condition, waiver, guaranty,
limitation or disclaimer of liability and the like accompanying
an indorsement do not affect its character as an indorsement.
Section 36-3-203. Where an instrument is made payable to
a person under a misspelled name or one other than his own he
may indorse in that name or his own or both; but signature in
both names may be required by a person paying or giving value
for the instrument.
Section 36-3-204. (1) A special indorsement specifies the
person to whom or to whose order it makes the instrument
payable. Any instrument specially indorsed becomes payable
to the order of the special indorsee and may be further
negotiated only by his indorsement.
(2) An indorsement in blank specifies no particular indorsee
and may consist of a mere signature. An instrument payable to
order and indorsed in blank becomes payable to bearer and may
be negotiated by delivery alone until specially indorsed.
(3) The holder may convert a blank indorsement into a
special indorsement by writing over the signature of the
indorser in blank any contract consistent with the character of
the indorsement.
Section 36-3-205. An indorsement is restrictive which
either
(a) is conditional; or
(b) purports to prohibit further transfer of the instrument; or
(c) includes the words `for collection,' `for deposit,' `pay any
bank,' or like terms signifying a purpose of deposit or
collection; or
(d) otherwise states that it is for the benefit or use of the
indorser or of another person.
Section 36-3-206. (1) No restrictive indorsement prevents
further transfer or negotiation of the instrument.
(2) An intermediary bank, or a payor bank which is not the
depositary bank, is neither given notice nor otherwise affected
by a restrictive indorsement of any person except the bank's
immediate transferor or the person presenting for payment.
(3) Except for an intermediary bank, any transferee under an
indorsement which is conditional or includes the words `for
collection,' `for deposit,' `pay any bank,' or like terms
(subparagraphs (a) and (c) of Section 36-3-205) must pay or
apply any value given by him for or on the security of the
instrument consistently with the indorsement and to the extent
that he does so he becomes a holder for value. In addition such
transferee is a holder in due course if he otherwise complies
with the requirements of Section 36-3-302 on what constitutes
a holder in due course.
(4) The first taker under an indorsement for the benefit of
the indorser or another person (subparagraph (d) of Section
36-3-205) must pay or apply any value given by him for or on
the security of the instrument consistently with the indorsement
and to the extent that he does so he becomes a holder for value.
In addition such taker is a holder in due course if he otherwise
complies with the requirements of Section 36-3-302 on what
constitutes a holder in due course. A later holder for value is
neither given notice nor otherwise affected by such restrictive
indorsement unless he has knowledge that a fiduciary or other
person has negotiated the instrument in any transaction for his
own benefit or otherwise in breach of duty (subsection (2) of
Section 36-3-304).
Section 36-3-207. (1) Negotiation is effective to transfer the
instrument although the negotiation is
(a) made by an infant, a corporation exceeding its powers,
or any other person without capacity; or
(b) obtained by fraud, duress or mistake of any kind; or
(c) part of an illegal transaction; or
(d) made in breach of duty.
(2) Except as against a subsequent holder in due course such
negotiation is in an appropriate case subject to rescission, the
declaration of a constructive trust or any other remedy
permitted by law.
Section 36-3-208. Where an instrument is returned to or
reacquired by a prior party he may cancel any indorsement
which is not necessary to his title and reissue or further
negotiate the instrument, but any intervening party is
discharged as against the reacquiring party and subsequent
holders not in due course and if his indorsement has been
canceled is discharged as against subsequent holders in due
course as well.
Section 36-3-301. The holder of an instrument whether or
not he is the owner may transfer or negotiate it and, except as
otherwise provided in Section 36-3-603 on payment or
satisfaction, discharge it or enforce payment in his own name.
Section 36-3-302. (1) A holder in due course is a holder
who takes the instrument
(a) for value; and
(b) in good faith; and
(c) without notice that it is overdue or has been
dishonored or of any defense against or claim to it on the part
of any person.
(2) A payee may be a holder in due course.
(3) A holder does not become a holder in due course of an
instrument:
(a) by purchase of it at judicial sale or by taking it under
legal process; or
(b) by acquiring it in taking over an estate; or
(c) by purchasing it as part of a bulk transaction not in
regular course of business of the transferor.
(4) A purchaser of a limited interest can be a holder in due
course only to the extent of the interest purchased.
Section 36-3-303. A holder takes the instrument for value
(a) to the extent that the agreed consideration has been
performed or that he acquires a security interest in or a lien on
the instrument otherwise than by legal process; or
(b) when he takes the instrument in payment of or as
security for an antecedent claim against any person whether or
not the claim is due; or
(c) when he gives a negotiable instrument for it or makes an
irrevocable commitment to a third person.
Section 36-3-304. (1) The purchaser has notice of a claim
or defense if
(a) the instrument is so incomplete, bears such visible
evidence of forgery or alteration, or is otherwise so irregular as
to call into question its validity, terms or ownership or to create
an ambiguity as to the party to pay; or
(b) the purchaser has notice that the obligation of any
party is voidable in whole or in part, or that all parties have
been discharged.
(2) The purchaser has notice of a claim against the
instrument when he has knowledge that a fiduciary has
negotiated the instrument in payment of or as security for his
own debt or in any transaction for his own benefit or otherwise
in breach of duty.
(3) The purchaser has notice that an instrument is overdue
if he has reason to know
(a) that any part of the principal amount is overdue or that
there is an uncured default in payment of another instrument of
the same series; or
(b) that acceleration of the instrument has been made; or
(c) that he is taking a demand instrument after demand
has been made or more than a reasonable length of time after its
issue. A reasonable time for a check drawn and payable within
the states and territories of the United States and the District of
Columbia is presumed to be thirty days.
(4) Knowledge of the following facts does not of itself give
the purchaser notice of a defense or claim
(a) that the instrument is antedated or postdated;
(b) that it was issued or negotiated in return for an
executory promise or accompanied by a separate agreement,
unless the purchaser has notice that a defense or claim has
arisen from the terms thereof;
(c) that any party has signed for accommodation;
(d) that an incomplete instrument has been completed,
unless the purchaser has notice of any improper completion;
(e) that any person negotiating the instrument is or was a
fiduciary;
(f) that there has been default in payment of interest on
the instrument or in payment of any other instrument, except
one of the same series.
(5) The filing or recording of a document does not of itself
constitute notice within the provisions of this chapter to a
person who would otherwise be a holder in due course.
(6) To be effective notice must be received at such time and
in such manner as to give a reasonable opportunity to act on it.
Section 36-3-305. To the extent that a holder is a holder in
due course he takes the instrument free from
(1) all claims to it on the part of any person; and
(2) all defenses of any party to the instrument with whom the
holder has not dealt except
(a) infancy, to the extent that it is a defense to a simple
contract; and
(b) such other incapacity, or duress, or illegality of the
transaction, as renders the obligation of the party a nullity; and
(c) such misrepresentation as has induced the party to
sign the instrument with neither knowledge nor reasonable
opportunity to obtain knowledge of its character or its essential
terms; and
(d) discharge in insolvency proceedings; and
(e) any other discharge of which the holder has notice
when he takes the instrument.
Section 36-3-306. Unless he has the rights of a holder in
due course any person takes the instrument subject to
(a) all valid claims to it on the part of any person; and
(b) all defenses of any party which would be available in an
action on a simple contract; and
(c) the defenses of want or failure of consideration,
nonperformance of any condition precedent, nondelivery, or
delivery for a special purpose (Section 36-3-408); and
(d) the defense that he or a person through whom he holds
the instrument acquired it by theft, or that payment or
satisfaction to such holder would be inconsistent with the terms
of a restrictive indorsement. The claim of any third person to
the instrument is not otherwise available as a defense to any
party liable thereon unless the third person himself defends the
action for such party.
Section 36-3-307. (1) Unless specifically denied in the
pleadings each signature on an instrument is admitted. When
the effectiveness of a signature is put in issue
(a) the burden of establishing it is on the party claiming
under the signature; but
(b) the signature is presumed to be genuine or authorized
except where the action is to enforce the obligation of a
purported signer who has died or become incompetent before
proof is required.
(2) When signatures are admitted or established, production
of the instrument entitles a holder to recover on it unless the
defendant establishes a defense.
(3) After it is shown that a defense exists a person claiming
the rights of a holder in due course has the burden of
establishing that he or some person under whom he claims is in
all respects a holder in due course.
Section 36-3-401. (1) No person is liable on an instrument
unless his signature appears thereon.
(2) A signature is made by use of any name, including any
trade or assumed name, upon an instrument, or by any word or
mark used in lieu of a written signature.
Section 36-3-402. Unless the instrument clearly indicates
that a signature is made in some other capacity it is an
indorsement.
Section 36-3-403. (1) A signature may be made by an agent
or other representative, and his authority to make it may be
established as in other cases of representation. No particular
form of appointment is necessary to establish such authority.
(2) An authorized representative who signs his own name to
an instrument
(a) is personally obligated if the instrument neither names
the person represented nor shows that the representative signed
in a representative capacity;
(b) except as otherwise established between the
immediate parties, is personally obligated if the instrument
names the person represented but does not show that the
representative signed in a representative capacity, or if the
instrument does not name the person represented but does show
that the representative signed in a representative capacity.
(3) Except as otherwise established the name of an
organization preceded or followed by the name and office of an
authorized individual is a signature made in a representative
capacity.
Section 36-3-404. (1) Any unauthorized signature is wholly
inoperative as that of the person whose name is signed unless
he ratifies it or is precluded from denying it; but it operates as
the signature of the unauthorized signer in favor of any person
who in good faith pays the instrument or takes it for value.
(2) Any unauthorized signature may be ratified for all
purposes of this chapter. Such ratification does not of itself
affect any rights of the person ratifying against the actual
signer.
Section 36-3-405. (1) An indorsement by any person in the
name of a named payee is effective if
(a) an impostor by use of the mails or otherwise has
induced the maker or drawer to issue the instrument to him or
his confederate in the name of the payee; or
(b) a person signing as or on behalf of a maker or drawer
intends the payee to have no interest in the instrument; or
(c) an agent or employee of the maker or drawer has
supplied him with the name of the payee intending the latter to
have no such interest.
(2) Nothing in this section shall affect the criminal or civil
liability of the person so indorsing.
Section 36-3-406. Any person who by his negligence
substantially contributes to a material alteration of the
instrument or to the making of an unauthorized signature is
precluded from asserting the alteration or lack of authority
against a holder in due course or against a drawee or other
payor who pays the instrument in good faith and in accordance
with the reasonable commercial standards of the drawee's or
payor's business.
Section 36-3-407. (1) Any alteration of an instrument is
material which changes the contract of any party thereto in any
respect, including any such change in
(a) the number or relations of the parties; or
(b) an incomplete instrument, by completing it otherwise
than as authorized; or
(c) the writing as signed, by adding to it or by removing
any part of it.
(2) As against any person other than a subsequent holder in
due course
(a) alteration by the holder which is both fraudulent and
material discharges any party whose contract is thereby
changed unless that party assents or is precluded from asserting
the defense;
(b) no other alteration discharges any party and the
instrument may be enforced according to its original tenor, or
as to incomplete instruments according to the authority given.
(3) A subsequent holder in due course may in all cases
enforce the instrument according to its original tenor, and when
an incomplete instrument has been completed, he may enforce
it as completed.
Section 36-3-408. Want or failure of consideration is a
defense as against any person not having the rights of a holder
in due course (Section 36-3-305), except that no consideration
is necessary for an instrument or obligation thereon given in
payment of or as security for an antecedent obligation of any
kind. Nothing in this section shall be taken to displace any
statute outside this act under which a promise is enforceable
notwithstanding lack or failure of consideration. Partial failure
of consideration is a defense pro tanto whether or not the failure
is in an ascertained or liquidated amount.
Section 36-3-409. (1) A check or other draft does not of
itself operate as an assignment of any funds in the hands of the
drawee available for its payment, and the drawee is not liable
on the instrument until he accepts it.
(2) Nothing in this section shall affect any liability in
contract, tort or otherwise arising from any letter of credit or
other obligation or representation which is not an acceptance.
Section 36-3-410. (1) Acceptance is the drawee's signed
engagement to honor the draft as presented. It must be written
on the draft, and may consist of his signature alone. It becomes
operative when completed by delivery or notification.
(2) A draft may be accepted although it has not been signed
by the drawer or is otherwise incomplete or is overdue or has
been dishonored.
(3) Where the draft is payable at a fixed period after sight
and the acceptor fails to date his acceptance the holder may
complete it by supplying a date in good faith.
Section 36-3-411. (1) Certification of a check is acceptance.
Where a holder procures certification the drawer and all prior
indorsers are discharged.
(2) Unless otherwise agreed a bank has no obligation to
certify a check.
(3) A bank may certify a check before returning it for lack
of proper indorsement. If it does so the drawer is discharged.
Section 36-3-412. (1) Where the drawee's proffered
acceptance in any manner varies the draft as presented the
holder may refuse the acceptance and treat the draft as
dishonored in which case the drawee is entitled to have his
acceptance canceled.
(2) The terms of the draft are not varied by an acceptance to
pay at any particular bank or place in the United States, unless
the acceptance states that the draft is to be paid only at such
bank or place.
(3) Where the holder assents to an acceptance varying the
terms of the draft each drawer and indorser who does not
affirmatively assent is discharged.
Section 36-3-413. (1) The maker or acceptor engages that
he will pay the instrument according to its tenor at the time of
his engagement or as completed pursuant to Section 36-3-115
on incomplete instruments.
(2) The drawer engages that upon dishonor of the draft and
any necessary notice of dishonor or protest he will pay the
amount of the draft to the holder or to any indorser who takes
it up. The drawer may disclaim this liability by drawing
without recourse.
(3) By making, drawing or accepting the party admits as
against all subsequent parties including the drawee the
existence of the payee and his then capacity to indorse.
Section 36-3-414. (1) Unless the indorsement otherwise
specifies (as by such words as `without recourse') every
indorser engages that upon dishonor and any necessary notice
of dishonor and protest he will pay the instrument according to
its tenor at the time of his indorsement to the holder or to any
subsequent indorser who takes it up, even though the indorser
who takes it up was not obligated to do so.
(2) Unless they otherwise agree indorsers are liable to one
another in the order in which they indorse, which is presumed
to be the order in which their signatures appear on the
instrument.
Section 36-3-415. (1) An accommodation party is one who
signs the instrument in any capacity for the purpose of lending
his name to another party to it.
(2) When the instrument has been taken for value before it
is due the accommodation party is liable in the capacity in
which he has signed even though the taker knows of the
accommodation.
(3) As against a holder in due course and without notice of
the accommodation oral proof of the accommodation is not
admissible to give the accommodation party the benefit of
discharges dependent on his character as such. In other cases
the accommodation character may be shown by oral proof.
(4) An indorsement which shows that it is not in the chain of
title is notice of its accommodation character.
(5) An accommodation party is not liable to the party
accommodated, and if he pays the instrument has a right of
recourse on the instrument against such party.
Section 36-3-416. (1) `Payment guaranteed' or equivalent
words added to a signature mean that the signer engages that if
the instrument is not paid when due he will pay it according to
its tenor without resort by the holder to any other party.
(2) `Collection guaranteed' or equivalent words added to a
signature mean that the signer engages that if the instrument is
not paid when due he will pay it according to its tenor, but only
after the holder has reduced his claim against the maker or
acceptor to judgment and execution has been returned
unsatisfied, or after the maker or acceptor has become insolvent
or it is otherwise apparent that it is useless to proceed against
him.
(3) Words of guaranty which do not otherwise specify
guarantee payment.
(4) No words of guaranty added to the signature of a sole
maker or acceptor affect his liability on the instrument. Such
words added to the signature of one of two or more makers or
acceptors create a presumption that the signature is for the
accommodation of the others.
(5) When words of guaranty are used presentment, notice of
dishonor and protest are not necessary to charge the user.
(6) Any guaranty written on the instrument is enforceable
notwithstanding any statute of frauds.
Section 36-3-417. (1) Any person who obtains payment or
acceptance and any prior transferor warrants to a person who in
good faith pays or accepts that
(a) he has a good title to the instrument or is authorized
to obtain payment or acceptance on behalf of one who has a
good title; and
(b) he has no knowledge that the signature of the maker
or drawer is unauthorized, except that this warranty is not given
by a holder in due course acting in good faith
(i) to a maker with respect to the maker's own
signature; or
(ii) to a drawer with respect to the drawer's own
signature, whether or not the drawer is also the drawee; or
(iii) to an acceptor of a draft if the holder in due course
took the draft after the acceptance or obtained the acceptance
without knowledge that the drawer's signature was
unauthorized; and
(c) the instrument has not been materially altered, except
that this warranty is not given by a holder in due course acting
in good faith
(i) to the maker of a note; or
(ii) to the drawer of a draft whether or not the drawer
is also the drawee; or
(iii) to the acceptor of a draft with respect to an
alteration made prior to the acceptance if the holder in due
course took the draft after the acceptance, even though the
acceptance provided `payable as originally drawn' or equivalent
terms; or
(iv) to the acceptor of a draft with respect to an
alteration made after the acceptance.
(2) Any person who transfers an instrument and receives
consideration warrants to his transferee and if the transfer is by
indorsement to any subsequent holder who takes the instrument
in good faith that
(a) he has a good title to the instrument or is authorized
to obtain payment or acceptance on behalf of one who has a
good title and the transfer is otherwise rightful; and
(b) all signatures are genuine or authorized; and
(c) the instrument has not been materially altered; and
(d) no defense of any party is good against him; and
(e) he has no knowledge of any insolvency proceeding
instituted with respect to the maker or acceptor or the drawer of
an unaccepted instrument.
(3) By transferring `without recourse' the transferor limits
the obligation stated in subsection (2) (d) to a warranty that he
has no knowledge of such a defense.
(4) A selling agent or broker who does not disclose the fact
that he is acting only as such gives the warranties provided in
this section, but if he makes such disclosure warrants only his
good faith and authority.
Section 36-3-418. Except for recovery of bank payments as
provided in the chapter on bank deposits and collections
(Chapter 4) and except for liability for breach of warranty on
presentment under the preceding section (Section 36-3-417),
payment or acceptance of any instrument is final in favor of a
holder in due course, or a person who has in good faith changed
his position in reliance on the payment.
Section 36-3-419. (1) An instrument is converted when
(a) a drawee to whom it is delivered for acceptance
refuses to return it on demand; or
(b) any person to whom it is delivered for payment
refuses on demand either to pay or to return it; or
(c) it is paid on a forged indorsement.
(2) In an action against a drawee under subsection (1) the
measure of the drawee's liability is the face amount of the
instrument. In any other action under subsection (1) the
measure of liability is presumed to be the face amount of the
instrument.
(3) Subject to the provisions of this act concerning
restrictive indorsements a representative, including a depositary
or collecting bank, who has in good faith and in accordance
with the reasonable commercial standards applicable to the
business of such representative dealt with an instrument or its
proceeds on behalf of one who was not the true owner is not
liable in conversion or otherwise to the true owner beyond the
amount of any proceeds remaining in his hands.
(4) An intermediary bank or payor bank which is not a
depositary bank is not liable in conversion solely by reason of
the fact that proceeds of an item indorsed restrictively (Sections
36-3-205 and 36-3-206) are not paid or applied consistently
with the restrictive indorsement of an indorser other than its
immediate transferor.
Section 36-3-501. (1) Unless excused (Section 36-3-511)
presentment is necessary to charge secondary parties as
follows:
(a) presentment for acceptance is necessary to charge the
drawer and indorsers of a draft where the draft so provides, or
is payable elsewhere than at the residence or place of business
of the drawee, or its date of payment depends upon such
presentment. The holder may at his option present for
acceptance any other draft payable at a stated date;
(b) presentment for payment is necessary to charge any
indorser;
(c) in the case of any drawer, the acceptor of a draft
payable at a bank or the maker of a note payable at a bank,
presentment for payment is necessary, but failure to make
presentment discharges such drawer, acceptor or maker only as
stated in Section 36-3-502(1)(b).
(2) Unless excused (Section 36-3-511)
(a) notice of any dishonor is necessary to charge any
indorser;
(b) in the case of any drawer, the acceptor of a draft
payable at a bank or the maker of a note payable at a bank,
notice of any dishonor is necessary, but failure to give such
notice discharges such drawer, acceptor or maker only as stated
in Section 36-3-502(1)(b).
(3) Unless excused (Section 36-3-511) protest of any
dishonor is necessary to charge the drawer and indorsers of any
draft which on its face appears to be drawn or payable outside
of the states and territories of the United States and the District
of Columbia. The holder may at his option make protest of any
dishonor of any other instrument and in the case of a foreign
draft may on insolvency of the acceptor before maturity make
protest for better security.
(4) Notwithstanding any provision of this section, neither
presentment nor notice of dishonor nor protest is necessary to
charge an indorser who has indorsed an instrument after
maturity.
Section 36-3-502. (1) Where without excuse any necessary
presentment or notice of dishonor is delayed beyond the time
when it is due
(a) any indorser is discharged; and
(b) any drawer or the acceptor of a draft payable at a bank
or the maker of a note payable at a bank who because the
drawee or payor bank becomes insolvent during the delay is
deprived of funds maintained with the drawee or payor bank to
cover the instrument may discharge his liability by written
assignment to the holder of his rights against the drawee or
payor bank in respect of such funds, but such drawer, acceptor
or maker is not otherwise discharged.
(2) Where without excuse a necessary protest is delayed
beyond the time when it is due any drawer or indorser is
discharged.
Section 36-3-503. (1) Unless a different time is expressed
in the instrument the time for any presentment is determined as
follows:
(a) where an instrument is payable at or a fixed period
after a stated date any presentment for acceptance must be
made on or before the date it is payable;
(b) where an instrument is payable after sight it must
either be presented for acceptance or negotiated within a
reasonable time after date or issue whichever is later;
(c) where an instrument shows the date on which it is
payable presentment for payment is due on that date;
(d) where an instrument is accelerated presentment for
payment is due within a reasonable time after the acceleration;
(e) with respect to the liability of any secondary party
presentment for acceptance or payment of any other instrument
is due within a reasonable time after such party becomes liable
thereon.
(2) A reasonable time for presentment is determined by the
nature of the instrument, any usage of banking or trade and the
facts of the particular case. In the case of an uncertified check
which is drawn and payable within the United States and which
is not a draft drawn by a bank the following are presumed to be
reasonable periods within which to present for payment or to
initiate bank collection:
(a) with respect to the liability of the drawer, thirty days
after date or issue whichever is later; and
(b) with respect to the liability of an indorser, seven days
after his indorsement.
(3) Where any presentment is due on a day which is not a
full business day for either the person making presentment or
the party to pay or accept, presentment is due on the next
following day which is a full business day for both parties.
(4) Presentment to be sufficient must be made at a
reasonable hour, and if at a bank during its banking day.
Section 36-3-504. (1) Presentment is a demand for
acceptance or payment made upon the maker, acceptor, drawee
or other payor by or on behalf of the holder.
(2) Presentment may be made
(a) by mail, in which event the time of presentment is
determined by the time of receipt of the mail; or
(b) through a clearing house; or
(c) at the place of acceptance or payment specified in the
instrument or if there be none at the place of business or
residence of the party to accept or pay. If neither the party to
accept or pay nor anyone authorized to act for him is present or
accessible at such place presentment is excused.
(3) It may be made
(a) to any one of two or more makers, acceptors, drawees
or other payors; or
(b) to any person who has authority to make or refuse the
acceptance or payment.
(4) A draft accepted or a note made payable at a bank in the
United States must be presented at such bank.
(5) In the cases described in Section 36-4-210 presentment
may be made in the manner and with the result stated in that
section.
Section 36-3-505. (1) The party to whom presentment is
made may without dishonor require
(a) exhibition of the instrument; and
(b) reasonable identification of the person making
presentment and evidence of his authority to make it if made
for another; and
(c) that the instrument be produced for acceptance or
payment at a place specified in it, or if there be none at any
place reasonable in the circumstances; and
(d) a signed receipt on the instrument for any partial or
full payment and its surrender upon full payment.
(2) Failure to comply with any such requirement invalidates
the presentment but the person presenting has a reasonable time
in which to comply and the time for acceptance or payment
runs from the time of compliance.
Section 36-3-506. (1) Acceptance may be deferred without
dishonor until the close of the next business day following
presentment. The holder may also in a good faith effort to
obtain acceptance and without either dishonor of the instrument
or discharge of secondary parties allow postponement of
acceptance for an additional business day.
(2) Except as a longer time is allowed in the case of
documentary drafts drawn under a letter of credit, and unless an
earlier time is agreed to by the party to pay, payment of an
instrument may be deferred without dishonor pending
reasonable examination to determine whether it is properly
payable, but payment must be made in any event before the
close of business on the day of presentment.
Section 36-3-507. (1) An instrument is dishonored when
(a) a necessary or optional presentment is duly made and
due acceptance or payment is refused or cannot be obtained
within the prescribed time or in case of bank collections the
instrument is seasonably returned by the midnight deadline
(Section 36-4-301); or
(b) presentment is excused and the instrument is not duly
accepted or paid.
(2) Subject to any necessary notice of dishonor and protest,
the holder has upon dishonor an immediate right of recourse
against the drawers and indorsers.
(3) Return of an instrument for lack of proper indorsement
is not dishonor.
(4) A term in a draft or an indorsement thereof allowing a
stated time for re-presentment in the event of any dishonor of
the draft by nonacceptance if a time draft or by nonpayment if
a sight draft gives the holder as against any secondary party
bound by the term an option to waive the dishonor without
affecting the liability of the secondary party and he may present
again up to the end of the stated time.
Section 36-3-508. (1) Notice of dishonor may be given to
any person who may be liable on the instrument by or on behalf
of the holder or any party who has himself received notice, or
any other party who can be compelled to pay the instrument.
In addition an agent or bank in whose hands the instrument is
dishonored may give notice to his principal or customer or to
another agent or bank from which the instrument was received.
(2) Any necessary notice must be given by a bank before its
midnight deadline and by any other person before midnight of
the third business day after dishonor or receipt of notice of
dishonor.
(3) Notice may be given in any reasonable manner. It may
be oral or written and in any terms which identify the
instrument and state that it has been dishonored. A
misdescription which does not mislead the party notified does
not vitiate the notice. Sending the instrument bearing a stamp,
ticket or writing stating that acceptance or payment has been
refused or sending a notice of debit with respect to the
instrument is sufficient.
(4) Written notice is given when sent although it is not
received.
(5) Notice to one partner is notice to each although the firm
has been dissolved.
(6) When any party is in insolvency proceedings instituted
after the issue of the instrument notice may be given either to
the party or to the representative of his estate.
(7) When any party is dead or incompetent notice may be
sent to his last known address or given to his personal
representative.
(8) Notice operates for the benefit of all parties who have
rights on the instrument against the party notified.
Section 36-3-509. (1) A protest is a certificate of dishonor
made under the hand and seal of a United States consul or vice
consul or a notary public or other person authorized to certify
dishonor by the law of the place where dishonor occurs. It may
be made upon information satisfactory to such person.
(2) The protest must identify the instrument and certify
either that due presentment has been made or the reason why it
is excused and that the instrument has been dishonored by
nonacceptance or nonpayment.
(3) The protest may also certify that notice of dishonor has
been given to all parties or to specified parties.
(4) Subject to subsection (5) any necessary protest is due by
the time that notice of dishonor is due.
(5) If, before protest is due, an instrument has been noted for
protest by the officer to make protest, the protest may be made
at any time thereafter as of the date of the noting.
Section 36-3-510. The following are admissible as evidence
and create a presumption of dishonor and of any notice of
dishonor therein shown:
(a) a document regular in form as provided in the preceding
section (Section 36-3-509) which purports to be a protest;
(b) the purported stamp or writing of the drawee, payor bank
or presenting bank on the instrument or accompanying it stating
that acceptance or payment has been refused for reasons
consistent with dishonor;
(c) any book or record of the drawee, payor bank, or any
collecting bank kept in the usual course of business which
shows dishonor, even though there is no evidence of who made
the entry.
Section 36-3-511. (1) Delay in presentment, protest or
notice of dishonor is excused when the party is without notice
that it is due or when the delay is caused by circumstances
beyond his control and he exercises reasonable diligence after
the cause of the delay ceases to operate.
(2) Presentment or notice or protest as the case may be is
entirely excused when
(a) the party to be charged has waived it expressly or by
implication either before or after it is due; or
(b) such party has himself dishonored the instrument or
has countermanded payment or otherwise has no reason to
expect or right to require that the instrument be accepted or
paid; or
(c) by reasonable diligence the presentment or protest
cannot be made or the notice given.
(3) Presentment is also entirely excused when
(a) the maker, acceptor or drawee of any instrument
except a documentary draft is dead or in insolvency
proceedings instituted after the issue of the instrument; or
(b) acceptance or payment is refused but not for want of
proper presentment.
(4) Where a draft has been dishonored by nonacceptance a
later presentment for payment and any notice of dishonor and
protest for nonpayment are excused unless in the meantime the
instrument has been accepted.
(5) A waiver of protest is also a waiver of presentment and
of notice of dishonor even though protest is not required.
(6) Where a waiver of presentment or notice or protest is
embodied in the instrument itself it is binding upon all parties;
but where it is written above the signature of an indorser it
binds him only.
Section 36-3-601. (1) The extent of the discharge of any
party from liability on an instrument is governed by the
sections on
(a) payment or satisfaction (Section 36-3-603); or
(b) tender of payment (Section 36-3-604); or
(c) cancellation or renunciation (Section 36-3-605); or
(d) impairment of right of recourse or of collateral
(Section 36-3-606); or
(e) reacquisition of the instrument by a prior party
(Section 36-3-208); or
(f) fraudulent and material alteration (Section 36-3-407);
or
(g) certification of a check (Section 36-3-411); or
(h) acceptance varying a draft (Section 36-3-412); or
(i) unexcused delay in presentment or notice of dishonor
or protest (Section 36-3-502).
(2) Any party is also discharged from his liability on an
instrument to another party by any other act or agreement with
such party which would discharge his simple contract for the
payment of money.
(3) The liability of all parties is discharged when any party
who has himself no right of action or recourse on the
instrument
(a) reacquires the instrument in his own right; or
(b) is discharged under any provision of this chapter,
except as otherwise provided with respect to discharge for
impairment of recourse or of collateral (Section 36-3-606).
Section 36-3-602. No discharge of any party provided by
this chapter is effective against a subsequent holder in due
course unless he has notice thereof when he takes the
instrument.
Section 36-3-603. (1) The liability of any party is
discharged to the extent of his payment or satisfaction to the
holder even though it is made with knowledge of a claim of
another person to the instrument unless prior to such payment
or satisfaction the person making the claim either supplies
indemnity deemed adequate by the party seeking the discharge
or enjoins payment or satisfaction by order of a court of
competent jurisdiction in an action in which the adverse
claimant and the holder are parties. This subsection does not,
however, result in the discharge of the liability
(a) of a party who in bad faith pays or satisfies a holder
who acquired the instrument by theft or who (unless having the
rights of a holder in due course) holds through one who so
acquired it; or
(b) of a party (other than an intermediary bank or a payor
bank which is not a depositary bank) who pays or satisfies the
holder of an instrument which has been restrictively indorsed
in a manner not consistent with the terms of such restrictive
indorsement.
(2) Payment or satisfaction may be made with the consent of
the holder by any person including a stranger to the instrument.
Surrender of the instrument to such a person gives him the
rights of a transferee (Section 36-3-201).
Section 36-3-604. (1) Any party making tender of full
payment to a holder when or after it is due is discharged to the
extent of all subsequent liability for interest, costs and
attorney's fees.
(2) The holder's refusal of such tender wholly discharges any
party who has a right of recourse against the party making the
tender.
50 (3) Where the maker or acceptor of an instrument payable
otherwise than on demand is able and ready to pay at every
place of payment specified in the instrument when it is due, it
is equivalent to tender.
Section 36-3-605. (1) The holder of an instrument may even
without consideration discharge any party
(a) in any manner apparent on the face of the instrument
or the indorsement, as by intentionally cancelling the
instrument or the party's signature by destruction or mutilation,
or by striking out the party's signature; or
(b) by renouncing his rights by a writing signed and
delivered or by surrender of the instrument to the party to be
discharged.
(2) Neither cancellation nor renunciation without surrender
of the instrument affects the title thereto.
Section 36-3-606. (1) The holder discharges any party to the
instrument to the extent that without such party's consent the
holder
(a) without express reservation of rights releases or
agrees not to sue any person against whom the party has to the
knowledge of the holder a right of recourse or agrees to
suspend the right to.enforce against such person the instrument
or collateral or otherwise discharges such person, except that
failure or delay in effecting any required presentment, protest
or notice of dishonor with respect to any such person does not
discharge any party as to whom presentment, protest or notice
of dishonor is effective or unnecessary; or
(b) unjustifiably impairs any collateral for the instrument
given by or on behalf of the party or any person against whom
he has a right of recourse.
(2) By express reservation of rights against a party with a
right of recourse the holder preserves
(a) all his rights against such party as of the time when
the instrument was originally due; and
(b) the right of the party to pay the instrument as of that
time; and
(c) all rights of such party to recourse against others.
Section 36-3-701. (1) A `letter of advice' is a drawer's
communication to the drawee that a described draft has been
drawn.
(2) Unless otherwise agreed when a bank receives from
another bank a letter of advice of an international sight draft the
drawee bank may immediately debit the drawer's account and
stop the running of interest pro tanto. Such a debit and any
resulting credit to any account covering outstanding drafts
leaves in the drawer full power to stop payment or otherwise
dispose of the amount and creates no trust or interest in favor
of the holder.
(3) Unless otherwise agreed and except where a draft is
drawn under a credit issued by the drawee, the drawee of an
international sight draft owes the drawer no duty to pay an
unadvised draft but if it does so and the draft is genuine, may
appropriately debit the drawer's account.
Section 36-3-801. (1) Where a draft is drawn in a set of
parts, each of which is numbered and expressed to be an order
only if no other part has been honored, the whole of the parts
constitutes one draft but a taker of any part may become a
holder in due course of the draft.
(2) Any person who negotiates, indorses or accepts a single
part of a draft drawn in a set thereby becomes liable to any
holder in due course of that part as if it were the whole set, but
as between different holders in due course to whom different
parts have been negotiated the holder whose title first accrues
has all rights to the draft and its proceeds.
(3) As against the drawee the first presented part of a draft
drawn in a set is the part entitled to payment, or if a time draft
to acceptance and payment. Acceptance of any subsequently
presented part renders the drawee liable thereon under
subsection (2). With respect both to a holder and to the drawer
payment of a subsequently presented part of a draft payable at
sight has the same effect as payment of a check notwithstanding
an effective stop order (Section 36-4-407).
(4) Except as otherwise provided in this section, where any
part of a draft in a set is discharged by payment or otherwise
the whole draft is discharged.
Section 36-3-802. (1) Unless otherwise agreed where an
instrument is taken for an underlying obligation
(a) the obligation is pro tanto discharged if a bank is
drawer, maker or acceptor of the instrument and there is no
recourse on the instrument against the underlying obligor; and
(b) in any other case the obligation is suspended pro tanto
until the instrument is due or if it is payable on demand until its
presentment. If the instrument is dishonored action may be
maintained on either the instrument or the obligation; discharge
of the underlying obligor on the instrument also discharges him
on the obligation.
(2) The taking in good faith of a check which is not
postdated does not of itself so extend the time on the original
obligation as to discharge a surety.
Section 36-3-803. Where a defendant is sued for breach of
an obligation for which a third person is answerable over under
this chapter he may give the third person written notice of the
litigation, and the person notified may then give similar notice
to any other person who is answerable over to him under this
chapter. If the notice states that the person notified may come
in and defend and that if the person notified does not do so he
will in any action against him by the person giving the notice
be bound by any determination of fact common to the two
litigations, then unless after seasonable receipt of the notice the
person notified does come in and defend he is so bound.
Section 36-3-804. The owner of an instrument which is lost,
whether by destruction, theft or otherwise, may maintain an
action in his own name and recover from any party liable
thereon upon due proof of his ownership, the facts which
prevent his production of the instrument and its terms. The
court may require security indemnifying the defendant against
loss by reason of further claims on the instrument.
Section 36-3-805. This chapter applies to any instrument
whose terms do not preclude transfer and which is otherwise
negotiable within this chapter but which is not payable to order
or to bearer, except that there can be no holder in due course of
such an instrument."
"CHAPTER 3
Uniform Commercial Code - Negotiable
Instruments
Part 1
General Provisions and Definitions.
Section 36-3-101. SHORT TITLE.
This chapter may be cited as Uniform Commercial Code -
Negotiable Instruments.
Section 36-3-102. SUBJECT MATTER.
(a) This chapter applies to negotiable instruments. It does
not apply to money, to payment orders governed by Chapter
4A, or to securities governed by Chapter 8.
(b) If there is conflict between this chapter and Chapter 4
or Chapter 9, Chapter 4 or Chapter 9 governs.
(c) Regulations of the Board of Governors of the Federal
Reserve System and operating circulars of the Federal Reserve
Banks supersede any inconsistent provision of this chapter to
the extent of the inconsistency.
OFFICIAL COMMENT
1. Former Article 3 had no provision affirmatively stating
its scope. Former Section 3-103 was a limitation on scope. In
revised Article 3, Section 3-102 states that Article 3 applies to
"negotiable instruments," defined in Section 3-104.
Section 3-104(b) also defines the term "instrument"
as a synonym for "negotiable instrument." In most
places Article 3 uses the shorter term "instrument."
This follows the convention used in former Article 3.
2. The reference in former Section 3-103(1) to
"documents of title" is omitted as superfluous
because these documents contain no promise to pay money.
The definition of "payment order" in Section
4A-103(a)(1)(iii) excludes drafts which are governed by Article
3. Section 3-102(a) makes clear that a payment order governed
by Article 4A is not governed by Article 3. Thus, Article 3 and
Article 4A are mutually exclusive.
Article 8 states in Section 8-102(1)(c) that "A writing
that is a certificated security is governed by this Article and not
by Article 3, even though it also meets the requirements of that
Article." Section 3-102(a) conforms to this provision.
With respect to some promises or orders to pay money, there
may be a question whether the promise or order is an
instrument under Section 3-104(a) or a certificated security
under Section 8-102(1)(a). Whether a writing is covered by
Article 3 or Article 8 has important consequences. Among
other things, under Section 8-207, the issuer of a certificated
security may treat the registered owner as the owner for all
purposes until the presentment for registration of a transfer.
The issuer of a negotiable instrument, on the other hand, may
discharge its obligation to pay the instrument only by paying a
person entitled to enforce under Section 3-301. There are also
important consequences to an indorser. An indorser of a
security does not undertake the issuer's obligation or make any
warranty that the issuer will honor the underlying obligation,
while an indorser of a negotiable instrument becomes
secondarily liable on the underlying obligation.
Ordinarily the distinction between instruments and
certificated securities in non-bearer form should be relatively
clear. A certificated security under Article 8 must be in
registered form (Section 8-102(1)(a)(i)) so that it can be
registered on the issuer's records. By contrast, registration
plays no part in Article 3. The distinction between an
instrument and a certificated security in bearer form may be
somewhat more difficult and will generally lie in the economic
functions of the two writings. Ordinarily, negotiable
instruments under Article 3 will be separate and distinct
instruments, while certificated securities under Article 8 will be
either one of a class or series or by their terms divisible into a
class or series (Section 8-102(1)(a)(iii)). Thus, a promissory
note in bearer form could come under either Article 3 if it were
simply an individual note, or under Article 8 if it were one of
a series of notes or divisible into a series. An additional
distinction is whether the instrument is of the type commonly
dealt in on securities exchanges or markets or commonly
recognized as a medium for investment (Section
8-102(1)(a)(ii)). Thus, a check written in bearer form (i.e., a
check made payable to "cash") would not be a
certificated security within Article 8 of the Uniform
Commercial Code.
Occasionally, a particular writing may fit the definition of
both a negotiable instrument under Article 3 and of an
investment security under Article 8. In such cases, the
instrument is subject exclusively to the requirements of Article
8. Section 8-102(1)(c) and Section 3-102(a).
3. Although the terms of Article 3 apply to transactions by
Federal Reserve Banks, federal preemption would make
ineffective any Article 3 provision that conflicts with federal
law. The activities of the Federal Reserve Banks are governed
by regulations of the Federal Reserve Board and by operating
circulars issued by the Reserve Banks themselves. In some
instances, the operating circulars are issued pursuant to a
Federal Reserve Board regulation. In other cases, the Reserve
Bank issues the operating circular under its own authority under
the Federal Reserve Act, subject to review by the Federal
Reserve Board. Section 3-102(c) states that Federal Reserve
Board regulations and operating circulars of the Federal
Reserve Banks supersede any inconsistent provision of Article
3 to the extent of the inconsistency. Federal Reserve Board
regulations, being valid exercises of regulatory authority
pursuant to a federal statute, take precedence over state law if
there is an inconsistency. Childs v. Federal Reserve Bank
of Dallas, 719 F.2d 812 (5th Cir. 1983), reh. den. 724 F.2d
127 (5th Cir. 1984). Section 3-102(c) treats operating circulars
as having the same effect whether issued under the Reserve
Bank's own authority or under a Federal Reserve Board
regulation. Federal statutes may also preempt Article 3. For
example, the Expedited Funds Availability Act, 12 U.S.C.
Section 4001 et seq., provides that the Act and the regulations
issued pursuant to the Act supersede any inconsistent
provisions of the UCC. 12 U.S.C. Section 4007(b).
4. In Clearfield Trust Co. v. United States, 318
U.S. 363 (1943), the Court held that if the United States is a
party to an instrument, its rights and duties are governed by
federal common law in the absence of a specific federal statute
or regulation. In United States v. Kimbell Foods, Inc.,
440 U.S. 715 (1979), the Court stated a three-pronged test to
ascertain whether the federal common-law rule should follow
the state rule. In most instances courts under the
Kimbell test have shown a willingness to adopt UCC
rules in formulating federal common law on the subject. In
Kimbell the Court adopted the priorities rules of
Article 9.
5. In 1989 the United Nations Commission on International
Trade Law completed a Convention on International Bills of
Exchange and International Promissory Notes. If the United
States becomes a party to this Convention, the Convention will
preempt state law with respect to international bills and notes
governed by the Convention. Thus, an international bill of
exchange or promissory note that meets the definition of
instrument in Section 3-104 will not be governed by Article 3
if it is governed by the Convention.
Section 36-3-103. DEFINITIONS.
(a) As used in this chapter:
(1) `Acceptor' means a drawee who has accepted a
draft.
(2) `Drawee' means a person ordered in a draft to make
payment.
(3) `Drawer' means a person who signs or is identified
in a draft as a person ordering payment.
(4) `Good faith' means honesty in fact and the
observance of reasonable commercial standards of fair dealing.
(5) `Maker' means a person who signs or is identified
in a note as a person undertaking to pay.
(6) `Order' means a written instruction to pay money
signed by the person giving the instruction. The instruction
may be addressed to any person, including the person giving
the instruction, or to one or more persons jointly or in the
alternative but not in succession. An authorization to pay is not
an order unless the person authorized to pay is also instructed
to pay.
(7) `Ordinary care' in the case of a person engaged in
business means observance of reasonable commercial
standards, prevailing in the area in which the person is located,
with respect to the business in which the person is engaged. In
the case of a bank that takes an instrument for processing for
collection or payment by automated means, reasonable
commercial standards do not require the bank to examine the
instrument if the failure to examine does not violate the bank's
prescribed procedures and the bank's procedures do not vary
unreasonably from general banking usage not disapproved by
this chapter or Chapter 4.
(8) `Party' means a party to an instrument.
(9) `Promise' means a written undertaking to pay
money signed by the person undertaking to pay. An
acknowledgment of an obligation by the obligor is not a
promise unless the obligor also undertakes to pay the
obligation.
(10) `Prove' with respect to a fact means to meet the
burden of establishing the fact (Section 36-1-201(8)).
(11) `Remitter' means a person who purchases an
instrument from its issuer if the instrument is payable to an
identified person other than the purchaser.
(b) Other definitions applying to this chapter and the
sections in which they appear are:
`Acceptance' Section 36-3-409
`Accommodated party' Section 36-3-419
`Accommodation party' Section 36-3-419
`Alteration' Section 36-3-407
`Anomalous indorsement' Section 36-3-205
`Blank indorsement' Section 36-3-205
`Cashier's check' Section 36-3-104
`Certificate of deposit' Section 36-3-104
`Certified check' Section 36-3-409
`Check' Section 36-3-104
`Consideration' Section 36-3-303
`Draft' Section 36-3-104
`Holder in due course' Section 36-3-302
`Incomplete instrument' Section 36-3-115
`Indorsement' Section 36-3-204
`Indorser' Section 36-3-204
`Instrument' Section 36-3-104
`Issue' Section 36-3-105
`Issuer' Section 36-3-105
`Negotiable instrument' Section 36-3-104
`Negotiation' Section 36-3-201
`Note' Section 36-3-104
`Payable at a definite time' Section 36-3-108
`Payable on demand' Section 36-3-108
`Payable to bearer' Section 36-3-109
`Payable to order' Section 36-3-109
`Payment' Section 36-3-602
`Person entitled to enforce' Section 36-3-301
`Presentment' Section 36-3-501
`Reacquisition' Section 36-3-207
`Special indorsement' Section 36-3-205
`Teller's check' Section 36-3-104
`Transfer of instrument' Section 36-3-203
`Traveler's check' Section 36-3-104
`Value' Section 36-3-303
(c) The following definitions in other chapters apply to
this chapter:
`Bank' Section 36-4-105
`Banking day' Section 36-4-104
`Clearing-house' Section 36-4-104
`Collecting bank' Section 36-4-105
`Depositary bank' Section 36-4-105
`Documentary draft' Section 36-4-104
`Intermediary bank' Section 36-4-105
`Item' Section 36-4-104
`Payor bank' Section 36-4-105
`Suspends payments' Section 36-4-104
(d) In addition, Chapter 1 contains general definitions and
principles of construction and interpretation applicable
throughout this chapter.
OFFICIAL COMMENT
1. Subsection (a) defines some common terms used
throughout the Article that were not defined by former Article
3 and adds the definitions of "order" and
"promise" found in former Section 3-102(1)(b) and
(c).
2. The definition of "order" includes an
instruction given by the signer to itself. The most common
example of this kind of order is a cashier's check: a draft with
respect to which the drawer and drawee are the same bank or
branches of the same bank. Former Section 3-118(a) treated a
cashier's check as a note. It stated "a draft drawn on the
drawer is effective as a note." Although it is technically
more correct to treat a cashier's check as a promise by the
issuing bank to pay rather than an order to pay, a cashier's
check is in the form of a check and it is normally referred to as
a check. Thus, revised Article 3 follows banking practice in
referring to a cashier's check as both a draft and a check rather
than a note. Some insurance companies also follow the practice
of issuing drafts in which the drawer draws on itself and makes
the draft payable at or through a bank. These instruments are
also treated as drafts. The obligation of the drawer of a
cashier's check or other draft drawn on the drawer is stated in
Section 3-412.
An order may be addressed to more than one person as
drawee either jointly or in the alternative. The authorization of
alternative drawees follows former Section 3-102(1)(b) and
recognizes the practice of drawers, such as corporations issuing
dividend checks, who for commercial convenience name a
number of drawees, usually in different parts of the country.
Section 3-501(b)(1) provides that presentment may be made to
any one of multiple drawees. Drawees in succession are not
permitted because the holder should not be required to make
more than one presentment. Dishonor by any drawee named in
the draft entitles the holder to rights of recourse against the
drawer or indorsers.
3. The last sentence of subsection (a)(9) is intended to make
it clear that an I.O.U. or other written acknowledgement of
indebtedness is not a note unless there is also an undertaking to
pay the obligation.
4. Subsection (a)(4) introduces a definition of good faith to
apply to Articles 3 and 4. Former Articles 3 and 4 used the
definition in Section 1-201(19). The definition in subsection
(a)(4) is consistent with the definitions of good faith applicable
to Articles 2, 2A, 4, and 4A. The definition requires not only
honesty in fact but also "observance of reasonable
commercial standards of fair dealing." Although fair
dealing is a broad term that must be defined in context, it is
clear that it is concerned with the fairness of conduct rather
than the care with which an act is performed. Failure to
exercise ordinary care in conducting a transaction is an entirely
different concept than failure to deal fairly in conducting the
transaction. Both fair dealing and ordinary care, which is
defined in Section 3-103(a)(7), are to be judged in the light of
reasonable commercial standards, but those standards in each
case are directed to different aspects of commercial conduct.
5. Subsection (a)(7) is a definition of ordinary care which is
applicable not only to Article 3 but to Article 4 as well. See
Section 4-104(c). The general rule is stated in the first sentence
of subsection (a)(7) and it applies both to banks and to persons
engaged in businesses other than banking. Ordinary care
means observance of reasonable commercial standards of the
relevant business prevailing in the area in which the person is
located. The second sentence of subsection (a)(7) is a
particular rule limited to the duty of a bank to examine an
instrument taken by a bank for processing for collection or
payment by automated means. This particular rule applies
primarily to Section 4-406 and it is discussed in Comment 4 to
that section. Nothing in Section 3-103(a)(7) is intended to
prevent a customer from proving that the procedures followed
by a bank are unreasonable, arbitrary, or unfair.
6. In subsection (c) reference is made to a new definition of
"bank" in amended Article 4.
Section 36-3-104. NEGOTIABLE INSTRUMENT.
(a) Except as provided in subsections (c) and (d),
`negotiable instrument' means 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 it:
(1) is payable to bearer or to order at the time it is issued
or first comes into possession of a holder;
(2) is payable on demand or at a definite time; and
(3) 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, but the promise or order may
contain (i) an undertaking or power to give, maintain, or protect
collateral to secure payment, (ii) an authorization or power to
the holder to confess judgment or realize on or dispose of
collateral, or (iii) a waiver of the benefit of any law intended for
the advantage or protection of an obligor.
(b) `Instrument' means a negotiable instrument.
(c) An order that meets all of the requirements of
subsection (a), except paragraph (1), and otherwise falls within
the definition of `check' in subsection (f) is a negotiable
instrument and a check.
(d) A promise or order other than a check is not an
instrument if, at the time it is issued or first comes into
possession of a holder, it contains a conspicuous statement,
however expressed, to the effect that the promise or order is not
negotiable or is not an instrument governed by this chapter.
(e) An instrument is a `note' if it is a promise and is a
`draft' if it is an order. If an instrument falls within the
definition of both `note' and `draft', a person entitled to enforce
the instrument may treat it as either.
(f) `Check' means (i) a draft, other than a documentary
draft, payable on demand and drawn on a bank or (ii) a cashier's
check or teller's check. An instrument may be a check even
though it is described on its face by another term, such as
`money order'.
(g) `Cashier's check' means a draft with respect to which
the drawer and drawee are the same bank or branches of the
same bank.
(h) `Teller's check' means a draft drawn by a bank (i) on
another bank, or (ii) payable at or through a bank.
(i) `Traveler's check' means an instrument that (i) is payable
on demand, (ii) is drawn on or payable at or through a bank,
(iii) is designated by the term `traveler's check' or by a
substantially similar term, and (iv) requires, as a condition to
payment, a countersignature by a person whose specimen
signature appears on the instrument.
(j) `Certificate of deposit' means an instrument containing an
acknowledgment by a bank that a sum of money has been
received by the bank and a promise by the bank to repay the
sum of money. A certificate of deposit is a note of the
bank.
OFFICIAL COMMENT
1. The definition of "negotiable instrument"
defines the scope of Article 3 since Section 3-102 states:
"This Article applies to negotiable instruments."
The definition in Section 3-104(a) incorporates other
definitions in Article 3. An instrument is either a
"promise," defined in Section 3-103(a)(9), or
"order," defined in Section 3-103(a)(6). A promise
is a written undertaking to pay money signed by the person
undertaking to pay. An order is a written instruction to pay
money signed by the person giving the instruction. Thus, the
term "negotiable instrument" is limited to a signed
writing that orders or promises payment of money.
"Money" is defined in Section 1-201(24) and is not
limited to United States dollars. It also includes a medium of
exchange established by a foreign government or monetary
units of account established by an intergovernmental
organization or by agreement between two or more nations.
Five other requirements are stated in Section 3-104(a): First,
the promise or order must be "unconditional." The
quoted term is explained in Section 3-106. Second, the amount
of money must be "a fixed amount * * * with or without
interest or other charges described in the promise or
order." Section 3-112(b) relates to "interest."
Third, the promise or order must be "payable to bearer or
to order." The quoted phrase is explained in Section
3-109. An exception to this requirement is stated in subsection
(c). Fourth, the promise or order must be payable "on
demand or at a definite time." The quoted phrase is
explained in Section 3-108. Fifth, the promise or order may 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" with three exceptions. The quoted
phrase is based on the first sentence of N.I.L. Section 5 which
is the precursor of "no other promise, order, obligation or
power given by the maker or drawer" appearing in former
Section 3-104(1)(b). The words "instruction" and
"undertaking" are used instead of
"order" and "promise" that are used in
the N.I.L. formulation because the latter words are defined
terms that include only orders or promises to pay money. The
three exceptions stated in Section 3-104(a)(3) are based on and
are intended to have the same meaning as former Section
3-112(1)(b), (c), (d), and (e), as well as N.I.L. Section 5(1), (2),
and (3). Subsection (b) states that "instrument"
means a "negotiable instrument." This follows
former Section 3-102(1)(e) which treated the two terms as
synonymous.
2. Unless subsection (c) applies, the effect of subsection
(a)(1) and Section 3-102(a) is to exclude from Article 3 any
promise or order that is not payable to bearer or to order. There
is no provision in revised Article 3 that is comparable to former
Section 3-805. The Comment to former Section 3-805 states
that the typical example of a writing covered by that section is
a check reading "Pay John Doe." Such a check was
governed by former Article 3 but there could not be a holder in
due course of the check. Under Section 3-104(c) such a check
is governed by revised Article 3 and there can be a holder in
due course of the check. But subsection (c) applies only to
checks. The Comment to former Section 3-805 does not state
any example other than the check to illustrate that section.
Subsection (c) is based on the belief that it is good policy to
treat checks, which are payment instruments, as negotiable
instruments whether or not they contain the words "to the
order of". These words are almost always pre-printed on
the check form. Occasionally the drawer of a check may strike
out these words before issuing the check. In the past some
credit unions used check forms that did not contain the quoted
words. Such check forms may still be in use but they are no
longer common. Absence of the quoted words can easily be
overlooked and should not affect the rights of holders who may
pay money or give credit for a check without being aware that
it is not in the conventional form.
Total exclusion from Article 3 of other promises or orders
that are not payable to bearer or to order serves a useful
purpose. It provides a simple device to clearly exclude a
writing that does not fit the pattern of typical negotiable
instruments and which is not intended to be a negotiable
instrument. If a writing could be an instrument despite the
absence of "to order" or "to bearer"
language and a dispute arises with respect to the writing, it
might be argued that the writing is a negotiable instrument
because the other requirements of subsection (a) are somehow
met. Even if the argument is eventually found to be without
merit it can be used as a litigation ploy. Words making a
promise or order payable to bearer or to order are the most
distinguishing feature of a negotiable instrument and such
words are frequently referred to as "words of
negotiability." Article 3 is not meant to apply to
contracts for the sale of goods or services or the sale or lease of
real property or similar writings that may contain a promise to
pay money. The use of words of negotiability in such contracts
would be an aberration. Absence of the words precludes any
argument that such contracts might be negotiable instruments.
An order or promise that is excluded from Article 3 because
of the requirements of Section 3-104(a) may nevertheless be
similar to a negotiable instrument in many respects. Although
such a writing cannot be made a negotiable instrument within
Article 3 by contract or conduct of its parties, nothing in
Section 3-104 or in Section 3-102 is intended to mean that in a
particular case involving such a writing a court could not arrive
at a result similar to the result that would follow if the writing
were a negotiable instrument. For example, a court might find
that the obligor with respect to a promise that does not fall
within Section 3-104(a) is precluded from asserting a defense
against a bona fide purchaser. The preclusion could be based
on estoppel or ordinary principles of contract. It does not
depend upon the law of negotiable instruments. An example is
stated in the paragraph following Case #2 in Comment 4 to
Section 3-302.
Moreover, consistent with the principle stated in Section
1-102(2)(b), the immediate parties to an order or promise that
is not an instrument may provide by agreement that one or
more of the provisions of Article 3 determine their rights and
obligations under the writing. Upholding the parties' choice is
not inconsistent with Article 3. Such an agreement may bind
a transferee of the writing if the transferee has notice of it or the
agreement arises from usage of trade and the agreement does
not violate other law or public policy. An example of such an
agreement is a provision that a transferee of the writing has the
rights of a holder in due course stated in Article 3 if the
transferee took rights under the writing in good faith, for value,
and without notice of a claim or defense.
Even without an agreement of the parties to an order or
promise that is not an instrument, it may be appropriate,
consistent with the principles stated in Section 1-102(2), for a
court to apply one or more provisions of Article 3 to the writing
by analogy, taking into account the expectations of the parties
and the differences between the writing and an instrument
governed by Article 3. Whether such application is appropriate
depends upon the facts of each case.
3. Subsection (d) allows exclusion from Article 3 of a
writing that would otherwise be an instrument under subsection
(a) by a statement to the effect that the writing is not negotiable
or is not governed by Article 3. For example, a promissory
note can be stamped with the legend NOT NEGOTIABLE.
The effect under subsection (d) is not only to negate the
possibility of a holder in due course, but to prevent the writing
from being a negotiable instrument for any purpose.
Subsection (d) does not, however, apply to a check. If a writing
is excluded from Article 3 by subsection (d), a court could,
nevertheless, apply Article 3 principles to it by analogy as
stated in Comment 2.
4. Instruments are divided into two general categories:
drafts and notes. A draft is an instrument that is an order. A
note is an instrument that is a promise. Section 3-104(e). The
term "bill of exchange" is not used in Article 3. It
is generally understood to be a synonym for the term
"draft." Subsections (f) through (j) define
particular instruments that fall within the categories of draft and
note. The term "draft," defined in subsection (e),
includes a "check" which is defined in subsection
(f). "Check" includes a share draft drawn on a
credit union payable through a bank because the definition of
bank (Section 4-104) includes credit unions. However, a draft
drawn on an insurance company payable through a bank is not
a check because it is not drawn on a bank. "Money
orders" are sold both by banks and non-banks. They vary
in form and their form determines how they are treated in
Article 3. The most common form of money order sold by
banks is that of an ordinary check drawn by the purchaser
except that the amount is machine impressed. That kind of
money order is a check under Article 3 and is subject to a stop
order by the purchaser-drawer as in the case of ordinary checks.
The seller bank is the drawee and has no obligation to a holder
to pay the money order. If a money order falls within the
definition of a teller's check, the rules applicable to teller's
checks apply. Postal money orders are subject to federal law.
"Teller's check" is separately defined in subsection
(h). A teller's check is always drawn by a bank and is usually
drawn on another bank. In some cases a teller's check is drawn
on a nonbank but is made payable at or through a bank. Article
3 treats both types of teller's check identically, and both are
included in the definition of "check." A cashier's
check, defined in subsection (g), is also included in the
definition of "check." Traveler's checks are issued
both by banks and non-banks and may be in the form of a note
or draft. Subsection (i) states the essential characteristics of a
traveler's check. The requirement that the instrument be
"drawn on or payable at or through a bank" may be
satisfied without words on the instrument that identify a bank
as drawee or paying agent so long as the instrument bears an
appropriate routing number that identifies a bank as paying
agent.
The definitions in Regulation CC Section 229.2 of the terms
"check," "cashier's check,"
"teller's check," and "traveler's check"
are different from the definitions of those terms in Article 3.
Certificates of deposit are treated in former Article 3 as a
separate type of instrument. In revised Article 3, Section
3-104(j) treats them as notes.
Section 36-3-105. ISSUE OF INSTRUMENT.
(a) `Issue' means the first delivery of an instrument by the
maker or drawer, whether to a holder or nonholder, for the
purpose of giving rights on the instrument to any person.
(b) An unissued instrument, or an unissued incomplete
instrument that is completed, is binding on the maker or drawer,
but nonissuance is a defense. An instrument that is
conditionally issued or is issued for a special purpose is binding
on the maker or drawer, but failure of the condition or special
purpose to be fulfilled is a defense.
(c) `Issuer' applies to issued and unissued instruments and
means a maker or drawer of an instrument.
OFFICIAL COMMENT
1. Under former Section 3-102(1)(a) "issue"
was defined as the first delivery to a "holder or a
remitter" but the term "remitter" was neither
defined nor otherwise used. In revised Article 3, Section
3-105(a) defines "issue" more broadly to include
the first delivery to anyone by the drawer or maker for the
purpose of giving rights to anyone on the instrument.
"Delivery" with respect to instruments is defined in
Section 1-201(14) as meaning "voluntary transfer of
possession."
2. Subsection (b) continues the rule that nonissuance,
conditional issuance or issuance for a special purpose is a
defense of the maker or drawer of an instrument. Thus, the
defense can be asserted against a person other than a holder in
due course. The same rule applies to nonissuance of an
incomplete instrument later completed.
3. Subsection (c) defines "issuer" to include the
signer of an unissued instrument for convenience of reference
in the statute.
Section 36-3-106. UNCONDITIONAL PROMISE OR
ORDER.
(a) Except as provided in this section, for the purposes of
Section 36-3-104(a), a promise or order is unconditional unless
it states (i) an express condition to payment, (ii) that the
promise or order is subject to or governed by another writing,
or (iii) that rights or obligations with respect to the promise or
order are stated in another writing. A reference to another
writing does not of itself make the promise or order conditional.
(b) A promise or order is not made conditional (i) by a
reference to another writing for a statement of rights with
respect to collateral, prepayment, or acceleration, or (ii)
because payment is limited to resort to a particular fund or
source.
(c) If a promise or order requires, as a condition to
payment, a countersignature by a person whose specimen
signature appears on the promise or order, the condition does
not make the promise or order conditional for the purposes of
Section 36-3-104(a). If the person whose specimen signature
appears on an instrument fails to countersign the instrument,
the failure to countersign is a defense to the obligation of the
issuer, but the failure does not prevent a transferee of the
instrument from becoming a holder of the instrument.
(d) If a promise or order at the time it is issued or first
comes into possession of a holder contains a statement,
required by applicable statutory or administrative law, to the
effect that the rights of a holder or transferee are subject to
claims or defenses that the issuer could assert against the
original payee, the promise or order is not made conditional for
the purposes of Section 3-104(a); but if the promise or order is
an instrument, there cannot be a holder in due course of the
instrument.
OFFICIAL COMMENT
1. This provision replaces former Section 3-105. Its
purpose is to define when a promise or order fulfills the
requirement in Section 3-104(a) that it be an
"unconditional" promise or order to pay. Under
Section 3-106(a) a promise or order is deemed to be
unconditional unless one of the two tests of the subsection
make the promise or order conditional. If the promise or order
states an express condition to payment, the promise or order is
not an instrument. For example, a promise states, "I
promise to pay $100,000 to the order of John Doe if he conveys
title to Blackacre to me." The promise is not an
instrument because there is an express condition to payment.
However, suppose a promise states, "In consideration of
John Doe's promise to convey title to Blackacre I promise to
pay $100,000 to the order of John Doe." That promise
can be an instrument if Section 3-104 is otherwise satisfied.
Although the recital of the executory promise of Doe to convey
Blackacre might be read as an implied condition that the
promise be performed, the condition is not an express condition
as required by Section 3-106(a)(i). This result is consistent
with former Section 3-105(1)(a) and (b). Former Section
3-105(1)(b) is not repeated in Section 3-106 because it is not
necessary. It is an example of an implied condition. Former
Section 3-105(1)(d), (e), and (f) and the first clause of former
Section 3-105(1)(c) are other examples of implied conditions.
They are not repeated in Section 3-106 because they are not
necessary. The law is not changed.
Section 3-106(a)(ii) and (iii) carry forward the substance of
former Section 3-105(2)(a). The only change is the use of
"writing" instead of "agreement" and
a broadening of the language that can result in conditionality.
For example, a promissory note is not an instrument defined by
Section 3-104 if it contains any of the following statements: 1.
"This note is subject to a contract of sale dated April 1,
1990 between the payee and maker of this note." 2.
"This note is subject to a loan and security agreement
dated April 1, 1990 between the payee and maker of this
note." 3. "Rights and obligations of the parties
with respect to this note are stated in an agreement dated April
1, 1990 between the payee and maker of this note." It is
not relevant whether any condition to payment is or is not
stated in the writing to which reference is made. The rationale
is that the holder of a negotiable instrument should not be
required to examine another document to determine rights with
respect to payment. But subsection (b)(i) permits reference to
a separate writing for information with respect to collateral,
prepayment, or acceleration.
Many notes issued in commercial transactions are secured
by collateral, are subject to acceleration in the event of default,
or are subject to prepayment. A statement of rights and
obligations concerning collateral, prepayment, or acceleration
does not prevent the note from being an instrument if the
statement is in the note itself. See Section 3-104(a)(3) and
Section 3-108(b). In some cases it may be convenient not to
include a statement concerning collateral, prepayment, or
acceleration in the note, but rather to refer to an accompanying
loan agreement, security agreement or mortgage for that
statement. Subsection (b)(i) allows a reference to the
appropriate writing for a statement of these rights. For
example, a note would not be made conditional by the
following statement: "This note is secured by a security
interest in collateral described in a security agreement dated
April 1, 1990 between the payee and maker of this note. Rights
and obligations with respect to the collateral are [stated in]
[governed by] the security agreement." The bracketed
words are alternatives, either of which complies.
Subsection (b)(ii) addresses the issues covered by former
Section 3-105(1)(f), (g), and (h) and Section 3-105(2)(b).
Under Section 3-106(a) a promise or order is not made
conditional because payment is limited to payment from a
particular source or fund. This reverses the result of former
Section 3-105(2)(b). There is no cogent reason why the general
credit of a legal entity must be pledged to have a negotiable
instrument. Market forces determine the marketability of
instruments of this kind. If potential buyers don't want
promises or orders that are payable only from a particular
source or fund, they won't take them, but Article 3 should
apply.
2. Subsection (c) applies to traveler's checks or other
instruments that may require a countersignature. Although the
requirement of a countersignature is a condition to the
obligation to pay, traveler's checks are treated in the
commercial world as money substitutes and therefore should be
governed by Article 3. The first sentence of subsection (c)
allows a traveler's check to meet the definition of instrument by
stating that the countersignature condition does not make it
conditional for the purposes of Section 3-104. The second
sentence states the effect of a failure to meet the condition.
Suppose a thief steals a traveler's check and cashes it by
skillfully imitating the specimen signature so that the
countersignature appears to be authentic. The countersignature
is for the purpose of identification of the owner of the
instrument. It is not an indorsement. Subsection (c) provides
that the failure of the owner to countersign does not prevent a
transferee from becoming a holder. Thus, the merchant or bank
that cashed the traveler's check becomes a holder when the
traveler's check is taken. The forged countersignature is a
defense to the obligation of the issuer to pay the instrument,
and is included in defenses under Section 3-305(a)(2). These
defenses may not be asserted against a holder in due course.
Whether a holder has notice of the defense is a factual question.
If the countersignature is a very bad forgery, there may be
notice. But if the merchant or bank cashed a traveler's check
and the countersignature appeared to be similar to the specimen
signature, there might not be notice that the countersignature
was forged. Thus, the merchant or bank could be a holder in
due course.
3. Subsection (d) concerns the effect of a statement to the
effect that the rights of a holder or transferee are subject to
claims and defenses that the issuer could assert against the
original payee. The subsection applies only if the statement is
required by statutory or administrative law. The prime example
is the Federal Trade Commission Rule (16 C.F.R. Part 433)
preserving consumers' claims and defenses in consumer credit
sales. The intent of the FTC rule is to make it impossible for
there to be a holder in due course of a note bearing the FTC
legend and undoubtedly that is the result. But, under former
Article 3, the legend may also have had the unintended effect
of making the note conditional, thus excluding the note from
former Article 3 altogether. Subsection (d) is designed to make
it possible to preclude the possibility of a holder in due course
without excluding the instrument from Article 3. Most of the
provisions of Article 3 are not affected by the
holder-in-due-course doctrine and there is no reason why
Article 3 should not apply to a note bearing the FTC legend if
holder-in-due-course rights are not involved. Under subsection
(d) the statement does not make the note conditional. If the
note otherwise meets the requirements of Section 3-104(a) it is
a negotiable instrument for all purposes except that there cannot
be a holder in due course of the note. No particular form of
legend or statement is required by subsection (d). The form of
a particular legend or statement may be determined by the other
statute or administrative law. For example, the FTC legend
required in a note taken by the seller in a consumer sale of
goods or services is tailored to that particular transaction and
therefore uses language that is somewhat different from that
stated in subsection (d), but the difference in expression does
not affect the essential similarity of the message conveyed. The
effect of the FTC legend is to make the rights of a holder or
transferee subject to claims or defenses that the issuer could
assert against the original payee of the note.
Section 36-3-107. INSTRUMENT PAYABLE IN
FOREIGN MONEY.
Unless the instrument otherwise provides, an instrument that
states the amount payable in foreign money may be paid in the
foreign money or in an equivalent amount in dollars calculated
by using the current bank-offered spot rate at the place of
payment for the purchase of dollars on the day on which the
instrument is paid.
OFFICIAL COMMENT
The definition of instrument in Section 3-104 requires that
the promise or order be payable in "money." That
term is defined in Section 1-201(24) and is not limited to
United States dollars. Section 3-107 states than an instrument
payable in foreign money may be paid in dollars if the
instrument does not prohibit it. It also states a conversion rate
which applies in the absence of a different conversion rate
stated in the instrument. The reference in former Section
3-107(1) to instruments payable in "currency" or
"current funds" has been dropped as superfluous.
Section 36-3-108. PAYABLE ON DEMAND OR AT
DEFINITE TIME.
(a) A promise or order is `payable on demand' if it (i)
states that it is payable on demand or at sight, or otherwise
indicates that it is payable at the will of the holder, or (ii) does
not state any time of payment.
(b) A promise or order is `payable at a definite time' if it
is payable on elapse of a definite period of time after sight or
acceptance or at a fixed date or dates or at a time or times
readily ascertainable at the time the promise or order is issued,
subject to rights of (i) prepayment, (ii) acceleration, (iii)
extension at the option of the holder, or (iv) extension to a
further definite time at the option of the maker or acceptor or
automatically upon or after a specified act or event.
(c) If an instrument, payable at a fixed date, is also
payable upon demand made before the fixed date, the
instrument is payable on demand until the fixed date and, if
demand for payment is not made before that date, becomes
payable at a definite time on the fixed date.
OFFICIAL COMMENT
This section is a restatement of former Section 3-108 and
Section 3-109. Subsection (b) broadens former Section 3-109
somewhat by providing that a definite time includes a time
readily ascertainable at the time the promise or order is issued.
Subsection (b)(iii) and (iv) restates former Section 3-109(1)(d).
It adopts the generally accepted rule that a clause providing for
extension at the option of the holder, even without a time limit,
does not affect negotiability since the holder is given only a
right which the holder would have without the clause. If the
extension is to be at the option of the maker or acceptor or is to
be automatic, a definite time limit must be stated or the time of
payment remains uncertain and the order or promise is not a
negotiable instrument. If a definite time limit is stated, the
effect upon certainty of time of payment is the same as if the
instrument were made payable at the ultimate date with a term
providing for acceleration.
Section 36-3-109. PAYABLE TO BEARER OR TO
ORDER.
(a) A promise or order is payable to bearer if it:
(1) states that it is payable to bearer or to the order of
bearer or otherwise indicates that the person in possession of
the promise or order is entitled to payment;
(2) does not state a payee; or
(3) states that it is payable to or to the order of cash or
otherwise indicates that it is not payable to an identified person.
(b) A promise or order that is not payable to bearer is
payable to order if it is payable (i) to the order of an identified
person or (ii) to an identified person or order. A promise or
order that is payable to order is payable to the identified person.
(c) An instrument payable to bearer may become payable
to an identified person if it is specially indorsed pursuant to
Section 36-3-205(a). An instrument payable to an identified
person may become payable to bearer if it is indorsed in blank
pursuant to Section 36-3-205(b).
OFFICIAL COMMENT
1. Under Section 3-104(a), a promise or order cannot be an
instrument unless the instrument is payable to bearer or to order
when it is issued or unless Section 3-104(c) applies. The terms
"payable to bearer" and "payable to
order" are defined in Section 3-109. The quoted terms
are also relevant in determining how an instrument is
negotiated. If the instrument is payable to bearer it can be
negotiated by delivery alone. Section 3-201(b). An instrument
that is payable to an identified person cannot be negotiated
without the indorsement of the identified person. Section
3-201(b). An instrument payable to order is payable to an
identified person. Section 3-109(b). Thus, an instrument
payable to order requires the indorsement of the person to
whose order the instrument is payable.
2. Subsection (a) states when an instrument is payable to
bearer. An instrument is payable to bearer if it states that it is
payable to bearer, but some instruments use ambiguous terms.
For example, check forms usually have the words "to the
order of" printed at the beginning of the line to be filled
in for the name of the payee. If the drawer writes in the word
"bearer" or "cash," the check reads
"to the order of bearer" or "to the order of
cash." In each case the check is payable to bearer.
Sometimes the drawer will write the name of the payee
"John Doe" but will add the words "or
bearer." In that case the check is payable to bearer.
Subsection (a). Under subsection (b), if an instrument is
payable to bearer it can't be payable to order. This is different
from former Section 3-110(3). An instrument that purports to
be payable both to order and bearer states contradictory terms.
A transferee of the instrument should be able to rely on the
bearer term and acquire rights as a holder without obtaining the
indorsement of the identified payee. An instrument is also
payable to bearer if it does not state a payee. Instruments that
do not state a payee are in most cases incomplete instruments.
In some cases the drawer of a check may deliver or mail it to
the person to be paid without filling in the line for the name of
the payee. Under subsection (a) the check is payable to bearer
when it is sent or delivered. It is also an incomplete instrument.
This case is discussed in Comment 2 to Section 3-115.
Subsection (a)(3) contains the words "otherwise indicates
that it is not payable to an identified person." The quoted
words are meant to cover uncommon cases in which an
instrument indicates that it is not meant to be payable to a
specific person. Such an instrument is treated like a check
payable to "cash." The quoted words are not meant
to apply to an instrument stating that it is payable to an
identified person such as "ABC Corporation" if
ABC Corporation is a nonexistent company. Although the
holder of the check cannot be the nonexistent company, the
instrument is not payable to bearer. Negotiation of such an
instrument is governed by Section 3-404(b).
Section 36-3-110. IDENTIFICATION OF PERSON
TO WHOM INSTRUMENT IS PAYABLE.
(a) The person to whom an instrument is initially payable
is determined by the intent of the person, whether or not
authorized, signing as, or in the name or behalf of, the issuer of
the instrument. The instrument is payable to the person
intended by the signer even if that person is identified in the
instrument by a name or other identification that is not that of
the intended person. If more than one person signs in the name
or behalf of the issuer of an instrument and all the signers do
not intend the same person as payee, the instrument is payable
to any person intended by one or more of the signers.
(b) If the signature of the issuer of an instrument is made
by automated means, such as a check-writing machine, the
payee of the instrument is determined by the intent of the
person who supplied the name or identification of the payee,
whether or not authorized to do so.
(c) A person to whom an instrument is payable may be
identified in any way, including by name, identifying number,
office, or account number. For the purpose of determining the
holder of an instrument, the following rules apply:
(1) If an instrument is payable to an account and the
account is identified only by number, the instrument is payable
to the person to whom the account is payable. If an instrument
is payable to an account identified by number and by the name
of a person, the instrument is payable to the named person,
whether or not that person is the owner of the account identified
by number.
(2) If an instrument is payable to:
(i) a trust, an estate, or a person described as trustee
or representative of a trust or estate, the instrument is payable
to the trustee, the representative, or a successor of either,
whether or not the beneficiary or estate is also named;
(ii) a person described as agent or similar
representative of a named or identified person, the instrument
is payable to the represented person, the representative, or a
successor of the representative;
(iii) a fund or organization that is not a legal entity,
the instrument is payable to a representative of the members of
the fund or organization; or
(iv) an office or to a person described as holding an
office, the instrument is payable to the named person, the
incumbent of the office, or a successor to the incumbent.
(d) If an instrument is payable to two or more persons
alternatively, it is payable to any of them and may be
negotiated, discharged, or enforced by any or all of them in
possession of the instrument. If an instrument is payable to two
or more persons not alternatively, it is payable to all of them
and may be negotiated, discharged, or enforced only by all of
them. If an instrument payable to two or more persons is
ambiguous as to whether it is payable to the persons
alternatively, the instrument is payable to the persons
alternatively.
OFFICIAL COMMENT
1. Section 3-110 states rules for determining the identity of
the person to whom an instrument is initially payable if the
instrument is payable to an identified person. This issue
usually arises in a dispute over the validity of an indorsement
in the name of the payee. Subsection (a) states the general rule
that the person to whom an instrument is payable is determined
by the intent of "the person, whether or not authorized,
signing as, or in the name or behalf of, the issuer of the
instrument." "Issuer" means the maker or
drawer of the instrument. Section 3-105(c). If X signs a check
as drawer of a check on X's account, the intent of X controls.
If X, as President of Corporation, signs a check as President in
behalf of Corporation as drawer, the intent of X controls. If X
forges Y's signature as drawer of a check, the intent of X also
controls. Under Section 3-103(a)(3), Y is referred to as the
drawer of the check because the signing of Y's name identifies
Y as the drawer. But since Y's signature was forged Y has no
liability as drawer (Section 3-403(a)) unless some other
provision of Article 3 or Article 4 makes Y liable. Since X,
even though unauthorized, signed in the name of Y as issuer,
the intent of X determines to whom the check is payable.
In the case of a check payable to "John Smith,"
since there are many people in the world named "John
Smith" it is not possible to identify the payee of the check
unless there is some further identification or the intention of the
drawer is determined. Name alone is sufficient under
subsection (a), but the intention of the drawer determines which
John Smith is the person to whom the check is payable. The
same issue is presented in cases of misdescriptions of the
payee. The drawer intends to pay a person known to the drawer
as John Smith. In fact that person's name is James Smith or
John Jones or some other entirely different name. If the check
identifies the payee as John Smith, it is nevertheless payable to
the person intended by the drawer. That person may indorse
the check in either the name John Smith or the person's correct
name or in both names. Section 3-204(d). The intent of the
drawer is also controlling in fictitious payee cases. Section
3-404(b). The last sentence of subsection (a) refers to rare
cases in which the signature of an organization requires more
than one signature and the persons signing on behalf of the
organization do not all intend the same person as payee. Any
person intended by a signer for the organization is the payee
and an indorsement by that person is an effective indorsement.
Subsection (b) recognizes the fact that in a large number of
cases there is no human signer of an instrument because the
instrument, usually a check, is produced by automated means
such as a check-writing machine. In that case, the relevant
intent is that of the person who supplied the name of the payee.
In most cases that person is an employee of the drawer, but in
some cases the person could be an outsider who is committing
a fraud by introducing names of payees of checks into the
system that produces the checks. A check-writing machine is
likely to be operated by means of a computer in which is stored
information as to name and address of the payee and the
amount of the check. Access to the computer may allow
production of fraudulent checks without knowledge of the
organization that is the issuer of the check. Section 3-404(b) is
also concerned with this issue. See Case #4 in Comment 2 to
Section 3-404.
2. Subsection (c) allows the payee to be identified in any
way including the various ways stated. Subsection (c)(1)
relates to instruments payable to bank accounts. In some cases
the account might be identified by name and number, and the
name and number might refer to different persons. For
example, a check is payable to "X Corporation Account
No. 12345 in Bank of Podunk." Under the last sentence
of subsection (c)(1), this check is payable to X Corporation and
can be negotiated by X Corporation even if Account No. 12345
is some other person's account or the check is not deposited in
that account. In other cases the payee is identified by an
account number and the name of the owner of the account is not
stated. For example, Debtor pays Creditor by issuing a check
drawn on Payor Bank. The check is payable to a bank account
owned by Creditor but identified only by number. Under the
first sentence of subsection (c)(1) the check is payable to
Creditor and, under Section 1-201(20), Creditor becomes the
holder when the check is delivered. Under Section 3-201(b),
further negotiation of the check requires the indorsement of
Creditor. But under Section 4-205(a), if the check is taken by
a depositary bank for collection, the bank may become a holder
without the indorsement. Under Section 3-102(b), provisions
of Article 4 prevail over those of Article 3. The depositary
bank warrants that the amount of the check was credited to the
payee's account.
3. Subsection (c)(2) replaces former Section 3-117 and
subsections (1)(e), (f), and (g) of former Section 3-110. This
provision merely determines who can deal with an instrument
as a holder. It does not determine ownership of the instrument
or its proceeds. Subsection (c)(2)(i) covers trusts and estates.
If the instrument is payable to the trust or estate or to the trustee
or representative of the trust or estate, the instrument is payable
to the trustee or representative or any successor. Under
subsection (c)(2)(ii), if the instrument states that it is payable to
Doe, President of X Corporation, either Doe or X Corporation
can be holder of the instrument. Subsection (c)(2)(iii) concerns
informal organizations that are not legal entities such as
unincorporated clubs and the like. Any representative of the
members of the organization can act as holder. Subsection
(c)(2)(iv) applies principally to instruments payable to public
offices such as a check payable to County Tax Collector.
4. Subsection (d) replaces former Section 3-116. An
instrument payable to X or Y is governed by the first sentence
of subsection (d). An instrument payable to X and Y is
governed by the second sentence of subsection (d). If an
instrument is payable to X or Y, either is the payee and if either
is in possession that person is the holder and the person entitled
to enforce the instrument. Section 3-301. If an instrument is
payable to X and Y, neither X nor Y acting alone is the person
to whom the instrument is payable. Neither person, acting
alone, can be the holder of the instrument. The instrument is
"payable to an identified person." The
"identified person" is X and Y acting jointly.
Section 3-109(b) and Section 1-102(5)(a). Thus, under Section
1-201(20) X or Y, acting alone, cannot be the holder or the
person entitled to enforce or negotiate the instrument because
neither, acting alone, is the identified person stated in the
instrument.
The third sentence of subsection (d) is directed to cases in
which it is not clear whether an instrument is payable to
multiple payees alternatively. In the case of ambiguity persons
dealing with the instrument should be able to rely on the
indorsement of a single payee. For example, an instrument
payable to X and/or Y is treated like an instrument payable to
X or Y.
Section 36-3-111. PLACE OF PAYMENT.
Except as otherwise provided for items in Article 4, an
instrument is payable at the place of payment stated in the
instrument. If no place of payment is stated, an instrument is
payable at the address of the drawee or maker stated in the
instrument. If no address is stated, the place of payment is the
place of business of the drawee or maker. If a drawee or maker
has more than one place of business, the place of payment is
any place of business of the drawee or maker chosen by the
person entitled to enforce the instrument. If the drawee or
maker has no place of business, the place of payment is the
residence of the drawee or maker.
OFFICIAL COMMENT
If an instrument is payable at a bank in the United States,
Section 3-501(b)(1) states that presentment must be made at the
place of payment, i.e. the bank. The place of presentment of a
check is governed by Regulation CC Section 229.36.
Section 36-3-112. INTEREST.
(a) Unless otherwise provided in the instrument, (i) an
instrument is not payable with interest, and (ii) interest on an
interest-bearing instrument is payable from the date of the
instrument.
(b) Interest may be stated in an instrument as a fixed or
variable amount of money or it may be expressed as a fixed or
variable rate or rates. The amount or rate of interest may be
stated or described in the instrument in any manner and may
require reference to information not contained in the
instrument. If an instrument provides for interest, but the
amount of interest payable cannot be ascertained from the
description, interest is payable at the judgment rate in effect at
the place of payment of the instrument and at the time interest
first accrues.
OFFICIAL COMMENT
1. Under Section 3-104(a) the requirement of a "fixed
amount" applies only to principal. The amount of interest
payable is that described in the instrument. If the description
of interest in the instrument does not allow for the amount of
interest to be ascertained, interest is payable at the judgment
rate. Hence, if an instrument calls for interest, the amount of
interest will always be determinable. If a variable rate of
interest is prescribed, the amount of interest is ascertainable by
reference to the formula or index described or referred to in the
instrument. The last sentence of subsection (b) replaces
subsection (d) of former Section 3-118.
2. The purpose of subsection (b) is to clarify the meaning of
"interest" in the introductory clause of Section
3-104(a). It is not intended to validate a provision for interest
in an instrument if that provision violates other law.
Section 36-3-113. DATE OF INSTRUMENT.
(a) An instrument may be antedated or postdated. The
date stated determines the time of payment if the instrument is
payable at a fixed period after date. Except as provided in
Section 36-4-401(c), an instrument payable on demand is not
payable before the date of the instrument.
(b) If an instrument is undated, its date is the date of its
issue or, in the case of an unissued instrument, the date it first
comes into possession of a holder.
OFFICIAL COMMENT
This section replaces former Section 3-114. Subsections (1)
and (3) of former Section 3-114 are deleted as unnecessary.
Section 3-113(a) is based in part on subsection (2) of former
Section 3-114. The rule that a demand instrument is not
payable before the date of the instrument is subject to Section
4-401(c) which allows the payor bank to pay a postdated check
unless the drawer has notified the bank of the postdating
pursuant to a procedure prescribed in that subsection. With
respect to an undated instrument, the date is the date of issue.
Section 36-3-114. CONTRADICTORY TERMS OF
INSTRUMENT.
If an instrument contains contradictory terms, typewritten
terms prevail over printed terms, handwritten terms prevail over
both, and words prevail over numbers.
OFFICIAL COMMENT
Section 3-114 replaces subsections (b) and (c) of former
Section 3-118.
Section 36-3-115. INCOMPLETE INSTRUMENT.
(a) `Incomplete instrument' means a signed writing,
whether or not issued by the signer, the contents of which show
at the time of signing that it is incomplete but that the signer
intended it to be completed by the addition of words or
numbers.
(b) Subject to subsection (c), if an incomplete instrument
is an instrument under Section 36-3-104, it may be enforced
according to its terms if it is not completed, or according to its
terms as augmented by completion. If an incomplete
instrument is not an instrument under Section 36-3-104, but,
after completion, the requirements of Section 36-3-104 are met,
the instrument may be enforced according to its terms as
augmented by completion.
(c) If words or numbers are added to an incomplete
instrument without authority of the signer, there is an alteration
of the incomplete instrument under Section 36-3-407.
(d) The burden of establishing that words or numbers
were added to an incomplete instrument without authority of
the signer is on the person asserting the lack of authority.
OFFICIAL COMMENT
1. This section generally carries forward the rules set out in
former Section 3-115. The term "incomplete
instrument" applies both to an "instrument,"
i.e. a writing meeting all the requirements of Section 3-104, and
to a writing intended to be an instrument that is signed but lacks
some element of an instrument. The test in both cases is
whether the contents show that it is incomplete and that the
signer intended that additional words or numbers be added.
2. If an incomplete instrument meets the requirements of
Section 3-104 and is not completed it may be enforced in
accordance with its terms. Suppose, in the following two cases,
that a note delivered to the payee is incomplete solely because
a space on the pre-printed note form for the due date is not
filled in:
Case #1. If the incomplete instrument is never
completed, the note is payable on demand. Section
3-108(a)(ii). However, if the payee and the maker agreed to a
due date, the maker may have a defense under Section 3-117 if
demand for payment is made before the due date agreed to by
the parties.
Case #2. If the payee completes the note by
filling in the due date agreed to by the parties, the note is
payable on the due date stated. However, if the due date filled
in was not the date agreed to by the parties there is an alteration
of the note. Section 3-407 governs the case.
Suppose Debtor pays Creditor by giving Creditor a check on
which the space for the name of the payee is left blank. The
check is an instrument but it is incomplete. The check is
enforceable in its incomplete form and it is payable to bearer
because it does not state a payee. Section 3-109(a)(2). Thus,
Creditor is a holder of the check. Normally in this kind of case
Creditor would simply fill in the space with Creditor's name.
When that occurs the check becomes payable to the Creditor.
3. In some cases the incomplete instrument does not meet
the requirements of Section 3-104. An example is a check with
the amount not filled in. The check cannot be enforced until
the amount is filled in. If the payee fills in an amount
authorized by the drawer the check meets the requirements of
Section 3-104 and is enforceable as completed. If the payee
fills in an unauthorized amount there is an alteration of the
check and Section 3-407 applies.
4. Section 3-302(a)(1) also bears on the problem of
incomplete instruments. Under that section a person cannot be
a holder in due course of the instrument if it is so incomplete as
to call into question its validity. Subsection (d) of Section
3-115 is based on the last clause of subsection (2) of former
Section 3-115.
Section 36-3-116. JOINT AND SEVERAL
LIABILITY; CONTRIBUTION.
(a) Except as otherwise provided in the instrument, two or
more persons who have the same liability on an instrument as
makers, drawers, acceptors, indorsers who indorse as joint
payees, or anomalous indorsers are jointly and severally liable
in the capacity in which they sign.
(b) Except as provided in Section 36-3-419(e) or by
agreement of the affected parties, a party having joint and
several liability who pays the instrument is entitled to receive
from any party having the same joint and several liability
contribution in accordance with applicable law.
(c) Discharge of one party having joint and several
liability by a person entitled to enforce the instrument does not
affect the right under subsection (b) of a party having the same
joint and several liability to receive contribution from the party
discharged.
OFFICIAL COMMENT
1. Subsection (a) replaces subsection (e) of former Section
3-118. Subsection (b) states contribution rights of parties with
joint and several liability by referring to applicable law. But
subsection (b) is subject to Section 3-419(e). If one of the
parties with joint and several liability is an accommodation
party and the other is the accommodated party, Section
3-419(e) applies. Subsection (c) deals with discharge. The
discharge of a jointly and severally liable obligor does not
affect the right of other obligors to seek contribution from the
discharged obligor.
2. Indorsers normally do not have joint and several liability.
Rather, an earlier indorser has liability to a later indorser. But
indorsers can have joint and several liability in two cases. If an
instrument is payable to two payees jointly, both payees must
indorse. The indorsement is a joint indorsement and the
indorsers have joint and several liability and subsection (b)
applies. The other case is that of two or more anomalous
indorsers. The term is defined in Section 3-205(d). An
anomalous indorsement normally indicates that the indorser
signed as an accommodation party. If more than one
accommodation party indorses a note as an accommodation to
the maker, the indorsers have joint and several liability and
subsection (b) applies.
Section 36-3-117. OTHER AGREEMENTS
AFFECTING INSTRUMENT.
Subject to applicable law regarding exclusion of proof of
contemporaneous or previous agreements, the obligation of a
party to an instrument to pay the instrument may be modified,
supplemented, or nullified by a separate agreement of the
obligor and a person entitled to enforce the instrument, if the
instrument is issued or the obligation is incurred in reliance on
the agreement or as part of the same transaction giving rise to
the agreement. To the extent an obligation is modified,
supplemented, or nullified by an agreement under this section,
the agreement is a defense to the obligation.
OFFICIAL COMMENT
1. The separate agreement might be a security agreement or
mortgage or it might be an agreement that contradicts the terms
of the instrument. For example, a person may be induced to
sign an instrument under an agreement that the signer will not
be liable on the instrument unless certain conditions are met.
Suppose X requested credit from Creditor who is willing to
give the credit only if an acceptable accommodation party will
sign the note of X as co-maker. Y agrees to sign as co-maker
on the condition that Creditor also obtain the signature of Z as
co-maker. Creditor agrees and Y signs as co-maker with X.
Creditor fails to obtain the signature of Z on the note. Under
Sections 3-412 and 3-419(b), Y is obliged to pay the note, but
Section 3-117 applies. In this case, the agreement modifies the
terms of the note by stating a condition to the obligation of Y
to pay the note. This case is essentially similar to a case in
which a maker of a note is induced to sign the note by fraud of
the holder. Although the agreement that Y not be liable on the
note unless Z also signs may not have been fraudulently made,
a subsequent attempt by Creditor to require Y to pay the note
in violation of the agreement is a bad faith act. Section 3-117,
in treating the agreement as a defense, allows Y to assert the
agreement against Creditor, but the defense would not be good
against a subsequent holder in due course of the note that took
it without notice of the agreement. If there cannot be a holder
in due course because of Section 3-106(d), a subsequent holder
that took the note in good faith, for value and without
knowledge of the agreement would not be able to enforce the
liability of Y. This result is consistent with the risk that a
holder not in due course takes with respect to fraud in inducing
issuance of an instrument.
2. The effect of merger or integration clauses to the effect
that a writing is intended to be the complete and exclusive
statement of the terms of the agreement or that the agreement
is not subject to conditions is left to the supplementary law of
the jurisdiction pursuant to Section 1-103. Thus, in the case
discussed in Comment 1, whether Y is permitted to prove the
condition to Y's obligation to pay the note is determined by that
law. Moreover, nothing in this section is intended to validate
an agreement which is fraudulent or void as against public
policy, as in the case of a note given to deceive a bank
examiner.
Section 36-3-118. STATUTE OF LIMITATIONS.
(a) Except as provided in subsection (e), an action to
enforce the obligation of a party to pay a note payable at a
definite time must be commenced within six years after the due
date or dates stated in the note or, if a due date is accelerated,
within six years after the accelerated due date.
(b) Except as provided in subsection (d) or (e), if demand
for payment is made to the maker of a note payable on demand,
an action to enforce the obligation of a party to pay the note
must be commenced within six years after the demand. If no
demand for payment is made to the maker, an action to enforce
the note is barred if neither principal nor interest on the note
has been paid for a continuous period of ten years.
(c) Except as provided in subsection (d), an action to
enforce the obligation of a party to an unaccepted draft to pay
the draft must be commenced within three years after dishonor
of the draft or ten years after the date of the draft, whichever
period expires first.
(d) An action to enforce the obligation of the acceptor of
a certified check or the issuer of a teller's check, cashier's
check, or traveler's check must be commenced within three
years after demand for payment is made to the acceptor or
issuer, as the case may be.
(e) An action to enforce the obligation of a party to a
certificate of deposit to pay the instrument must be commenced
within six years after demand for payment is made to the
maker, but if the instrument states a due date and the maker is
not required to pay before that date, the six-year period begins
when a demand for payment is in effect and the due date has
passed.
(f) An action to enforce the obligation of a party to pay an
accepted draft, other than a certified check, must be
commenced (i) within six years after the due date or dates
stated in the draft or acceptance if the obligation of the acceptor
is payable at a definite time, or (ii) within six years after the
date of the acceptance if the obligation of the acceptor is
payable on demand.
(g) Unless governed by other law regarding claims for
indemnity or contribution, an action (i) for conversion of an
instrument, for money had and received, or like action based on
conversion, (ii) for breach of warranty, or (iii) to enforce an
obligation, duty, or right arising under this chapter and not
governed by this section must be commenced within three years
after the cause of action accrues.
OFFICIAL COMMENT
1. Section 3-118 differs from former Section 3-122, which
states when a cause of action accrues on an instrument. Section
3-118 does not define when a cause of action accrues. Accrual
of a cause of action is stated in other sections of Article 3 such
as those that state the various obligations of parties to an
instrument. The only purpose of Section 3-118 is to define the
time within which an action to enforce an obligation, duty, or
right arising under Article 3 must be commenced. Section
3-118 does not attempt to state all rules with respect to a statute
of limitations. For example, the circumstances under which the
running of a limitations period may be tolled is left to other law
pursuant to Section 1-103.
2. The first six subsections apply to actions to enforce an
obligation of any party to an instrument to pay the instrument.
This changes present law in that indorsers who may become
liable on an instrument after issue are subject to a period of
limitations running from the same date as that of the maker or
drawer. Subsections (a) and (b) apply to notes. If the note is
payable at a definite time, a six-year limitations period starts at
the due date of the note, subject to prior acceleration. If the
note is payable on demand, there are two limitations periods.
Although a note payable on demand could theoretically be
called a day after it was issued, the normal expectation of the
parties is that the note will remain outstanding until there is
some reason to call it. If the law provides that the limitations
period does not start until demand is made, the cause of action
to enforce it may never be barred. On the other hand, if the
limitations period starts when demand for payment may be
made, i.e. at any time after the note was issued, the payee of a
note on which interest or portions of principal are being paid
could lose the right to enforce the note even though it was
treated as a continuing obligation by the parties. Some demand
notes are not enforced because the payee has forgiven the debt.
This is particularly true in family and other noncommercial
transactions. A demand note found after the death of the payee
may be presented for payment many years after it was issued.
The maker may be a relative and it may be difficult to
determine whether the note represents a real or a forgiven debt.
Subsection (b) is designed to bar notes that no longer represent
a claim to payment and to require reasonably prompt action to
enforce notes on which there is default. If a demand for
payment is made to the maker, a six-year limitations period
starts to run when demand is made. The second sentence of
subsection (b) bars an action to enforce a demand note if no
demand has been made on the note and no payment of interest
or principal has been made for a continuous period of 10 years.
This covers the case of a note that does not bear interest or a
case in which interest due on the note has not been paid. This
kind of case is likely to be a family transaction in which a
failure to demand payment may indicate that the holder did not
intend to enforce the obligation but neglected to destroy the
note. A limitations period that bars stale claims in this kind of
case is appropriate if the period is relatively long.
3. Subsection (c) applies primarily to personal uncertified
checks. Checks are payment instruments rather than credit
instruments. The limitations period expires three years after the
date of dishonor or 10 years after the date of the check,
whichever is earlier. Teller's checks, cashier's checks, certified
checks, and traveler's checks are treated differently under
subsection (d) because they are commonly treated as cash
equivalents. A great delay in presenting a cashier's check for
payment in most cases will occur because the check was
mislaid during that period. The person to whom traveler's
checks are issued may hold them indefinitely as a safe form of
cash for use in an emergency. There is no compelling reason
for barring the claim of the owner of the cashier's check or
traveler's check. Under subsection (d) the claim is never barred
because the three-year limitations period does not start to run
until demand for payment is made. The limitations period in
subsection (d) in effect applies only to cases in which there is
a dispute about the legitimacy of the claim of the person
demanding payment.
4. Subsection (e) covers certificates of deposit. The
limitations period of six years doesn't start to run until the
depositor demands payment. Most certificates of deposit are
payable on demand even if they state a due date. The effect of
a demand for payment before maturity is usually that the bank
will pay, but that a penalty will be assessed against the
depositor in the form of a reduction in the amount of interest
that is paid. Subsection (e) also provides for cases in which the
bank has no obligation to pay until the due date. In that case
the limitations period doesn't start to run until there is a demand
for payment in effect and the due date has passed.
5. Subsection (f) applies to accepted drafts other than
certified checks. When a draft is accepted it is in effect turned
into a note of the acceptor. In almost all cases the acceptor will
agree to pay at a definite time. Subsection (f) states that in that
case the six-year limitations period starts to run on the due date.
In the rare case in which the obligation of the acceptor is
payable on demand, the six-year limitations period starts to run
at the date of the acceptance.
6. Subsection (g) covers warranty and conversion cases and
other actions to enforce obligations or rights arising under
Article 3. A three-year period is stated and subsection (g)
follows general law in stating that the period runs from the time
the cause of action accrues. Since the traditional term
"cause of action" may have been replaced in some
states by "claim for relief" or some equivalent term,
the words "cause of action" have been bracketed to
indicate that the words may be replaced by an appropriate
substitute to conform to local practice.
Section 36-3-119. NOTICE OF RIGHT TO DEFEND
ACTION.
In an action for breach of an obligation for which a third
person is answerable over pursuant to this chapter or Chapter
4, the defendant may give the third person written notice of the
litigation, and the person notified may then give similar notice
to any other person who is answerable over. If the notice states
(i) that the person notified may come in and defend and (ii) that
failure to do so will bind the person notified in an action later
brought by the person giving the notice as to any determination
of fact common to the two litigations, the person notified is so
bound unless after seasonable receipt of the notice the person
notified comes in and defends.
OFFICIAL COMMENT
This section is a restatement of former Section 3-803.
PART 2
NEGOTIATION, TRANSFER, AND
INDORSEMENT
Section 36-3-201. NEGOTIATION.
(a) `Negotiation' means a transfer of possession, whether
voluntary or involuntary, of an instrument by a person other
than the issuer to a person who then becomes its holder.
(b) Except for negotiation by a remitter, if an instrument
is payable to an identified person, negotiation requires transfer
of possession of the instrument and its indorsement by the
holder. If an instrument is payable to bearer, it may be
negotiated by transfer of possession alone.
OFFICIAL COMMENT
1. Subsections (a) and (b) are based in part on subsection (1)
of former Section 3-202. A person can become holder of an
instrument when the instrument is issued to that person, or the
status of holder can arise as the result of an event that occurs
after issuance. "Negotiation" is the term used in
Article 3 to describe this post-issuance event. Normally,
negotiation occurs as the result of a voluntary transfer of
possession of an instrument by a holder to another person who
becomes the holder as a result of the transfer. Negotiation
always requires a change in possession of the instrument
because nobody can be a holder without possessing the
instrument, either directly or through an agent. But in some
cases the transfer of possession is involuntary and in some
cases the person transferring possession is not a holder. In
defining "negotiation" former Section 3-202(1)
used the word "transfer," an undefined term, and
"delivery," defined in Section 1-201(14) to mean
voluntary change of possession. Instead, subsections (a) and
(b) use the term "transfer of possession" and,
subsection (a) states that negotiation can occur by an
involuntary transfer of possession. For example, if an
instrument is payable to bearer and it is stolen by Thief or is
found by Finder, Thief or Finder becomes the holder of the
instrument when possession is obtained. In this case there is an
involuntary transfer of possession that results in negotiation to
Thief or Finder.
2. In most cases negotiation occurs by a transfer of
possession by a holder or remitter. Remitter transactions
usually involve a cashier's or teller's check. For example,
Buyer buys goods from Seller and pays for them with a
cashier's check of Bank that Buyer buys from Bank. The check
is issued by Bank when it is delivered to Buyer, regardless of
whether the check is payable to Buyer or to Seller. Section
3-105(a). If the check is payable to Buyer, negotiation to Seller
is done by delivery of the check to Seller after it is indorsed by
Buyer. It is more common, however, that the check when
issued will be payable to Seller. In that case Buyer is referred
to as the "remitter." Section 3-103(a)(11). The
remitter, although not a party to the check, is the owner of the
check until ownership is transferred to Seller by delivery. This
transfer is a negotiation because Seller becomes the holder of
the check when Seller obtains possession. In some cases Seller
may have acted fraudulently in obtaining possession of the
check. In those cases Buyer may be entitled to rescind the
transfer to Seller because of the fraud and assert a claim of
ownership to the check under Section 3-306 against Seller or a
subsequent transferee of the check. Section 3-202(b) provides
for rescission of negotiation, and that provision applies to
rescission by a remitter as well as by a holder.
3. Other sections of Article 3 may modify the rule stated in
the first sentence of subsection (b). See for example, Sections
3-404, 3-405, and 3-406.
Section 36-3-202. NEGOTIATION SUBJECT TO
RESCISSION.
(a) Negotiation is effective even if obtained (i) from an
infant, a corporation exceeding its powers, or a person without
capacity, (ii) by fraud, duress, or mistake, or (iii) in breach of
duty or as part of an illegal transaction.
(b) To the extent permitted by other law, negotiation may
be rescinded or may be subject to other remedies, but those
remedies may not be asserted against a subsequent holder in
due course or a person paying the instrument in good faith and
without knowledge of facts that are a basis for rescission or
other remedy.
OFFICIAL COMMENT
1. This section is based on former Section 3-207.
Subsection (2) of former Section 3-207 prohibited rescission of
a negotiation against holders in due course. Subsection (b) of
Section 3-202 extends this protection to payor banks.
2. Subsection (a) applies even though the lack of capacity
or the illegality, is of a character which goes to the essence of
the transaction and makes it entirely void. It is inherent in the
character of negotiable instruments that any person in
possession of an instrument which by its terms is payable to
that person or to bearer is a holder and may be dealt with by
anyone as a holder. The principle finds its most extreme
application in the well settled rule that a holder in due course
may take the instrument even from a thief and be protected
against the claim of the rightful owner. The policy of
subsection (a) is that any person to whom an instrument is
negotiated is a holder until the instrument has been recovered
from that person's possession. The remedy of a person with a
claim to an instrument is to recover the instrument by replevin
or otherwise; to impound it or to enjoin its enforcement,
collection or negotiation; to recover its proceeds from the
holder; or to intervene in any action brought by the holder
against the obligor. As provided in Section 3-305(c), the claim
of the claimant is not a defense to the obligor unless the
claimant defends the action.
3. There can be no rescission or other remedy against a
holder in due course or a person who pays in good faith and
without notice, even though the prior negotiation may have
been fraudulent or illegal in its essence and entirely void. As
against any other party the claimant may have any remedy
permitted by law. This section is not intended to specify what
that remedy may be, or to prevent any court from imposing
conditions or limitations such as prompt action or return of the
consideration received. All such questions are left to the law of
the particular jurisdiction. Section 3-202 gives no right that
would not otherwise exist. The section is intended to mean that
any remedies afforded by other law are cut off only by a holder
in due course.
Section 36-3-203. TRANSFER OF INSTRUMENT;
RIGHTS ACQUIRED BY TRANSFER.
(a) An instrument is transferred when it is delivered by a
person other than its issuer for the purpose of giving to the
person receiving delivery the right to enforce the instrument.
(b) Transfer of an instrument, whether or not the transfer
is a negotiation, vests in the transferee any right of the
transferor to enforce the instrument, including any right as a
holder in due course, but the transferee cannot acquire rights of
a holder in due course by a transfer, directly or indirectly, from
a holder in due course if the transferee engaged in fraud or
illegality affecting the instrument.
(c) Unless otherwise agreed, if an instrument is
transferred for value and the transferee does not become a
holder because of lack of indorsement by the transferor, the
transferee has a specifically enforceable right to the unqualified
indorsement of the transferor, but negotiation of the instrument
does not occur until the indorsement is made.
(d) If a transferor purports to transfer less than the entire
instrument, negotiation of the instrument does not occur. The
transferee obtains no rights under this chapter and has only the
rights of a partial assignee.
OFFICIAL COMMENT
1. Section 3-203 is based on former Section 3-201 which
stated that a transferee received such rights as the transferor
had. The former section was confusing because some rights of
the transferor are not vested in the transferee unless the transfer
is a negotiation. For example, a transferee that did not become
the holder could not negotiate the instrument, a right that the
transferor had. Former Section 3-201 did not define
"transfer." Subsection (a) defines transfer by
limiting it to cases in which possession of the instrument is
delivered for the purpose of giving to the person receiving
delivery the right to enforce the instrument.
Although transfer of an instrument might mean in a
particular case that title to the instrument passes to the
transferee, that result does not follow in all cases. The right to
enforce an instrument and ownership of the instrument are two
different concepts. A thief who steals a check payable to bearer
becomes the holder of the check and a person entitled to
enforce it, but does not become the owner of the check. If the
thief transfers the check to a purchaser the transferee obtains
the right to enforce the check. If the purchaser is not a holder
in due course, the owner's claim to the check may be asserted
against the purchaser. Ownership rights in instruments may be
determined by principles of the law of property, independent of
Article 3, which do not depend upon whether the instrument
was transferred under Section 3-203. Moreover, a person who
has an ownership right in an instrument might not be a person
entitled to enforce the instrument. For example, suppose X is
the owner and holder of an instrument payable to X. X sells the
instrument to Y but is unable to deliver immediate possession
to Y. Instead, X signs a document conveying all of X's right,
title, and interest in the instrument to Y. Although the
document may be effective to give Y a claim to ownership of
the instrument, Y is not a person entitled to enforce the
instrument until Y obtains possession of the instrument. No
transfer of the instrument occurs under Section 3-203(a) until
it is delivered to Y.
An instrument is a reified right to payment. The right is
represented by the instrument itself. The right to payment is
transferred by delivery of possession of the instrument
"by a person other than its issuer for the purpose of
giving to the person receiving delivery the right to enforce the
instrument." The quoted phrase excludes issue of an
instrument, defined in Section 3-105, and cases in which a
delivery of possession is for some purpose other than transfer
of the right to enforce. For example, if a check is presented for
payment by delivering the check to the drawee, no transfer of
the check to the drawee occurs because there is no intent to
give the drawee the right to enforce the check.
2. Subsection (b) states that transfer vests in the transferee
any right of the transferor to enforce the instrument
"including any right as a holder in due course." If
the transferee is not a holder because the transferor did not
indorse, the transferee is nevertheless a person entitled to
enforce the instrument under Section 3-301 if the transferor was
a holder at the time of transfer. Although the transferee is not
a holder, under subsection (b) the transferee obtained the rights
of the transferor as holder. Because the transferee's rights are
derivative of the transferor's rights, those rights must be proved.
Because the transferee is not a holder, there is no presumption
under Section 3-308 that the transferee, by producing the
instrument, is entitled to payment. The instrument, by its terms,
is not payable to the transferee and the transferee must account
for possession of the unindorsed instrument by proving the
transaction through which the transferee acquired it. Proof of
a transfer to the transferee by a holder is proof that the
transferee has acquired the rights of a holder. At that point the
transferee is entitled to the presumption under Section 3-308.
Under subsection (b) a holder in due course that transfers an
instrument transfers those rights as a holder in due course to the
purchaser. The policy is to assure the holder in due course a
free market for the instrument. There is one exception to this
rule stated in the concluding clause of subsection (b). A person
who is party to fraud or illegality affecting the instrument is not
permitted to wash the instrument clean by passing it into the
hands of a holder in due course and then repurchasing it.
3. Subsection (c) applies only to a transfer for value. It
applies only if the instrument is payable to order or specially
indorsed to the transferor. The transferee acquires, in the
absence of a contrary agreement, the specifically enforceable
right to the indorsement of the transferor. Unless otherwise
agreed, it is a right to the general indorsement of the transferor
with full liability as indorser, rather than to an indorsement
without recourse. The question may arise if the transferee has
paid in advance and the indorsement is omitted fraudulently or
through oversight. A transferor who is willing to indorse only
without recourse or unwilling to indorse at all should make
those intentions clear before transfer. The agreement of the
transferee to take less than an unqualified indorsement need not
be an express one, and the understanding may be implied from
conduct, from past practice, or from the circumstances of the
transaction. Subsection (c) provides that there is no negotiation
of the instrument until the indorsement by the transferor is
made. Until that time the transferee does not become a holder,
and if earlier notice of a defense or claim is received, the
transferee does not qualify as a holder in due course under
Section 3-302.
4. The operation of Section 3-203 is illustrated by the
following cases. In each case Payee, by fraud, induced Maker
to issue a note to Payee. The fraud is a defense to the
obligation of Maker to pay the note under Section 3-305(a)(2).
Case #1. Payee negotiated the note to X who
took as a holder in due course. After the instrument became
overdue X negotiated the note to Y who had notice of the fraud.
Y succeeds to X's rights as a holder in due course and takes free
of Maker's defense of fraud.
Case #2. Payee negotiated the note to X who
took as a holder in due course. Payee then repurchased the note
from X. Payee does not succeed to X's rights as a holder in due
course and is subject to Maker's defense of fraud.
Case #3. Payee negotiated the note to X who
took as a holder in due course. X sold the note to Purchaser
who received possession. The note, however, was indorsed to
X and X failed to indorse it. Purchaser is a person entitled to
enforce the instrument under Section 3-301 and succeeds to the
rights of X as holder in due course. Purchaser is not a holder,
however, and under Section 3-308 Purchaser will have to prove
the transaction with X under which the rights of X as holder in
due course were acquired.
Case #4. Payee sold the note to Purchaser
who took for value, in good faith and without notice of the
defense of Maker. Purchaser received possession of the note
but Payee neglected to indorse it. Purchaser became a person
entitled to enforce the instrument but did not become the holder
because of the missing indorsement. If Purchaser received
notice of the defense of Maker before obtaining the
indorsement of Payee, Purchaser cannot become a holder in due
course because at the time notice was received the note had not
been negotiated to Purchaser. If indorsement by Payee was
made after Purchaser received notice, Purchaser had notice of
the defense when it became the holder.
5. Subsection (d) restates former Section 3-202(3). The
cause of action on an instrument cannot be split. Any
indorsement which purports to convey to any party less than the
entire amount of the instrument is not effective for negotiation.
This is true of either "Pay A one-half," or
"Pay A two-thirds and B one-third." Neither A nor
B becomes a holder. On the other hand an indorsement reading
merely "Pay A and B" is effective, since it transfers
the entire cause of action to A and B as tenants in common. An
indorsement purporting to convey less than the entire
instrument does, however, operate as a partial assignment of the
cause of action. Subsection (d) makes no attempt to state the
legal effect of such an assignment, which is left to other law.
A partial assignee of an instrument has rights only to the extent
the applicable law gives rights, either at law or in equity, to a
partial assignee.
Section 36-3-204. INDORSEMENT.
(a) `Indorsement' means a signature, other than that of a
signer as maker, drawer, or acceptor, that alone or accompanied
by other words is made on an instrument for the purpose of (i)
negotiating the instrument, (ii) restricting payment of the
instrument, or (iii) incurring indorser's liability on the
instrument, but regardless of the intent of the signer, a signature
and its accompanying words is an indorsement unless the
accompanying words, terms of the instrument, place of the
signature, or other circumstances unambiguously indicate that
the signature was made for a purpose other than indorsement.
For the purpose of determining whether a signature is made on
an instrument, a paper affixed to the instrument is a part of the
instrument.
(b) `Indorser' means a person who makes an indorsement.
(c) For the purpose of determining whether the transferee
of an instrument is a holder, an indorsement that transfers a
security interest in the instrument is effective as an unqualified
indorsement of the instrument.
(d) If an instrument is payable to a holder under a name
that is not the name of the holder, indorsement may be made by
the holder in the name stated in the instrument or in the holder's
name or both, but signature in both names may be required by
a person paying or taking the instrument for value or collection.
OFFICIAL COMMENT
1. Subsection (a) is a definition of
"indorsement," a term which was not defined in
former Article 3. Indorsement is defined in terms of the
purpose of the signature. If a blank or special indorsement is
made to give rights as a holder to a transferee the indorsement
is made for the purpose of negotiating the instrument.
Subsection (a)(i). If the holder of a check has an account in the
drawee bank and wants to be sure that payment of the check
will be made by credit to the holder's account, the holder can
indorse the check by signing the holder's name with the
accompanying words "for deposit only" before
presenting the check for payment to the drawee bank. In that
case the purpose of the quoted words is to restrict payment of
the instrument. Subsection (a)(ii). If X wants to guarantee
payment of a note signed by Y as maker, X can do so by
signing X's name to the back of the note as an indorsement.
This indorsement is known as an anomalous indorsement
(Section 3-205(d)) and is made for the purpose of incurring
indorser's liability on the note. Subsection (a)(iii). In some
cases an indorsement may serve more than one purpose. For
example, if the holder of a check deposits it to the holder's
account in a depositary bank for collection and indorses the
check by signing the holder's name with the accompanying
words "for deposit only" the purpose of the
indorsement is both to negotiate the check to the depositary
bank and to restrict payment of the check.
The "but" clause of the first sentence of
subsection (a) elaborates on former Section 3-402. In some
cases it may not be clear whether a signature was meant to be
that of an indorser, a party to the instrument in some other
capacity such as drawer, maker or acceptor, or a person who
was not signing as a party. The general rule is that a signature
is an indorsement if the instrument does not indicate an
unambiguous intent of the signer not to sign as an indorser.
Intent may be determined by words accompanying the
signature, the place of signature, or other circumstances. For
example, suppose a depositary bank gives cash for a check
properly indorsed by the payee. The bank requires the payee's
employee to sign the back of the check as evidence that the
employee received the cash. If the signature consists only of
the initials of the employee it is not reasonable to assume that
it was meant to be an indorsement. If there was a full signature
but accompanying words indicated that it was meant as a
receipt for the cash given for the check, it is not an
indorsement. If the signature is not qualified in any way and
appears in the place normally used for indorsements, it may be
an indorsement even though the signer intended the signature
to be a receipt. To take another example, suppose the drawee
of a draft signs the draft on the back in the space usually used
for indorsements. No words accompany the signature. Since
the drawee has no reason to sign a draft unless the intent is to
accept the draft, the signature is effective as an acceptance.
Custom and usage may be used to determine intent. For
example, by long-established custom and usage, a signature in
the lower right hand corner of an instrument indicates an intent
to sign as the maker of a note or the drawer of a draft. Any
similar clear indication of an intent to sign in some other
capacity or for some other purpose may establish that a
signature is not an indorsement. For example, if the owner of
a traveler's check countersigns the check in the process of
negotiating it, the countersignature is not an indorsement. The
countersignature is a condition to the issuer's obligation to pay
and its purpose is to provide a means of verifying the identify
of the person negotiating the traveler's check by allowing
comparison of the specimen signature and the countersignature.
The countersignature is not necessary for negotiation and the
signer does not incur indorser's liability. See Comment 2 to
Section 3-106.
The last sentence of subsection (a) is based on subsection (2)
of former Section 3-202. An indorsement on an allonge is valid
even though there is sufficient space on the instrument for an
indorsement.
2. Assume that Payee indorses a note to Creditor as security
for a debt. Under subsection (b) of Section 3-203 Creditor
takes Payee's rights to enforce or transfer the instrument subject
to the limitations imposed by Article 9. Subsection (c) of
Section 3-204 makes clear that Payee's indorsement to Creditor,
even though it mentions creation of a security interest, is an
unqualified indorsement that gives to Creditor the right to
enforce the note as its holder.
3. Subsection (d) is a restatement of former Section 3-203.
Section 3-110(a) states that an instrument is payable to the
person intended by the person signing as or in the name or
behalf of the issuer even if that person is identified by a name
that is not the true name of the person. In some cases the name
used in the instrument is a misspelling of the correct name and
in some cases the two names may be entirely different. The
payee may indorse in the name used in the instrument, in the
payee's correct name, or in both. In each case the indorsement
is effective. But because an indorsement in a name different
from that used in the instrument may raise a question about its
validity and an indorsement in a name that is not the correct
name of the payee may raise a problem of identifying the
indorser, the accepted commercial practice is to indorse in both
names. Subsection (d) allows a person paying or taking the
instrument for value or collection to require indorsement in
both names.
Section 36-3-205. SPECIAL INDORSEMENT;
BLANK INDORSEMENT; ANOMALOUS INDORSEMENT.
(a) If an indorsement is made by the holder of an
instrument, whether payable to an identified person or payable
to bearer, and the indorsement identifies a person to whom it
makes the instrument payable, it is a `special indorsement'.
When specially indorsed, an instrument becomes payable to the
identified person and may be negotiated only by the
indorsement of that person. The principles stated in Section
36-3-110 apply to special indorsements.
(b) If an indorsement is made by the holder of an
instrument and it is not a special indorsement, it is a `blank
indorsement'. When indorsed in blank, an instrument becomes
payable to bearer and may be negotiated by transfer of
possession alone until specially indorsed.
(c) The holder may convert a blank indorsement that
consists only of a signature into a special indorsement by
writing, above the signature of the indorser, words identifying
the person to whom the instrument is made payable.
(d) `Anomalous indorsement' means an indorsement made
by a person who is not the holder of the instrument. An
anomalous indorsement does not affect the manner in which the
instrument may be negotiated.
OFFICIAL COMMENT
1. Subsection (a) is based on subsection (1) of former
Section 3-204. It states the test of a special indorsement to be
whether the indorsement identifies a person to whom the
instrument is payable. Section 3-110 states rules for identifying
the payee of an instrument. Section 3-205(a) incorporates the
principles stated in Section 3-110 in identifying an indorsee.
The language of Section 3-110 refers to language used by the
issuer of the instrument. When that section is used with respect
to an indorsement, Section 3-110 must be read as referring to
the language used by the indorser.
2. Subsection (b) is based on subsection (2) of former
Section 3-204. An indorsement made by the holder is either a
special or blank indorsement. If the indorsement is made by a
holder and is not a special indorsement, it is a blank
indorsement. For example, the holder of an instrument,
intending to make a special indorsement, writes the words
"Pay to the order of" without completing the
indorsement by writing the name of the indorsee. The holder's
signature appears under the quoted words. The indorsement is
not a special indorsement because it does not identify a person
to whom it makes the instrument payable. Since it is not a
special indorsement it is a blank indorsement and the
instrument is payable to bearer. The result is analogous to that
of a check in which the name of the payee is left blank by the
drawer. In that case the check is payable to bearer. See the last
paragraphs of Comment 2 to Section 3-115.
A blank indorsement is usually the signature of the indorser
on the back of the instrument without other words. Subsection
(c) is based on subsection (3) of former Section 3-204. A
"restrictive indorsement" described in Section
3-206 can be either a blank indorsement or a special
indorsement. "Pay to T, in trust for B" is a
restrictive indorsement. It is also a special indorsement
because it identifies T as the person to whom the instrument is
payable. "For deposit only" followed by the
signature of the payee of a check is a restrictive indorsement.
It is also a blank indorsement because it does not identify the
person to whom the instrument is payable.
3. The only effect of an "anomalous
indorsement," defined in subsection (d), is to make the
signer liable on the instrument as an indorser. Such an
indorsement is normally made by an accommodation party.
Section 3-419.
Section 36-3-206. RESTRICTIVE INDORSEMENT.
(a) An indorsement limiting payment to a particular
person or otherwise prohibiting further transfer or negotiation
of the instrument is not effective to prevent further transfer or
negotiation of the instrument.
(b) An indorsement stating a condition to the right of the
indorsee to receive payment does not affect the right of the
indorsee to enforce the instrument. A person paying the
instrument or taking it for value or collection may disregard the
condition, and the rights and liabilities of that person are not
affected by whether the condition has been fulfilled.
(c) If an instrument bears an indorsement (i) described in
Section 36-4-201(b), or (ii) in blank or to a particular bank
using the words `for deposit,' `for collection,' or other words
indicating a purpose of having the instrument collected by a
bank for the indorser or for a particular account, the following
rules apply:
(1) A person, other than a bank, who purchases the
instrument when so indorsed converts the instrument unless the
amount paid for the instrument is received by the indorser or
applied consistently with the indorsement.
(2) A depositary bank that purchases the instrument or
takes it for collection when so indorsed converts the instrument
unless the amount paid by the bank with respect to the
instrument is received by the indorser or applied consistently
with the indorsement.
(3) A payor bank that is also the depositary bank or
that takes the instrument for immediate payment over the
counter from a person other than a collecting bank converts the
instrument unless the proceeds of the instrument are received
by the indorser or applied consistently with the indorsement.
(4) Except as otherwise provided in paragraph (3), a
payor bank or intermediary bank may disregard the
indorsement and is not liable if the proceeds of the instrument
are not received by the indorser or applied consistently with the
indorsement.
(d) Except for an indorsement covered by subsection (c),
if an instrument bears an indorsement using words to the effect
that payment is to be made to the indorsee as agent, trustee, or
other fiduciary for the benefit of the indorser or another person,
the following rules apply:
(1) Unless there is notice of breach of fiduciary duty as
provided in Section 36-3-307, a person who purchases the
instrument from the indorsee or takes the instrument from the
indorsee for collection or payment may pay the proceeds of
payment or the value given for the instrument to the indorsee
without regard to whether the indorsee violates a fiduciary duty
to the indorser.
(2) A subsequent transferee of the instrument or person
who pays the instrument is neither given notice nor otherwise
affected by the restriction in the indorsement unless the
transferee or payor knows that the fiduciary dealt with the
instrument or its proceeds in breach of fiduciary duty.
(e) The presence on an instrument of an indorsement to
which this section applies does not prevent a purchaser of the
instrument from becoming a holder in due course of the
instrument unless the purchaser is a converter under subsection
(c) or has notice or knowledge of breach of fiduciary duty as
stated in subsection (d).
(f) In an action to enforce the obligation of a party to pay
the instrument, the obligor has a defense if payment would
violate an indorsement to which this section applies and the
payment is not permitted by this section.
OFFICIAL COMMENT
1. This section replaces former Sections 3-205 and 3-206
and clarifies the law of restrictive indorsements.
2. Subsection (a) provides that an indorsement that purports
to limit further transfer or negotiation is ineffective to prevent
further transfer or negotiation. If a payee indorses "Pay
A only," A may negotiate the instrument to subsequent
holders who may ignore the restriction on the indorsement.
Subsection (b) provides that an indorsement that states a
condition to the right of a holder to receive payment is
ineffective to condition payment. Thus if a payee indorses
"Pay A if A ships goods complying with our
contract," the right of A to enforce the instrument is not
affected by the condition. In the case of a note, the obligation
of the maker to pay A is not affected by the indorsement. In the
case of a check, the drawee can pay A without regard to the
condition, and if the check is dishonored the drawer is liable to
pay A. If the check was negotiated by the payee to A in return
for a promise to perform a contract and the promise was not
kept, the payee would have a defense or counterclaim against
A if the check were dishonored and A sued the payee as
indorser, but the payee would have that defense or counterclaim
whether or not the condition to the right of A was expressed in
the indorsement. Former Section 3-206 treated a conditional
indorsement like indorsements for deposit or collection. In
revised Article 3, Section 3-206(b) rejects that approach and
makes the conditional indorsement ineffective with respect to
parties other than the indorser and indorsee. Since the
indorsements referred to in subsections (a) and (b) are not
effective as restrictive indorsements, they are no longer
described as restrictive indorsements.
3. The great majority of restrictive indorsements are those
that fall within subsection (c) which continues previous law.
The depositary bank or the payor bank, if it takes the check for
immediate payment over the counter, must act consistently with
the indorsement, but an intermediary bank or payor bank that
takes the check from a collecting bank is not affected by the
indorsement. Any other person is also bound by the
indorsement. For example, suppose a check is payable to X,
who indorses in blank but writes above the signature the words
"For deposit only." The check is stolen and is
cashed at a grocery store by the thief. The grocery store
indorses the check and deposits it in Depositary Bank. The
account of the grocery store is credited and the check is
forwarded to Payor Bank which pays the check. Under
subsection (c), the grocery store and Depositary Bank are
converters of the check because X did not receive the amount
paid for the check. Payor Bank and any intermediary bank in
the collection process are not liable to X. This Article does not
displace the law of waiver as it may apply to restrictive
indorsements. The circumstances under which a restrictive
indorsement may be waived by the person who made it is not
determined by this Article.
4. Subsection (d) replaces subsection (4) of former Section
3-206. Suppose Payee indorses a check "Pay to T in trust
for B." T indorses in blank and delivers it to (a) Holder
for value; (b) Depositary Bank for collection; or (c) Payor Bank
for payment. In each case these takers can safely pay T so long
as they have no notice under Section 3-307 of any breach of
fiduciary duty that T may be committing. For example, under
subsection (a) of Section 3-307 these takers have notice of a
breach of trust if the check was taken in any transaction known
by the taker to be for T's personal benefit. Subsequent
transferees of the check from Holder or Depositary Bank are
not affected by the restriction unless they have knowledge that
T dealt with the check in breach of trust.
5. Subsection (f) allows a restrictive indorsement to be used
as a defense by a person obliged to pay the instrument if that
person would be liable for paying in violation of the
indorsement.
Section 36-3-207. REACQUISITION.
Reacquisition of an instrument occurs if it is transferred to
a former holder by negotiation or otherwise. A former holder
who reacquires the instrument may cancel indorsements made
after the reacquirer first became a holder of the instrument. If
the cancellation causes the instrument to be payable to the
reacquirer or to bearer, the reacquirer may negotiate the
instrument. An indorser whose indorsement is canceled is
discharged, and the discharge is effective against any
subsequent holder.
OFFICIAL COMMENT
Section 3-207 restates former Section 3-208. Reacquisition
refers to cases in which a former holder reacquires the
instrument either by negotiation from the present holder or by
a transfer other than negotiation. If the reacquisition is by
negotiation, the former holder reacquires the status of holder.
Although Section 3-207 allows the holder to cancel all
indorsements made after the holder first acquired holder status,
cancellation is not necessary. Status of holder is not affected
whether or not cancellation is made. But if the reacquisition is
not the result of negotiation the former holder can obtain holder
status only by striking the former holder's indorsement and any
subsequent indorsements. The latter case is an exception to the
general rule that if an instrument is payable to an identified
person, the indorsement of that person is necessary to allow a
subsequent transferee to obtain the status of holder.
Reacquisition without indorsement by the person to whom the
instrument is payable is illustrated by two examples:
Case #1. X, a former holder, buys the
instrument from Y, the present holder. Y delivers the
instrument to X but fails to indorse it. Negotiation does
not occur because the transfer of possession did not result
in X's becoming holder. Section 3-201(a). The
instrument by its terms is payable to Y, not to X. But X
can obtain the status of holder by striking X's
indorsement and all subsequent indorsements. When
these indorsements are struck, the instrument by its terms
is payable either to X or to bearer, depending upon how
X originally became holder. In either case X becomes
holder. Section 1-201(20).
Case #2. X, the holder of an instrument
payable to X, negotiates it to Y by special indorsement.
The negotiation is part of an underlying transaction
between X and Y. The underlying transaction is
rescinded by agreement of X and Y, and Y returns the
instrument without Y's indorsement. The analysis is the
same as that in Case #1. X can obtain holder status by
canceling X's indorsement to Y.
In Case #1 and Case #2, X acquired ownership of the
instrument after reacquisition, but X's title was clouded because
the instrument by its terms was not payable to X. Normally, X
can remedy the problem by obtaining Y's indorsement, but in
some cases X may not be able to conveniently obtain that
indorsement. Section 3-207 is a rule of convenience which
relieves X of the burden of obtaining an indorsement that
serves no substantive purpose. The effect of cancellation of
any indorsement under Section 3-207 is to nullify it. Thus, the
person whose indorsement is canceled is relieved of indorser's
liability. Since cancellation is notice of discharge, discharge is
effective even with respect to the rights of a holder in due
course. Sections 3-601 and 3-604.
PART 3
ENFORCEMENT OF INSTRUMENTS
Section 36-3-301. PERSON ENTITLED TO ENFORCE
INSTRUMENT.
`Person entitled to enforce' an instrument means (i) the
holder of the instrument, (ii) a nonholder in possession of the
instrument who has the rights of a holder, or (iii) a person not
in possession of the instrument who is entitled to enforce the
instrument pursuant to Section 36-3-309 or 36-3-418(d). A
person may be a person entitled to enforce the instrument even
though he is not the owner of the instrument or is in wrongful
possession of the instrument.
OFFICIAL COMMENT
This section replaces former Section 3-3301 that stated the
rights of a holder. The rights stated in former Section 3-301 to
transfer, negotiate, enforce, or discharge an instrument are
stated in other sections of Article 3. In revised Article 3,
Section 3-301 defines "person entitled to enforce"
an instrument. The definition recognizes that enforcement is
not limited to holders. The quoted phrase includes a person
enforcing a lost or stolen instrument. Section 3-309. It also
includes a person in possession of an instrument who is not a
holder. A nonholder in possession of an instrument includes a
person that acquired rights of a holder by subrogation or under
Section 3-203(a). It also includes any other person who under
applicable law is a successor to the holder or otherwise acquires
the holder's rights.
Section 36-3-302. HOLDER IN DUE COURSE.
(a) Subject to subsection (c) and Section 36-3-106(d),
`holder in due course' means the holder of an instrument if:
(1) the instrument when issued or negotiated to the
holder does not bear the apparent evidence of forgery or
alteration or is not otherwise so irregular or incomplete as to
call into question its authenticity; and
(2) the holder took the instrument (i) for value, (ii) in
good faith, (iii) without notice that the instrument is overdue or
has been dishonored or that there is an uncured default with
respect to payment of another instrument issued as part of the
same series, (iv) without notice that the instrument contains an
unauthorized signature or has been altered, (v) without notice
of any claim to the instrument described in Section 36-3-306,
and (vi) without notice that any party has a defense or claim in
recoupment described in Section 36-3-305(a).
(b) Notice of discharge of a party, other than discharge in
an insolvency proceeding, is not notice of a defense under
subsection (a), but discharge is effective against a person who
became a holder in due course with notice of the discharge.
Public filing or recording of a document does not of itself
constitute notice of a defense, claim in recoupment, or claim to
the instrument.
(c) Except to the extent a transferor or predecessor in
interest has rights as a holder in due course, a person does not
acquire rights of a holder in due course of an instrument taken
(i) by legal process or by purchase in an execution, bankruptcy,
or creditor's sale or similar proceeding, (ii) by purchase as part
of a bulk transaction not in ordinary course of business of the
transferor, or (iii) as the successor in interest to an estate or
other organization.
(d) If, under Section 36-3-303(a)(1), the promise of
performance that is the consideration for an instrument has
been partially performed, the holder may assert rights as a
holder in due course of the instrument only to the fraction of
the amount payable under the instrument equal to the value of
the partial performance divided by the value of the promised
performance.
(e) If (i) the person entitled to enforce an instrument has
only a security interest in the instrument and (ii) the person
obliged to pay the instrument has a defense, claim in
recoupment, or claim to the instrument that may be asserted
against the person who granted the security interest, the person
entitled to enforce the instrument may assert rights as a holder
in due course only to an amount payable under the instrument
which, at the time of enforcement of the instrument, does not
exceed the amount of the unpaid obligation secured.
(f) To be effective, notice must be received at a time and
in a manner that gives a reasonable opportunity to act on it.
(g) This section is subject to any law limiting status as a
holder in due course in particular classes of transactions.
OFFICIAL COMMENT
1. Subsection (a)(1) is a return to the N.I.L. rule that the
taker of an irregular or incomplete instrument is not a person
the law should protect against defenses of the obligor or claims
of prior owners. This reflects a policy choice against extending
the holder in due course doctrine to an instrument that is so
incomplete or irregular "as to call into question its
authenticity." The term "authenticity" is used
to make it clear that the irregularity or incompleteness must
indicate that the instrument may not be what it purports to be.
Persons who purchase or pay such instruments should do so at
their own risk. Under subsection (1) of former Section 3-304,
irregularity or incompleteness gave a purchaser notice of a
claim or defense. But it was not clear from that provision
whether the claim or defense had to be related to the
irregularity or incomplete aspect of the instrument. This
ambiguity is not present in subsection (a)(1).
2. Subsection (a)(2) restates subsection (1) of former
Section 3-302. Section 3-305(a) makes a distinction between
defenses to the obligation to pay an instrument and claims in
recoupment by the maker or drawer that may be asserted to
reduce the amount payable on the instrument. Because of this
distinction, which was not made in former Article 3, the
reference in subsection (a)(2)(vi) is to both a defense and a
claim in recoupment. Notice of forgery or alteration is stated
separately because forgery and alteration are not technically
defenses under subsection (a) of Section 3-305.
3. Discharge is also separately treated in the first sentence
of subsection (b). Except for discharge in an insolvency
proceeding, which is specifically stated to be a real defense in
Section 3-305(a)(1), discharge is not expressed in Article 3 as
a defense and is not included in Section 3-305(a)(2). Discharge
is effective against anybody except a person having rights of a
holder in due course who took the instrument without notice of
the discharge. Notice of discharge does not disqualify a person
from becoming a holder in due course. For example, a check
certified after it is negotiated by the payee may subsequently be
negotiated to a holder. If the holder had notice that the
certification occurred after negotiation by the payee, the holder
necessarily had notice of the discharge of the payee as indorser.
Section 3-415(d). Notice of that discharge does not prevent the
holder from becoming a holder in due course, but the discharge
is effective against the holder. Section 3-601(b). Notice of a
defense under Section 3-305(a)(1) of a maker, drawer or
acceptor based on a bankruptcy discharge is different. There is
no reason to give holder in due course status to a person with
notice of that defense. The second sentence of subsection (b)
is from former Section 3-304(5).
4. Professor Britton in his treatise Bills and Notes 309
(1961) stated: "A substantial number of decisions before
the [N.I.L.] indicates that at common law there was nothing in
the position of the payee as such which made it impossible for
him to be a holder in due course." The courts were
divided, however, about whether the payee of an instrument
could be a holder in due course under the N.I.L.. Some courts
read N.I.L. Section 52(4) to mean that a person could be a
holder in due course only if the instrument was
"negotiated" to that person. N.I.L. Section 30
stated that "an instrument is negotiated when it is
transferred from one person to another in such manner as to
constitute the transferee the holder thereof." Normally,
an instrument is "issued" to the payee; it is not
transferred to the payee. N.I.L. Section 191 defined
"issue" as the "first delivery of the instrument
* * * to a person who takes it as a holder." Thus, some
courts concluded that the payee never could be a holder in due
course. Other courts concluded that there was no evidence that
the N.I.L. was intended to change the common law rule that the
payee could be a holder in due course. Professor Britton states
on p.318: "The typical situations which raise the [issue]
are those where the defense of a maker is interposed because of
fraud by a [maker who is] principal debtor * * * against a
surety co-maker, or where the defense of fraud by a purchasing
remitter is interposed by the drawer of the instrument against
the good faith purchasing payee."
Former Section 3-302(2) stated: "A payee may be a
holder in due course." This provision was intended to
resolve the split of authority under the N.I.L. It made clear that
there was no intent to change the common-law rule that allowed
a payee to become a holder in due course. See Comment 2 to
former Section 3-302. But there was no need to put subsection
(2) in former Section 3-302 because the split in authority under
the N.I.L. was caused by the particular wording of N.I.L.
Section 52(4). The troublesome language in that section was
not repeated in former Article 3 nor is it repeated in revised
Article 3. Former Section 3-302(2) has been omitted in revised
Article 3 because it is surplusage and may be misleading. The
payee of an instrument can be a holder in due course, but use
of the holder-in-due-course doctrine by the payee of an
instrument is not the normal situation.
The primary importance of the concept of holder in due
course is with respect to assertion of defenses or claims in
recoupment (Section 3-305) and of claims to the instrument
(Section 3-306). The holder-in-due-course doctrine assumes
the following case as typical. Obligor issues a note or check to
Obligee. Obligor is the maker of the note or drawer of the
check. Obligee is the payee. Obligor has some defense to
Obligor's obligation to pay the instrument. For example,
Obligor issued the instrument for goods that Obligee promised
to deliver. Obligee never delivered the goods. The failure of
Obligee to deliver the goods is a defense. Section 3-303(b).
Although Obligor has a defense against Obligee, if the
instrument is negotiated to Holder and the requirements of
subsection (a) are met, Holder may enforce the instrument
against Obligor free of the defense. Section 3-305(b). In the
typical case the holder in due course is not the payee of the
instrument. Rather, the holder in due course is an immediate or
remote transferee of the payee. If Obligor in our example is the
only obligor on the check or note, the holder-in-due-course
doctrine is irrelevant in determining rights between Obligor and
Obligee with respect to the instrument.
But in a small percentage of cases it is appropriate to allow
the payee of an instrument to assert rights as a holder in due
course. The cases are like those referred to in the quotation
from Professor Britton referred to above, or other cases in
which conduct of some third party is the basis of the defense of
the issuer of the instrument. The following are examples:
Case #1. Buyer pays for goods bought
from Seller by giving to Seller a cashier's check bought
from Bank. Bank has a defense to its obligation to pay
the check because Buyer bought the check from Bank
with a check known to be drawn on an account with
insufficient funds to cover the check. If Bank issued the
check to Buyer as payee and Buyer indorsed it over to
Seller, it is clear that Seller can be a holder in due course
taking free of the defense if Seller had no notice of the
defense. Seller is a transferee of the check. There is no
good reason why Seller's position should be any different
if Bank drew the check to the order of Seller as payee. In
that case, when Buyer took delivery of the check from
Bank, Buyer became the owner of the check even though
Buyer was not the holder. Buyer was a remitter. Section
3-103(a)(11). At that point nobody was the holder.
When Buyer delivered the check to Seller, ownership of
the check was transferred to Seller who also became the
holder. This is a negotiation. Section 3-201. The rights
of Seller should not be affected by the fact that in one
case the negotiation to Seller was by a holder and in the
other case the negotiation was by a remitter. Moreover,
it should be irrelevant whether Bank delivered the check
to Buyer and Buyer delivered it to Seller or whether
Bank delivered it directly to Seller. In either case Seller
can be a holder in due course that takes free of Bank's
defense.
Case #2. X fraudulently induces Y to join
X in a spurious venture to purchase a business. The
purchase is to be financed by a bank loan for part of the
price. Bank lends money to X and Y by deposit in a joint
account of X and Y who sign a note payable to Bank for
the amount of the loan. X then withdraws the money
from the joint account and absconds. Bank acted in good
faith and without notice of the fraud of X against Y.
Bank is payee of the note executed by Y, but its right to
enforce the note against Y should not be affected by the
fact that Y was induced to execute the note by the fraud
of X. Bank can be a holder in due course that takes free
of the defense of Y. Case #2 is similar to Case #1. In
each case the payee of the instrument has given value to
the person committing the fraud in exchange for the
obligation of the person against whom the fraud was
committed. In each case the payee was not party to the
fraud and had no notice of it.
Suppose in Case #2 that the note does not meet the
requirements of Section 3-104(a) and thus is not a negotiable
instrument covered by Article 3. In that case, Bank cannot be
a holder in due course but the result should be the same. Bank's
rights are determined by general principles of contract law.
Restatement Second, Contracts Section 164(2) governs the
case. If Y is induced to enter into a contract with Bank by a
fraudulent misrepresentation by X, the contract is voidable by
Y unless Bank "in good faith and without reason to know
of the misrepresentation either gives value or relies materially
on the transaction." Comment e to Section 164(2) states:
"This is the same principle that protects an
innocent person who purchases goods or commercial
paper in good faith, without notice and for value from
one who obtained them from the original owner by a
misrepresentation. See Uniform Commercial Code
Sections 2-403(1), 3-305. In the cases that fall within
[Section 164 (2)], however, the innocent person deals
directly with the recipient of the misrepresentation,
which is made by one not a party to the contract."
The same result follows in Case #2 if Y had been induced to
sign the note as an accommodation party (Section 3-419). If Y
signs as co-maker of a note for the benefit of X, Y is a surety
with respect to the obligation of X to pay the note but is liable
as maker of the note to pay Bank. Section 3-419(b). If Bank
is a holder in due course, the fraud of X cannot be asserted
against Bank under Section 3-305(b). But the result is the same
without resort to holder-in-due-course doctrine. If the note is
not a negotiable instrument governed by Article 3, general rules
of suretyship apply. Restatement, Security Section 119 states
that the surety (Y) cannot assert a defense against the creditor
(Bank) based on the fraud of the principal (X) if the creditor
"without knowledge of the fraud * * * extended credit to
the principal on the security of the surety's promise
* * *." The underlying principle of Section 119 is the
same as that of Section 164(2) of Restatement Second,
Contracts.
Case #3. Corporation draws a check
payable to Bank. The check is given to an officer of
Corporation who is instructed to deliver it to Bank in
payment of a debt owed by Corporation to Bank.
Instead, the officer, intending to defraud Corporation,
delivers the check to Bank in payment of the officer's
personal debt, or the check is delivered to Bank for
deposit to the officer's personal account. If Bank obtains
payment of the check, Bank has received funds of
Corporation which have been used for the personal
benefit of the officer. Corporation in this case will assert
a claim to the proceeds of the check against Bank. If
Bank was a holder in due course of the check it took the
check free of Corporation's claim. Section 3-306. The
issue in this case is whether Bank had notice of the claim
when it took the check. If Bank knew that the officer
was a fiduciary with respect to the check, the issue is
governed by Section 3-307.
Case #4. Employer, who owed money to
X, signed a blank check and delivered it to Secretary with
instructions to complete the check by typing in X's name
and the amount owed to X. Secretary fraudulently
completed the check by typing in the name of Y, a
creditor to whom Secretary owed money. Secretary then
delivered the check to Y in payment of Secretary's debt.
Y obtained payment of the check. This case is similar to
Case #3. Since Secretary was authorized to complete the
check, Employer is bound by Secretary's act in making
the check payable to Y. The drawee bank properly paid
the check. Y received funds of Employer which were
used for the personal benefit of Secretary. Employer
asserts a claim to these funds against Y. If Y is a holder
in due course, Y takes free of the claim. Whether Y is a
holder in due course depends upon whether Y had notice
of Employer's claim.
5. Subsection (c) is based on former Section 3-302(3). Like
former Section 3-302(3), subsection (c) is intended to state
existing case law. It covers a few situations in which the
purchaser takes an instrument under unusual circumstances.
The purchaser is treated as a successor in interest to the prior
holder and can acquire no better rights. But if the prior holder
was a holder in due course, the purchaser obtains rights of a
holder in due course.
Subsection (c) applies to a purchaser in an execution sale or
sale in bankruptcy. It applies equally to an attaching creditor
or any other person who acquires the instrument by legal
process or to a representative, such as an executor,
administrator, receiver or assignee for the benefit of creditors,
who takes the instrument as part of an estate. Subsection (c)
applies to bulk purchases lying outside of the ordinary course
of business of the seller. For example, it applies to the
purchase by one bank of a substantial part of the paper held by
another bank which is threatened with insolvency and seeking
to liquidate its assets. Subsection (c) would also apply when a
new partnership takes over for value all of the assets of an old
one after a new member has entered the firm, or to a
reorganized or consolidated corporation taking over the assets
of a predecessor.
In the absence of controlling state law to the contrary,
subsection (c) applies to a sale by a state bank commissioner of
the assets of an insolvent bank. However, subsection (c) may
be preempted by federal law if the Federal Deposit Insurance
Corporation takes over an insolvent bank. Under the governing
federal law, the FDIC and similar financial institution insurers
are given holder in due course status and that status is also
acquired by their assignees under the shelter doctrine.
6. Subsection (d) and (e) clarify two matters not specifically
addressed by former Article 3:
Case #5. Payee negotiates a $1,000 note to
Holder who agrees to pay $900 for it. After paying $500,
Holder learns that Payee defrauded Maker in the
transaction giving rise to the note. Under subsection (d)
Holder may assert rights as a holder in due course to the
extent of $555.55 ($500 " $900 = .555 X $1,000 =
$555.55). This formula rewards Holder with a ratable
portion of the bargained for profit.
Case #6. Payee negotiates a note of Maker
for $1,000 to Holder as security for payment of Payee's
debt to Holder of $600. Maker has a defense which is
good against Payee but of which Holder has no notice.
Subsection (e) applies. Holder may assert rights as a
holder in due course only to the extent of $600. Payee
does not get the benefit of the holder-in-due-course status
of Holder. With respect to $400 of the note, Maker may
assert any rights that Maker has against Payee. A
different result follows if the payee of a note negotiated
it to a person who took it as a holder in due course and
that person pledged the note as security for a debt.
Because the defense cannot be asserted against the
pledgor, the pledgee can assert rights as a holder in due
course for the full amount of the note for the benefit of
both the pledgor and the pledgee.
7. There is a large body of state statutory and case law
restricting the use of the holder in due course doctrine in
consumer transactions as well as some business transactions
that raise similar issues. Subsection (g) subordinates Article 3
to that law and any other similar law that may evolve in the
future. Section 3-106(d) also relates to statutory or
administrative law intended to restrict use of the
holder-in-due-course doctrine. See Comment 3 to Section
3-106.
Section 36-3-303. VALUE AND CONSIDERATION.
(a) An instrument is issued or transferred for value if:
(1) the instrument is issued or transferred for a promise
of performance, to the extent the promise has been performed;
(2) the transferee acquires a security interest or other
lien in the instrument other than a lien obtained by judicial
proceeding;
(3) the instrument is issued or transferred as payment
of, or as security for, an antecedent claim against any person,
whether or not the claim is due;
(4) the instrument is issued or transferred in exchange
for a negotiable instrument; or
(5) the instrument is issued or transferred in exchange
for the incurring of an irrevocable obligation to a third party by
the person taking the instrument.
(b) `Consideration' means any consideration sufficient to
support a simple contract. The drawer or maker of an
instrument has a defense if the instrument is issued without
consideration. If an instrument is issued for a promise of
performance, the issuer has a defense to the extent performance
of the promise is due and the promise has not been performed.
If an instrument is issued for value as stated in subsection (a),
the instrument is also issued for consideration.
OFFICIAL COMMENT
1. Subsection (a) is a restatement of former Section 3-303
and subsection (b) replaces former Section 3-408. The
distinction between value and consideration in Article 3 is a
very fine one. Whether an instrument is taken for value is
relevant to the issue of whether a holder is a holder in due
course. If an instrument is not issued for consideration the
issuer has a defense to the obligation to pay the instrument.
Consideration is defined in subsection (b) as "any
consideration sufficient to support a simple contract."
The definition of value in Section 1-201(44), which doesn't
apply to Article 3, includes "any consideration sufficient
to support a simple contract." Thus, outside Article 3,
anything that is consideration is also value. A different rule
applies in Article 3. Subsection (b) of Section 3-303 states that
if an instrument is issued for value it is also issued for
consideration.
Case #1. X owes Y $1,000. The debt is
not represented by a note. Later X issues a note to Y for
the debt. Under subsection (a)(3) X's note is issued for
value. Under subsection (b) the note is also issued for
consideration whether or not, under contract law, Y is
deemed to have given consideration for the note.
Case #2. X issues a check to Y in
consideration of Y's promise to perform services in the
future. Although the executory promise is consideration
for issuance of the check it is value only to the extent the
promise is performed. Subsection (a)(1).
Case #3. X issues a note to Y in
consideration of Y's promise to perform services. If at
the due date of the note Y's performance is not yet due,
Y may enforce the note because it was issued for
consideration. But if at the due date of the note, Y's
performance is due and has not been performed, X has a
defense. Subsection (b).
2. Subsection (a), which defines value, has primary
importance in cases in which the issue is whether the holder of
an instrument is a holder in due course and particularly to cases
in which the issuer of the instrument has a defense to the
instrument. Suppose Buyer and Seller signed a contract on
April 1 for the sale of goods to be delivered on May 1.
Payment of 50% of the price of the goods was due upon signing
of the contract. On April 1 Buyer delivered to Seller a check in
the amount due under the contract. The check was drawn by X
to Buyer as payee and was indorsed to Seller. When the check
was presented for payment to the drawee on April 2, it was
dishonored because X had stopped payment. At that time
Seller had not taken any action to perform the contract with
Buyer. If X has a defense on the check, the defense can be
asserted against Seller who is not a holder in due course
because Seller did not give value for the check. Subsection
(a)(1). The policy basis for subsection (a)(1) is that the holder
who gives an executory promise of performance will not suffer
an out-of-pocket loss to the extent the executory promise is
unperformed at the time the holder learns of dishonor of the
instrument. When Seller took delivery of the check on April 1,
Buyer's obligation to pay 50% of the price on that date was
suspended, but when the check was dishonored on April 2 the
obligation revived. Section 3-310(b). If payment for goods is
due at or before delivery and the buyer fails to make the
payment, the seller is excused from performing the promise to
deliver the goods. Section 2-703. Thus, Seller is protected
from an out-of-pocket loss even if the check is not enforceable.
Holder-in-due-course status is not necessary to protect Seller.
3. Subsection (a)(2) equates value with the obtaining of a
security interest or a nonjudicial lien in the instrument. The
term "security interest" covers Article 9 cases in
which an instrument is taken as collateral as well as bank
collection cases in which a bank acquires a security interest
under Section 4-210. The acquisition of a common-law or
statutory banker's lien is also value under subsection (a)(2). An
attaching creditor or other person who acquires a lien by
judicial proceedings does not give value for the purposes of
subsection (a)(2).
4. Subsection (a)(3) follows former Section 3-303(b) in
providing that the holder takes for value if the instrument is
taken in payment of or as security for an antecedent claim, even
though there is no extension of time or other concession, and
whether or not the claim is due. Subsection (a)(3) applies to
any claim against any person; there is no requirement that the
claim arise out of contract. In particular the provision is
intended to apply to an instrument given in payment of or as
security for the debt of a third person, even though no
concession is made in return.
5. Subsection (a)(4) and (5) restate former Section 3-303(c).
They state generally recognized exceptions to the rule that an
executory promise is not value. A negotiable instrument is
value because it carries the possibility of negotiation to a holder
in due course, after which the party who gives it is obliged to
pay. The same reasoning applies to any irrevocable
commitment to a third person, such as a letter of credit issued
when an instrument is taken.
Section 36-3-304. OVERDUE INSTRUMENT.
(a) An instrument payable on demand becomes overdue
at the earliest of the following times:
(1) on the day after the day demand for payment is
properly made;
(2) if the instrument is a check, ninety days after its
date; or
(3) if the instrument is not a check, when the
instrument has been outstanding for a period of time after its
date which is unreasonably long under the circumstances of the
particular case in light of the nature of the instrument and usage
of the trade.
(b) With respect to an instrument payable at a definite
time the following rules apply:
(1) if the principal is payable in installments and a due
date has not been accelerated, the instrument becomes overdue
upon default under the instrument for nonpayment of an
installment, and the instrument remains overdue until the
default is cured.
(2) if the principal is not payable in installments and
the due date has not been accelerated, the instrument becomes
overdue on the day after the due date.
(3) if a due date with respect to principal has been
accelerated, the instrument becomes overdue on the day after
the accelerated due date.
(c) Unless the due date of principal has been accelerated,
an instrument does not become overdue if there is default in
payment of interest but no default in payment of principal.
OFFICIAL COMMENT
1. To be a holder in due course, one must take without
notice that an instrument is overdue. Section 3-302(a)(2)(iii).
Section 3-304 replaces subsection (3) of former Section 3-304.
For the sake of clarity it treats demand and time instruments
separately. Subsection (a) applies to demand instruments. A
check becomes stale after 90 days.
Under former Section 3-304(3)(c), a holder that took a
demand note had notice that it was overdue if it was taken
"more than a reasonable length of time after its
issue." In substitution for this test, subsection (a)(3)
requires the trier of fact to look at both the circumstances of the
particular case and the nature of the instrument and trade usage.
Whether a demand note is stale may vary a great deal
depending on the facts of the particular case.
2. Subsections (b) and (c) cover time instruments. They
follow the distinction made under former Article 3 between
defaults in payment of principal and interest. In subsection (b)
installment instruments and single payment instruments are
treated separately. If an installment is late, the instrument is
overdue until the default is cured.
Section 36-3-305. DEFENSES AND CLAIMS IN
RECOUPMENT.
(a) Except as stated in subsection (b), the right to enforce
the obligation of a party to pay an instrument is subject to the
following:
(1) a defense of the obligor based on (i) infancy of the
obligor to the extent it is a defense to a simple contract, (ii)
duress, lack of legal capacity, or illegality of the transaction
which, under other law, nullifies the obligation of the obligor,
(iii) fraud that induced the obligor to sign the instrument with
neither knowledge nor reasonable opportunity to learn of its
character or its essential terms, or (iv) discharge of the obligor
in insolvency proceedings;
(2) a defense of the obligor stated in another section of
this chapter or a defense of the obligor that would be available
if the person entitled to enforce the instrument were enforcing
a right to payment under a simple contract; and
(3) a claim in recoupment of the obligor against the
original payee of the instrument if the claim arose from the
transaction that gave rise to the instrument; but the claim of the
obligor may be asserted against a transferee of the instrument
only to reduce the amount owing on the instrument at the time
the action is brought.
(b) The right of a holder in due course to enforce the
obligation of a party to pay the instrument is subject to defenses
of the obligor stated in subsection (a)(1), but is not subject to
defenses of the obligor stated in subsection (a)(2) or claims in
recoupment stated in subsection (a)(3) against a person other
than the holder.
(c) Except as stated in subsection (d), in an action to
enforce the obligation of a party to pay the instrument, the
obligor may not assert against the person entitled to enforce the
instrument a defense, claim in recoupment, or claim to the
instrument (Section 36-3-306) of another person, but the other
person's claim to the instrument may be asserted by the obligor
if the other person is joined in the action and personally asserts
the claim against the person entitled to enforce the instrument.
An obligor is not obliged to pay the instrument if the person
seeking enforcement of the instrument does not have rights of
a holder in due course and the obligor proves that the
instrument is a lost or stolen instrument.
(d) In an action to enforce the obligation of an
accommodation party to pay an instrument, the accommodation
party may assert against the person entitled to enforce the
instrument any defense or claim in recoupment under
subsection (a) that the accommodated party could assert against
the person entitled to enforce the instrument, except the
defenses of discharge in insolvency proceedings, infancy, and
lack of legal capacity.
OFFICIAL COMMENT
1. Subsection (a) states the defenses to the obligation of a
party to pay the instrument. Subsection (a)(1) states the
"real defenses" that may be asserted against any
person entitled to enforce the instrument.
Subsection (a)(1)(i) allows assertion of the defense of
infancy against a holder in due course, even though the effect
of the defense is to render the instrument voidable but not void.
The policy is one of protection of the infant even at the expense
of occasional loss to an innocent purchaser. No attempt is
made to state when infancy is available as a defense or the
conditions under which it may be asserted. In some
jurisdictions it is held that an infant cannot rescind the
transaction or set up the defense unless the holder is restored to
the position held before the instrument was taken which, in the
case of a holder in due course, is normally impossible. In other
states an infant who has misrepresented age may be estopped
to assert infancy. Such questions are left to other law, as an
integral part of the policy of each state as to the protection of
infants.
Subsection (a)(1)(ii) covers mental incompetence,
guardianship, ultra vires acts or lack of corporate capacity to do
business, or any other incapacity apart from infancy. Such
incapacity is largely statutory. Its existence and effect is left to
the law of each state. If under the state law the effect is to
render the obligation of the instrument entirely null and void,
the defense may be asserted against a holder in due course. If
the effect is merely to render the obligation voidable at the
election of the obligor, the defense is cut off.
Duress, which is also covered by subsection (a)(ii), is a
matter of degree. An instrument signed at the point of a gun is
void, even in the hands of a holder in due course. One signed
under threat to prosecute the son of the maker for theft may be
merely voidable, so that the defense is cut off. Illegality is
most frequently a matter of gambling or usury, but may arise in
other forms under a variety of statutes. The statutes differ in
their provisions and the interpretations given them. They are
primarily a matter of local concern and local policy. All such
matters are therefore left to the local law. If under that law the
effect of the duress or the illegality is to make the obligation
entirely null and void, the defense may be asserted against a
holder in due course. Otherwise it is cut off.
Subsection (a)(1)(iii) refers to "real" or
"essential" fraud, sometimes called fraud in the
essence or fraud in the factum, as effective against a holder in
due course. The common illustration is that of the maker who
is tricked into signing a note in the belief that it is merely a
receipt or some other document. The theory of the defense is
that the signature on the instrument is ineffective because the
signer did not intend to sign such an instrument at all. Under
this provision the defense extends to an instrument signed with
knowledge that it is a negotiable instrument, but without
knowledge of its essential terms. The test of the defense is that
of excusable ignorance of the contents of the writing signed.
The party must not only have been in ignorance, but must also
have had no reasonable opportunity to obtain knowledge. In
determining what is a reasonable opportunity all relevant
factors are to be taken into account, including the intelligence,
education, business experience, and ability to read or
understand English of the signer. Also relevant is the nature of
the representations that were made, whether the signer had
good reason to rely on the representations or to have confidence
in the person making them, the presence or absence of any third
person who might read or explain the instrument to the signer,
or any other possibility of obtaining independent information,
and the apparent necessity, or lack of it, for acting without
delay. Unless the misrepresentation meets this test, the defense
is cut off by a holder in due course.
Subsection (a)(1)(iv) states specifically that the defense of
discharge in insolvency proceedings is not cut off when the
instrument is purchased by a holder in due course.
"Insolvency proceedings" is defined in Section
1-201(22) and it includes bankruptcy whether or not the debtor
is insolvent. Subsection (2)(e) of former Section 3-305 is
omitted. The substance of that provision is stated in Section
3-601(b).
2. Subsection (a)(2) states other defenses that, pursuant to
subsection (b), are cut off by a holder in due course. These
defenses comprise those specifically stated in Article 3 and
those based on common law contract principles. Article 3
defenses are nonissuance of the instrument, conditional
issuance, and issuance for a special purpose (Section 3-105(b));
failure to countersign a traveler's check (Section 3-106(c));
modification of the obligation by a separate agreement (Section
3-117); payment that violates a restrictive indorsement (Section
3-206(f)); instruments issued without consideration or for
which promised performance has not been given (Section
3-303(b)), and breach of warranty when a draft is accepted
(Section 3-417(b)). The most prevalent common law defenses
are fraud, misrepresentation or mistake in the issuance of the
instrument. In most cases the holder in due course will be an
immediate or remote transferee of the payee of the instrument.
In most cases the holder-in-due-course doctrine is irrelevant if
defenses are being asserted against the payee of the instrument,
but in a small number of cases the payee of the instrument may
be a holder in due course. Those cases are discussed in
Comment 4 to Section 3-302.
Assume Buyer issues a note to Seller in payment of the price
of goods that Seller fraudulently promises to deliver but which
are never delivered. Seller negotiates the note to Holder who
has no notice of the fraud. If Holder is a holder in due course,
Holder is not subject to Buyer's defense of fraud. But in some
cases an original party to the instrument is a holder in due
course. For example, Buyer fraudulently induces Bank to issue
a cashier's check to the order of Seller. The check is delivered
by Bank to Seller, who has no notice of the fraud. Seller can be
a holder in due course and can take the check free of Bank's
defense of fraud. This case is discussed as Case #1 in
Comment 4 to Section 3-302. Former Section 3-305 stated that
a holder in due course takes free of defenses of "any party
to the instrument with whom the holder has not dealt."
The meaning of this language was not at all clear and if read
literally could have produced the wrong result. In the
hypothetical case, it could be argued that Seller
"dealt" with Bank because Bank delivered the
check to Seller. But it is clear that Seller should take free of
Bank's defense against Buyer regardless of whether Seller took
delivery of the check from Buyer or from Bank. The quoted
language is not included in Section 3-305. It is not necessary.
If Buyer issues an instrument to Seller and Buyer has a defense
against Seller, that defense can obviously be asserted. Buyer
and Seller are the only people involved. The
holder-in-due-course doctrine has no relevance. The doctrine
applies only to cases in which more than two parties are
involved. Its essence is that the holder in due course does not
have to suffer the consequences of a defense of the obligor on
the instrument that arose from an occurrence with a third party.
3. Subsection (a)(3) is concerned with claims in recoupment
which can be illustrated by the following example. Buyer
issues a note to the order of Seller in exchange for a promise of
Seller to deliver specified equipment. If Seller fails to deliver
the equipment or delivers equipment that is rightfully rejected,
Buyer has a defense to the note because the performance that
was the consideration for the note was not rendered. Section
3-303(b). This defense is included in Section 3-305(a)(2).
That defense can always be asserted against Seller. This result
is the same as that reached under former Section 3-408.
But suppose Seller delivered the promised equipment and it
was accepted by Buyer. The equipment, however, was
defective. Buyer retained the equipment and incurred expenses
with respect to its repair. In this case, Buyer does not have a
defense under Section 3-303(b). Seller delivered the equipment
and the equipment was accepted. Under Article 2, Buyer is
obliged to pay the price of the equipment which is represented
by the note. But Buyer may have a claim against Seller for
breach of warranty. If Buyer has a warranty claim, the claim
may be asserted against Seller as a counterclaim or as a claim
in recoupment to reduce the amount owing on the note. It is not
relevant whether Seller is or is not a holder in due course of the
note or whether Seller knew or had notice that Buyer had the
warranty claim. It is obvious that holder-in-due-course doctrine
cannot be used to allow Seller to cut off a warranty claim that
Buyer has against Seller. Subsection (b) specifically covers
this point by stating that a holder in due course is not subject to
a "claim in recoupment * * * against a person other than
the holder."
Suppose Seller negotiates the note to Holder. If Holder had
notice of Buyer's warranty claim at the time the note was
negotiated to Holder, Holder is not a holder in due course
(Section 3-302(a)(2)(iv)) and Buyer may assert the claim
against Holder (Section 3-305(a)(3)) but only as a claim in
recoupment, i.e. to reduce the amount owed on the note. If the
warranty claim is $1,000 and the unpaid note is $10,000, Buyer
owes $9,000 to Holder. If the warranty claim is more than the
unpaid amount of the note, Buyer owes nothing to Holder, but
Buyer cannot recover the unpaid amount of the warranty claim
from Holder. If Buyer had already partially paid the note,
Buyer is not entitled to recover the amounts paid. The claim
can be used only as an offset to amounts owing on the note. If
Holder had no notice of Buyer's claim and otherwise qualifies
as a holder in due course, Buyer may not assert the claim
against Holder. Section 3-305(b).
The result under Section 3-305 is consistent with the result
reached under former Article 3, but the rules for reaching the
result are stated differently. Under former Article 3 Buyer
could assert rights against Holder only if Holder was not a
holder in due course, and Holder's status depended upon
whether Holder had notice of a defense by Buyer. Courts have
held that Holder had that notice if Holder had notice of Buyer's
warranty claim. The rationale under former Article 3 was
"failure of consideration." This rationale does not
distinguish between cases in which the seller fails to perform
and those in which the buyer accepts the performance of seller
but makes a claim against the seller because the performance is
faulty. The term "failure of consideration' is subject to
varying interpretations and is not used in Article 3. The use of
the term "claim in recoupment" in Section
3-305(a)(3) is a more precise statement of the nature of Buyer's
right against Holder. The use of the term does not change the
law because the treatment of a defense under subsection (a)(2)
and a claim in recoupment under subsection (a)(3) is essentially
the same.
Under former Article 3, case law was divided on the issue of
the extent to which an obligor on a note could assert against a
transferee who is not a holder in due course a debt or other
claim that the obligor had against the original payee of the
instrument. Some courts limited claims to those that arose in
the transaction that gave rise to the note. This is the approach
taken in Section 3-305(a)(3). Other courts allowed the obligor
on the note to use any debt or other claim, no matter how
unrelated to the note, to offset the amount owed on the note.
Under current judicial authority and non-UCC statutory law,
there will be many cases in which a transferee of a note arising
from a sale transaction will not qualify as a holder in due
course. For example, applicable law may require the use of a
note to which there cannot be a holder in due course. See
Section 3-106(d) and Comment 3 to Section 3-106. It is
reasonable to provide that the buyer should not be denied the
right to assert claims arising out of the sale transaction.
Subsection (a)(3) is based on the belief that it is not reasonable
to require the transferee to bear the risk that wholly unrelated
claims may also be asserted. The determination of whether a
claim arose from the transaction that gave rise to the instrument
is determined by law other than this Article and thus may vary
as local law varies.
4. Subsection (c) concerns claims and defenses of a person
other than the obligor on the instrument. It applies principally
to cases in which an obligation is paid with the instrument of a
third person. For example, Buyer buys goods from Seller and
negotiates to Seller a cashier's check issued by Bank in
payment of the price. Shortly after delivering the check to
Seller, Buyer learns that Seller had defrauded Buyer in the sale
transaction. Seller may enforce the check against Bank even
though Seller is not a holder in due course. Bank has no
defense to its obligation to pay the check and it may not assert
defenses, claims in recoupment, or claims to the instrument of
Buyer, except to the extent permitted by the "but"
clause of the first sentence of subsection (c). Buyer may have
a claim to the instrument under Section 3-306 based on a right
to rescind the negotiation to Seller because of Seller's fraud.
Section 3-202(b) and Comment 2 to Section 3-201. Bank
cannot assert that claim unless Buyer is joined in the action in
which Seller is trying to enforce payment of the check. In that
case Bank may pay the amount of the check into court and the
court will decide whether that amount belongs to Buyer or
Seller. The last sentence of subsection (c) allows the issuer of
an instrument such as a cashier's check to refuse payment in the
rare case in which the issuer can prove that the instrument is a
lost or stolen instrument and the person seeking enforcement
does not have rights of a holder in due course.
5. Subsection (d) applies to instruments signed for
accommodation (Section 3-419) and this subsection equates the
obligation of the accommodation party to that of the
accommodated party. The accommodation party can assert
whatever defense or claim the accommodated party had against
the person enforcing the instrument. The only exceptions are
discharge in bankruptcy, infancy and lack of capacity. The
same rule does not apply to an indorsement by a holder of the
instrument in negotiating the instrument. The indorser, as
transferor, makes a warranty to the indorsee, as transferee, that
no defense or claim in recoupment is good against the indorser.
Section 3-416(a)(4). Thus, if the indorsee sues the indorser
because of dishonor of the instrument, the indorser may not
assert the defense or claim in recoupment of the maker or
drawer against the indorsee.
Section 36-3-306. CLAIMS TO AN INSTRUMENT.
A person taking an instrument, other than a person having
rights of a holder in due course, is subject to a claim of a
property or possessory right in the instrument or its proceeds,
including a claim to rescind a negotiation and to recover the
instrument or its proceeds. A person having rights of a holder
in due course takes free of the claim to the instrument.
OFFICIAL COMMENT
This section expands on the reference to "claims
to" the instrument mentioned in former Sections 3-305
and 3-306. Claims covered by the section include not only
claims to ownership but also any other claim of a property or
possessory right. It includes the claim to a lien or the claim of
a person in rightful possession of an instrument who was
wrongfully deprived of possession. Also included is a claim
based on Section 3-202(b) for rescission of a negotiation of the
instrument by the claimant. Claims to an instrument under
Section 3-306 are different from claims in recoupment referred
to in Section 3-305(a)(3).
Section 36-3-307. NOTICE OF BREACH OF
FIDUCIARY DUTY.
(a) In this section:
(1) `Fiduciary' means an agent, trustee, partner,
corporate officer or director, or other representative owing a
fiduciary duty with respect to an instrument.
(2) `Represented person' means the principal,
beneficiary, partnership, corporation, or other person to whom
the duty stated in item (1) is owed.
(b) If (i) an instrument is taken from a fiduciary for
payment or collection or for value, (ii) the taker has knowledge
of the fiduciary status of the fiduciary, and (iii) the represented
person makes a claim to the instrument or its proceeds on the
basis that the transaction of the fiduciary is a breach of
fiduciary duty, the following rules apply:
(1) Notice of breach of fiduciary duty by the fiduciary
is notice of the claim of the represented person.
(2) In the case of an instrument payable to the
represented person or the fiduciary as such, the taker has notice
of the breach of fiduciary duty if the instrument is (i) taken in
payment of or as security for a debt known by the taker to be
the personal debt of the fiduciary, (ii) taken in a transaction
known by the taker to be for the personal benefit of the
fiduciary, or (iii) deposited to an account other than an account
of the fiduciary as such, or an account of the represented
person.
(3) If an instrument is issued by the represented person
or the fiduciary as such, and made payable to the fiduciary
personally, the taker does not have notice of the breach of
fiduciary duty unless the taker knows of the breach of fiduciary
duty.
(4) If an instrument is issued by the represented person
or the fiduciary as such, to the taker as payee, the taker has
notice of the breach of fiduciary duty if the instrument is (i)
taken in payment of or as security for a debt known by the taker
to be the personal debt of the fiduciary, (ii) taken in a
transaction known by the taker to be for the personal benefit of
the fiduciary, or (iii) deposited to an account other than an
account of the fiduciary as such, or an account of the
represented person.
OFFICIAL COMMENT
1. This section states rules for determining when a person
who has taken an instrument from a fiduciary has notice of a
breach of fiduciary duty that occurs as a result of the
transaction with the fiduciary. Former Section 3-304(2) and
(4)(e) related to this issue, but those provisions were unclear in
their meaning. Section 3-307 is intended to clarify the law by
stating rules that comprehensively cover the issue of when the
taker of an instrument has notice of breach of a fiduciary duty
and thus notice of a claim to the instrument or its proceeds.
2. Subsection (a) defines the terms "fiduciary"
and "represented person" and the introductory
paragraph of subsection (b) describes the transaction to which
the section applies. The basic scenario is one in which the
fiduciary in effect embezzles money of the represented person
by applying the proceeds of an instrument that belongs to the
represented person to the personal use of the fiduciary. The
person dealing with the fiduciary may be a depositary bank that
takes the instrument for collection or a bank or other person
that pays value for the instrument. The section also covers a
transaction in which an instrument is presented for payment to
a payor bank that pays the instrument by giving value to the
fiduciary. Subsections (b)(2), (3), and (4) state rules for
determining when the person dealing with the fiduciary has
notice of breach of fiduciary duty. Subsection (b)(1) states that
notice of breach of fiduciary duty is notice of the represented
person's claim to the instrument or its proceeds.
Under Section 3-306, a person taking an instrument is
subject to a claim to the instrument or its proceeds, unless the
taker has rights of a holder in due course. Under Section
3-302(a)(2)(v), the taker cannot be a holder in due course if the
instrument was taken with notice of a claim under Section
3-306. Section 3-307 applies to cases in which a represented
person is asserting a claim because a breach of fiduciary duty
resulted in a misapplication of the proceeds of an instrument.
The claim of the represented person is a claim described in
Section 3-306. Section 3-307 states rules for determining when
a person taking an instrument has notice of the claim which will
prevent assertion of rights as a holder in due course. It also
states rules for determining when a payor bank pays an
instrument with notice of breach of fiduciary duty.
Section 3-307(b) applies only if the person dealing with the
fiduciary "has knowledge of the fiduciary status of the
fiduciary." Notice which does not amount to knowledge
is not enough to cause Section 3-307 to apply.
"Knowledge" is defined in Section 1-201(25). In
most cases, the "taker" referred to in Section 3-307
will be a bank or other organization. Knowledge of an
organization is determined by the rules stated in Section
1-201(27). In many cases, the individual who receives and
processes an instrument on behalf of the organization that is the
taker of the instrument "for payment or collection or for
value" is a clerk who has no knowledge of any fiduciary
status of the person from whom the instrument is received. In
such cases, Section 3-307 doesn't apply because, under Section
1-201(27), knowledge of the organization is determined by the
knowledge of the "individual conducting that
transaction," i.e. the clerk who receives and processes the
instrument. Furthermore, paragraphs (2) and (4) each require
that the person acting for the organization have knowledge of
facts that indicate a breach of fiduciary duty. In the case of an
instrument taken for deposit to an account, the knowledge is
found in the fact that the deposit is made to an account other
than that of the represented person or a fiduciary account for
benefit of that person. In other cases the person acting for the
organization must know that the instrument is taken in payment
or as security for a personal debt of the fiduciary or for the
personal benefit of the fiduciary. For example, if the
instrument is being used to buy goods or services, the person
acting for the organization must know that the goods or
services are for the personal benefit of the fiduciary. The
requirement that the taker have knowledge rather than notice is
meant to limit Section 3-307 to relatively uncommon cases in
which the person who deals with the fiduciary knows all the
relevant facts: the fiduciary status and that the proceeds of the
instrument are being used for the personal debt or benefit of the
fiduciary or are being paid to an account that is not an account
of the represented person or of the fiduciary, as such. Mere
notice of these facts is not enough to put the taker on notice of
the breach of fiduciary duty and does not give rise to any duty
of investigation by the taker.
3. Subsection (b)(2) applies to instruments payable to the
represented person or the fiduciary as such. For example, a
check payable to Corporation is indorsed in the name of
Corporation by Doe as its President. Doe gives the check to
Bank as partial repayment of a personal loan that Bank had
made to Doe. The check was indorsed either in blank or to
Bank. Bank collects the check and applies the proceeds to
reduce the amount owed on Doe's loan. If the person acting for
Bank in the transaction knows that Doe is a fiduciary and that
the check is being used to pay a personal obligation of Doe,
subsection (b)(2) applies. If Corporation has a claim to the
proceeds of the check because the use of the check by Doe was
a breach of fiduciary duty, Bank has notice of the claim and did
not take the check as a holder in due course. The same result
follows if Doe had indorsed the check to himself before giving
it to Bank. Subsection (b)(2) follows Uniform Fiduciaries Act
Section 4 in providing that if the instrument is payable to the
fiduciary, as such, or to the represented person, the taker has
notice of a claim if the instrument is negotiated for the
fiduciary's personal debt. If fiduciary funds are deposited to a
personal account of the fiduciary or to an account that is not an
account of the represented person or of the fiduciary, as such,
there is a split of authority concerning whether the bank is on
notice of a breach of fiduciary duty. Subsection (b)(2)(iii)
states that the bank is given notice of breach of fiduciary duty
because of the deposit. The Uniform Fiduciaries Act Section 9
states that the bank is not on notice unless it has knowledge of
facts that makes its receipt of the deposit an act of bad faith.
The rationale of subsection (b)(2) is that it is not normal for
an instrument payable to the represented person or the
fiduciary, as such, to be used for the personal benefit of the
fiduciary. It is likely that such use reflects an unlawful use of
the proceeds of the instrument. If the fiduciary is entitled to
compensation from the represented person for services rendered
or for expenses incurred by the fiduciary the normal mode of
payment is by a check drawn on the fiduciary account to the
order of the fiduciary.
4. Subsection (b)(3) is based on Uniform Fiduciaries Act
Section 6 and applies when the instrument is drawn by the
represented person or the fiduciary as such to the fiduciary
personally. The term "personally" is used as it is
used in the Uniform Fiduciaries Act to mean that the instrument
is payable to the payee as an individual and not as a fiduciary.
For example, Doe as President of Corporation writes a check on
Corporation's account to the order of Doe personally. The
check is then indorsed over to Bank as in Comment 3. In this
case there is no notice of breach of fiduciary duty because there
is nothing unusual about the transaction. Corporation may have
owed Doe money for salary, reimbursement for expenses
incurred for the benefit of Corporation, or for any other reason.
If Doe is authorized to write checks on behalf of Corporation to
pay debts of Corporation, the check is a normal way of paying
a debt owed to Doe. Bank may assume that Doe may use the
instrument for his personal benefit.
5. Subsection (b)(4) can be illustrated by a hypothetical
case. Corporation draws a check payable to an organization.
X, an officer or employee of Corporation, delivers the check to
a person acting for the organization. The person signing the
check on behalf of Corporation is X or another person. If the
person acting for the organization in the transaction knows that
X is a fiduciary, the organization is on notice of a claim by
Corporation if it takes the instrument under the same
circumstances stated in subsection (b)(2). If the organization
is a bank and the check is taken in repayment of a personal loan
of the bank to X, the case is like the case discussed in Comment
3. It is unusual for Corporation, the represented person, to pay
a personal debt of Doe by issuing a check to the bank. It is
more likely that the use of the check by Doe reflects an
unlawful use of the proceeds of the check. The same analysis
applies if the check is made payable to an organization in
payment of goods or services. If the person acting for the
organization knew of the fiduciary status of X and that the
goods or services were for X's personal benefit, the
organization is on notice of a claim by Corporation to the
proceeds of the check. See the discussion in the last paragraph
of Comment 2.
Section 36-3-308. PROOF OF SIGNATURES AND
STATUS AS HOLDER IN DUE COURSE.
(a) In an action with respect to an instrument, the
authenticity of, and authority to make, each signature on the
instrument is admitted unless specifically denied in the
pleadings. If the validity of a signature is denied in the
pleadings, the burden of establishing validity is on the person
claiming validity, but the signature is presumed to be authentic
and authorized unless the action is to enforce the liability of the
purported signer and the signer is dead or incompetent at the
time of trial of the issue of validity of the signature. If an
action to enforce the instrument is brought against a person as
the undisclosed principal of a person who signed the instrument
as a party to the instrument, the plaintiff has the burden of
establishing that the defendant is liable on the instrument as a
represented person under Section 36-3-402(a).
(b) If the validity of signatures is admitted or proved and
there is compliance with subsection (a), a plaintiff producing
the instrument is entitled to payment if the plaintiff proves
entitlement to enforce the instrument under Section 36-3-301,
unless the defendant proves a defense or claim in recoupment.
If a defense or claim in recoupment is proved, the right to
payment of the plaintiff is subject to the defense or claim,
except to the extent the plaintiff proves that the plaintiff has
rights of a holder in due course which are not subject to the
defense or claim.
OFFICIAL COMMENT
1. Section 3-308 is a modification of former Section 3-307.
The first two sentences of subsection (a) are a restatement of
former Section 3-307(1). The purpose of the requirement of a
specific denial in the pleadings is to give the plaintiff notice of
the defendant's claim of forgery or lack of authority as to the
particular signature, and to afford the plaintiff an opportunity
to investigate and obtain evidence. If local rules of pleading
permit, the denial may be on information and belief, or it may
be a denial of knowledge or information sufficient to form a
belief. It need not be under oath unless the local statutes or
rules require verification. In the absence of such specific denial
the signature stands admitted, and is not in issue. Nothing in
this section is intended, however, to prevent amendment of the
pleading in a proper case.
The question of the burden of establishing the signature
arises only when it has been put in issue by specific denial.
"Burden of establishing" is defined in Section
1-201. The burden is on the party claiming under the signature,
but the signature is presumed to be authentic and authorized
except as stated in the second sentence of subsection (a).
"Presumed" is defined in Section 1-201 and means
that until some evidence is introduced which would support a
finding that the signature is forged or unauthorized, the plaintiff
is not required to prove that it is valid. The presumption rests
upon the fact that in ordinary experience forged or unauthorized
signatures are very uncommon, and normally any evidence is
within the control of, or more accessible to, the defendant. The
defendant is therefore required to make some sufficient
showing of the grounds for the denial before the plaintiff is
required to introduce evidence. The defendant's evidence need
not be sufficient to require a directed verdict, but it must be
enough to support the denial by permitting a finding in the
defendant's favor. Until introduction of such evidence the
presumption requires a finding for the plaintiff. Once such
evidence is introduced the burden of establishing the signature
by a preponderance of the total evidence is on the plaintiff. The
presumption does not arise if the action is to enforce the
obligation of a purported signer who has died or become
incompetent before the evidence is required, and so is disabled
from obtaining or introducing it. "Action" is
defined in Section 1-201 and includes a claim asserted against
the estate of a deceased or an incompetent.
The last sentence of subsection (a) is a new provision that is
necessary to take into account Section 3-402(a) that allows an
undisclosed principal to be liable on an instrument signed by an
authorized representative. In that case the person enforcing the
instrument must prove that the undisclosed principal is liable.
2. Subsection (b) restates former Section 3-307(2) and (3).
Once signatures are proved or admitted a holder, by mere
production of the instrument, proves "entitlement to
enforce the instrument" because under Section 3-301 a
holder is a person entitled to enforce the instrument. Any other
person in possession of an instrument may recover only if that
person has the rights of a holder. Section 3-301. That person
must prove a transfer giving that person such rights under
Section 3-203(b) or that such rights were obtained by
subrogation or succession.
If a plaintiff producing the instrument proves entitlement to
enforce the instrument, either as a holder or a person with rights
of a holder, the plaintiff is entitled to recovery unless the
defendant proves a defense or claim in recoupment. Until proof
of a defense or claim in recoupment is made, the issue as to
whether the plaintiff has rights of a holder in due course does
not arise. In the absence of a defense or claim in recoupment,
any person entitled to enforce the instrument is entitled to
recover. If a defense or claim in recoupment is proved, the
plaintiff may seek to cut off the defense or claim in recoupment
by proving that the plaintiff is a holder in due course or that the
plaintiff has rights of a holder in due course under Section
3-203(b) or by subrogation or succession. All elements of
Section 3-302(a) must be proved.
Nothing in this section is intended to say that the plaintiff
must necessarily prove rights as a holder in due course. The
plaintiff may elect to introduce no further evidence, in which
case a verdict may be directed for the plaintiff or the defendant,
or the issue of the defense or claim in recoupment may be left
to the trier of fact, according to the weight and sufficiency of
the defendant's evidence. The plaintiff may elect to rebut the
defense or claim in recoupment by proof to the contrary, in
which case a verdict may be directed for either party or the
issue may be for the trier of fact. Subsection (b) means only
that if the plaintiff claims the rights of a holder in due course
against the defense or claim in recoupment, the plaintiff has the
burden of proof on that issue.
Section 36-3-309. ENFORCEMENT OF LOST,
DESTROYED, OR STOLEN INSTRUMENT.
(a) A person not in possession of an instrument is entitled
to enforce the instrument if (i) the person was in possession of
the instrument and entitled to enforce it when loss of possession
occurred, (ii) the loss of possession was not the result of a
transfer by the person or a lawful seizure, and (iii) the person
cannot reasonably obtain possession of the instrument because
the instrument 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.
(b) A person seeking enforcement of an instrument under
subsection (a) must prove the terms of the instrument and the
person's right to enforce the instrument. If that proof is made,
Section 36-3-308 applies to the case as if the person seeking
enforcement had produced the instrument. The court may not
enter judgment in favor of the person seeking enforcement
unless it finds that the person required to pay the instrument is
adequately protected against loss that might occur by reason of
a claim by another person to enforce the instrument. Adequate
protection may be provided by any reasonable means.
OFFICIAL COMMENT
Section 3-309 is a modification of former Section 3-804.
The rights stated are those of "a person entitled to enforce
the instrument" at the time of loss rather than those of an
"owner" as in former Section 3-804. Under
subsection (b), judgment to enforce the instrument cannot be
given unless the court finds that the defendant will be
adequately protected against a claim to the instrument by a
holder that may appear at some later time. The court is given
discretion in determining how adequate protection is to be
assured. Former Section 3-804 allowed the court to
"require security indemnifying the defendant against
loss." Under Section 3-309 adequate protection is a
flexible concept. For example, there is substantial risk that a
holder in due course may make a demand for payment if the
instrument was payable to bearer when it was lost or stolen. On
the other hand if the instrument was payable to the person who
lost the instrument and that person did not indorse the
instrument, no other person could be a holder of the instrument.
In some cases there is risk of loss only if there is doubt about
whether the facts alleged by the person who lost the instrument
are true. Thus, the type of adequate protection that is
reasonable in the circumstances may depend on the degree of
certainty about the facts in the case.
Section 36-3-310. EFFECT OF INSTRUMENT ON
OBLIGATION FOR WHICH TAKEN.
(a) Unless otherwise agreed, if a certified check, cashier's
check, or teller's check is taken for an obligation, the obligation
is discharged to the same extent discharge would result if an
amount of money equal to the amount of the instrument were
taken in payment of the obligation. Discharge of the obligation
does not affect any liability that the obligor may have as an
indorser of the instrument.
(b) Unless otherwise agreed and except as provided in
subsection (a), if a note or an uncertified check is taken for an
obligation, the obligation is suspended to the same extent the
obligation would be discharged if an amount of money equal to
the amount of the instrument were taken, and the following
rules apply:
(1) In the case of an uncertified check, suspension of
the obligation continues until dishonor of the check or until it
is paid or certified. Payment or certification of the check
results in discharge of the obligation to the extent of the amount
of the check.
(2) In the case of a note, suspension of the obligation
continues until dishonor of the note or until it is paid. Payment
of the note results in discharge of the obligation to the extent of
the payment.
(3) Except as provided in item (4), if the check or note
is dishonored and the obligee of the obligation for which the
instrument was taken is the person entitled to enforce the
instrument, the obligee may enforce either the instrument or the
obligation. In the case of an instrument of a third person which
is negotiated to the obligee by the obligor, discharge of the
obligor on the instrument also discharges the obligation.
(4) If the person entitled to enforce the instrument
taken for an obligation is a person other than the obligee, the
obligee may not enforce the obligation to the extent the
obligation is suspended. If the obligee is the person entitled to
enforce the instrument but no longer has possession of it
because it was lost, stolen, or destroyed, the obligation may not
be enforced to the extent of the amount payable on the
instrument, and to that extent the obligee's rights against the
obligor are limited to enforcement of the instrument.
(c) If an instrument other than one described in subsection
(a) or (b) is taken for an obligation, the effect is (i) that stated
in subsection (a) if the instrument is one on which a bank is
liable as maker or acceptor, or (ii) that stated in subsection (b)
in any other case.
OFFICIAL COMMENT
1. Section 3-310 is a modification of former Section 3-802.
As a practical matter, application of former Section 3-802 was
limited to cases in which a check or a note was given for an
obligation. Subsections (a) and (b) of Section 3-310 are
therefore stated in terms of checks and notes in the interests of
clarity. Subsection (c) covers the rare cases in which some
other instrument is given to pay an obligation.
2. Subsection (a) deals with the case in which a certified
check, cashier's check or teller's check is given in payment of
an obligation. In that case the obligation is discharged unless
there is an agreement to the contrary. Subsection (a) drops the
exception in former Section 3-802 for cases in which there is a
right of recourse on the instrument against the obligor. Under
former Section 3-802(1)(a) the obligation was not discharged
if there was a right of recourse on the instrument against the
obligor. Subsection (a) changes this result. The underlying
obligation is discharged, but any right of recourse on the
instrument is preserved.
3. Subsection (b) concerns cases in which an uncertified
check or a note is taken for an obligation. The typical case is
that in which a buyer pays for goods or services by giving the
seller the buyer's personal check, or in which the buyer signs a
note for the purchase price. Subsection (b) also applies to the
uncommon cases in which a check or note of a third person is
given in payment of the obligation. Subsection (b) preserves
the rule under former Section 3-802(1)(b) that the buyer's
obligation to pay the price is suspended, but subsection (b)
spells out the effect more precisely. If the check or note is
dishonored, the seller may sue on either the dishonored
instrument or the contract of sale if the seller has possession of
the instrument and is the person entitled to enforce it. If the
right to enforce the instrument is held by somebody other than
the seller, the seller can't enforce the right to payment of the
price under the sales contract because that right is represented
by the instrument which is enforceable by somebody else.
Thus, if the seller sold the note or the check to a holder and has
not reacquired it after dishonor, the only right that survives is
the right to enforce the instrument.
The last sentence of subsection (b)(3) applies to cases in
which an instrument of another person is indorsed over to the
obligee in payment of the obligation. For example, Buyer
delivers an uncertified personal check of X payable to the order
of Buyer to Seller in payment of the price of goods. Buyer
indorses the check over to Seller. Buyer is liable on the check
as indorser. If Seller neglects to present the check for payment
or to deposit it for collection within 30 days of the indorsement,
Buyer's liability as indorser is discharged. Section 3-415(e).
Under the last sentence of Section 3-310(b)(3) Buyer is also
discharged on the obligation to pay for the goods.
4. There was uncertainty concerning the applicability of
former Section 3-802 to the case in which the check given for
the obligation was stolen from the payee, the payee's signature
was forged, and the forger obtained payment. The last sentence
of subsection (b)(4) addresses this issue. If the payor bank pays
a holder, the drawer is discharged on the underlying obligation
because the check was paid. Subsection (b)(1). If the payor
bank pays a person not entitled to enforce the instrument, as in
the hypothetical case, the suspension of the underlying
obligation continues because the check has not been paid.
Section 3-602(a). The payee's cause of action is against the
depositary bank or payor bank in conversion under Section
3-420 or against the drawer under Section 3-309. In the latter
case, the drawer's obligation under Section 3-414(b) is
triggered by dishonor which occurs because the check is
unpaid. Presentment for payment to the drawee is excused
under Section 3-504(a)(i) and, under Section 3-502(e), dishonor
occurs without presentment if the check is not paid. The payee
cannot merely ignore the instrument and sue the drawer on the
underlying contract. This would impose on the drawer the risk
that the check when stolen was indorsed in blank or to bearer.
A similar analysis applies with respect to lost instruments
that have not been paid. If a creditor takes a check of the
debtor in payment of an obligation, the obligation is suspended
under the introductory paragraph of subsection (b). If the
creditor then loses the check, what are the creditor's rights?
The creditor can request the debtor to issue a new check and in
many cases, the debtor will issue a replacement check after
stopping payment on the lost check. In that case both the
debtor and creditor are protected. But the debtor is not obliged
to issue a new check. If the debtor refuses to issue a
replacement check, the last sentence of subsection (b)(4)
applies. The creditor may not enforce the obligation of debtor
for which the check was taken. The creditor may assert only
rights on the check. The creditor can proceed under Section
3-309 to enforce the obligation of the debtor, as drawer, to pay
the check.
5. Subsection (c) deals with rare cases in which other
instruments are taken for obligations. If a bank is the obligor
on the instrument, subsection (a) applies and the obligation is
discharged. In any other case subsection (b) applies.
Section 36-3-311. ACCORD AND SATISFACTION
BY USE OF INSTRUMENT.
(a) If a person against whom a claim is asserted proves
that (i) that person in good faith tendered an instrument to the
claimant as full satisfaction of the claim, (ii) the amount of the
claim was unliquidated or subject to a bona fide dispute, and
(iii) the claimant obtained payment of the instrument, the
following subsections apply.
(b) Unless subsection (c) applies, the claim is discharged
if the person against whom the claim is asserted proves that the
instrument or an accompanying written communication
contained a conspicuous statement to the effect that the
instrument was tendered as full satisfaction of the claim.
(c) Subject to subsection (d), a claim is not discharged
under subsection (b) if either of the following applies:
(1) The claimant, if an organization, proves that (i)
within a reasonable time before the tender, the claimant sent a
conspicuous statement to the person against whom the claim is
asserted that communications concerning disputed debts,
including an instrument tendered as full satisfaction of a debt,
are to be sent to a designated person, office, or place, and (ii)
the instrument or accompanying communication was not
received by that designated person, office, or place.
(2) The claimant, whether or not an organization,
proves that within 90 days after payment of the instrument, the
claimant tendered repayment of the amount of the instrument
to the person against whom the claim is asserted. This
paragraph does not apply if the claimant is an organization that
sent a statement complying with subsection (c)(1)(i).
(d) A claim is discharged if the person against whom the
claim is asserted proves that within a reasonable time before
collection of the instrument was initiated, the claimant, or an
agent of the claimant having direct responsibility with respect
to the disputed obligation, knew that the instrument was
tendered in full satisfaction of the claim.
OFFICIAL COMMENT
1. This section deals with an informal method of dispute
resolution carried out by use of a negotiable instrument. In the
typical case there is a dispute concerning the amount that is
owed on a claim.
Case #1. The claim is for the price of
goods or services sold to a consumer who asserts that he
or she is not obliged to pay the full price for which the
consumer was billed because of a defect or breach of
warranty with respect to the goods or services.
Case #2. A claim is made on an insurance
policy. The insurance company alleges that it is not
liable under the policy for the amount of the claim.
In either case the person against whom the claim is asserted
may attempt an accord and satisfaction of the disputed claim by
tendering a check to the claimant for some amount less than the
full amount claimed by the claimant. A statement will be
included on the check or in a communication accompanying the
check to the effect that the check is offered as full payment or
full satisfaction of the claim. Frequently, there is also a
statement to the effect that obtaining payment of the check is an
agreement by the claimant to a settlement of the dispute for the
amount tendered. Before enactment of revised Article 3, the
case law was in conflict over the question of whether obtaining
payment of the check had the effect of an agreement to the
settlement proposed by the debtor. This issue was governed by
a common law rule, but some courts hold that the common law
was modified by former Section 1-207 which they interpreted
as applying to full settlement checks.
2. Comment d. to Restatement of Contracts, Section 281
discusses the full satisfaction check and the applicable common
law rule. In a case like Case #1, the buyer can propose a
settlement of the disputed bill by a clear notation on the check
indicating that the check is tendered as full satisfaction of the
bill. Under the common law rule the seller, by obtaining
payment of the check accepts the offer of compromise by the
buyer. The result is the same if the seller adds a notation to the
check indicating that the check is accepted under protest or in
only partial satisfaction of the claim. Under the common law
rule the seller can refuse the check or can accept it subject to
the condition stated by the buyer, but the seller can't accept the
check and refuse to be bound by the condition. The rule applies
only to an unliquidated claim or a claim disputed in good faith
by the buyer. The dispute in the courts was whether Section
1-207 changed the common law rule. The Restatement states
that section "need not be read as changing this
well-established rule."
3. As part of the revision of Article 3, Section 1-207 has
been amended to add subsection (2) stating that Section 1-207
"does not apply to an accord and satisfaction."
Because of that amendment and revised Article 3, Section
3-311 governs full satisfaction checks. Section 3-311 follows
the common law rule with some minor variations to reflect
modern business conditions. In cases covered by Section 3-311
there will often be an individual on one side of the dispute and
a business organization on the other. This section is not
designed to favor either the individual or the business
organization. In Case #1 the person seeking the accord and
satisfaction is an individual. In Case #2 the person seeking the
accord and satisfaction is an insurance company. Section 3-311
is based on a belief that the common law rule produces a fair
result and that informal dispute resolution by full satisfaction
checks should be encouraged.
4. Subsection (a) states three requirements for application
of Section 3-311. "Good faith" in subsection (a)(i)
is defined in Section 3-103(a)(4) as not only honesty in fact, but
the observance of reasonable commercial standards of fair
dealing. The meaning of "fair dealing" will depend
upon the facts in the particular case. For example, suppose an
insurer tenders a check in settlement of a claim for personal
injury in an accident clearly covered by the insurance policy.
The claimant is necessitous and the amount of the check is very
small in relationship to the extent of the injury and the amount
recoverable under the policy. If the trier of fact determines that
the insurer was taking unfair advantage of the claimant, an
accord and satisfaction would not result from payment of the
check because of the absence of good faith by the insurer in
making the tender. Another example of lack of good faith is
found in the practice of some business debtors in routinely
printing full satisfaction language on their check stocks so that
all or a large part of the debts of the debtor are paid by checks
bearing the full satisfaction language, whether or not there is
any dispute with the creditor. Under such a practice the
claimant cannot be sure whether a tender in full satisfaction is
or is not being made. Use of a check on which full satisfaction
language was affixed routinely pursuant to such a business
practice may prevent an accord and satisfaction on the ground
that the check was not tendered in good faith under subsection
(a)(i).
Section 3-311 does not apply to cases in which the debt is a
liquidated amount and not subject to a bona fide dispute.
Subsection (a)(ii). Other law applies to cases in which a debtor
is seeking discharge of such a debt by paying less than the
amount owed. For the purpose of subsection (a)(iii) obtaining
acceptance of a check is considered to be obtaining payment of
the check.
The person seeking the accord and satisfaction must prove
that the requirements of subsection (a) are met. If that person
also proves that the statement required by subsection (b) was
given, the claim is discharged unless subsection (c) applies.
Normally the statement required by subsection (b) is written on
the check. Thus, the canceled check can be used to prove the
statement as well as the fact that the claimant obtained payment
of the check. Subsection (b) requires a
"conspicuous" statement that the instrument was
tendered in full satisfaction of the claim.
"Conspicuous" is defined in Section 1-201(10).
The statement is conspicuous if "it is so written that a
reasonable person against whom it is to operate ought to have
noticed it." If the claimant can reasonably be expected to
examine the check, almost any statement on the check should
be noticed and is therefore conspicuous. In cases in which the
claimant is an individual the claimant will receive the check
and will normally indorse it. Since the statement concerning
tender in full satisfaction normally will appear above the space
provided for the claimant's indorsement of the check, the
claimant "ought to have noticed" the statement.
5. Subsection (c)(1) is a limitation on subsection (b) in cases
in which the claimant is an organization. It is designed to
protect the claimant against inadvertent accord and satisfaction.
If the claimant is an organization payment of the check might
be obtained without notice to the personnel of the organization
concerned with the disputed claim. Some business
organizations have claims against very large numbers of
customers. Examples are department stores, public utilities and
the like. These claims are normally paid by checks sent by
customers to a designated office at which clerks employed by
the claimant or a bank acting for the claimant process the
checks and record the amounts paid. If the processing office is
not designed to deal with communications extraneous to
recording the amount of the check and the account number of
the customer, payment of a full satisfaction check can easily be
obtained without knowledge by the claimant of the existence of
the full satisfaction statement. This is particularly true if the
statement is written on the reverse side of the check in the area
in which indorsements are usually written. Normally, the
clerks of the claimant have no reason to look at the reverse side
of checks. Indorsement by the claimant normally is done by
mechanical means or there may be no indorsement at all.
Section 4-205(a). Subsection (c)(1) allows the claimant to
protect itself by advising customers by a conspicuous statement
that communications regarding disputed debts must be sent to
a particular person, office, or place. The statement must be
given to the customer within a reasonable time before the
tender is made. This requirement is designed to assure that the
customer has reasonable notice that the full satisfaction check
must be sent to a particular place. The reasonable time
requirement could be satisfied by a notice on the billing
statement sent to the customer. If the full satisfaction check is
sent to the designated destination and the check is paid, the
claim is discharged. If the claimant proves that the check was
not received at the designated destination the claim is not
discharged unless subsection (d) applies.
6. Subsection (c)(2) is also designed to prevent inadvertent
accord and satisfaction. It can be used by a claimant other than
an organization or by a claimant as an alternative to subsection
(c)(1). Some organizations may be reluctant to use subsection
(c)(1) because it may result in confusion of customers that
causes checks to be routinely sent to the special designated
person, office, or place. Thus, much of the benefit of rapid
processing of checks may be lost. An organization that chooses
not to send a notice complying with subsection (c)(1)(i) may
prevent an inadvertent accord and satisfaction by complying
with subsection (c)(2). If the claimant discovers that it has
obtained payment of a full satisfaction check, it may prevent an
accord and satisfaction if, within 90 days of the payment of the
check, the claimant tenders repayment of the amount of the
check to the person against whom the claim is asserted.
7. Subsection (c) is subject to subsection (d). If a person
against whom a claim is asserted proves that the claimant
obtained payment of a check known to have been tendered in
full satisfaction of the claim by "the claimant or an agent
of the claimant having direct responsibility with respect to the
disputed obligation," the claim is discharged even if (i)
the check was not sent to the person, office, or place required
by a notice complying with subsection (c)(1), or (ii) the
claimant tendered repayment of the amount of the check in
compliance with subsection (c)(2).
A claimant knows that a check was tendered in full
satisfaction of a claim when the claimant "has actual
knowledge" of that fact. Section 1-201(25). Under
Section 1-201(27), if the claimant is an organization, it has
knowledge that a check was tendered in full satisfaction of the
claim when that fact is
"brought to the attention of the individual
conducting that transaction, and in any event when it
would have been brought to his attention if the
organization had exercised due diligence. An
organization exercises due diligence if it maintains
reasonable routines for communicating significant
information to the person conducting the transaction and
there is reasonable compliance with the routines. Due
diligence does not require an individual acting for the
organization to communicate information unless such
communication is part of his regular duties or unless he
has reason to know of the transaction and that the
transaction would be materially affected by the
information."
With respect to an attempted accord and satisfaction the
"individual conducting that transaction" is an
employee or other agent of the organization having direct
responsibility with respect to the dispute. For example, if the
check and communication are received by a collection agency
acting for the claimant to collect the disputed claim, obtaining
payment of the check will result in an accord and satisfaction
even if the claimant gave notice, pursuant to subsection (c)(1),
that full satisfaction checks be sent to some other office.
Similarly, if a customer asserting a claim for breach of warranty
with respect to defective goods purchased in a retail outlet of a
large chain store delivers the full satisfaction check to the
manager of the retail outlet at which the goods were purchased,
obtaining payment of the check will also result in an accord and
satisfaction. On the other hand, if the check is mailed to the
chief executive officer of the chain store subsection (d) would
probably not be satisfied. The chief executive officer of a large
corporation may have general responsibility for operations of
the company, but does not normally have direct responsibility
for resolving a small disputed bill to a customer. A check for
a relatively small amount mailed to a high executive officer of
a large organization is not likely to receive the executive's
personal attention. Rather, the check would normally be
routinely sent to the appropriate office for deposit and credit to
the customer's account. If the check does receive the personal
attention of the high executive officer and the officer is aware
of the full-satisfaction language, collection of the check will
result in an accord and satisfaction because subsection (d)
applies. In this case the officer has assumed direct
responsibility with respect to the disputed transaction.
If a full satisfaction check is sent to a lock box or other
office processing checks sent to the claimant, it is irrelevant
whether the clerk processing the check did or did not see the
statement that the check was tendered as full satisfaction of the
claim. Knowledge of the clerk is not imputed to the
organization because the clerk has no responsibility with
respect to an accord and satisfaction. Moreover, there is no
failure of "due diligence" under Section 1-201(27)
if the claimant does not require its clerks to look for full
satisfaction statements on checks or accompanying
communications. Nor is there any duty of the claimant to
assign that duty to its clerks. Section 3-311(c) is intended to
allow a claimant to avoid an inadvertent accord and satisfaction
by complying with either subsection (c)(1) or (2) without
burdening the check-processing operation with extraneous and
wasteful additional duties.
8. In some cases the disputed claim may have been assigned
to a finance company or bank as part of a financing
arrangement with respect to accounts receivable. If the account
debtor was notified of the assignment, the claimant is the
assignee of the account receivable and the "agent of the
claimant" in subsection (d) refers to an agent of the
assignee.
PART 4
LIABILITY OF PARTIES
Section 36-3-401. SIGNATURE.
(a) A person is not liable on an instrument unless (i) the
person signed the instrument, or (ii) the person is represented
by an agent or representative who signed the instrument and the
signature is binding on the represented person under Section
36-3-402.
(b) A signature may be made (i) manually or by means of
a device or machine, and (ii) by the use of any name, including
a trade or assumed name, or by a word, mark, or symbol
executed or adopted by a person with present intention to
authenticate a writing.
OFFICIAL COMMENT
1. Obligation on an instrument depends on a signature that
is binding on the obligor. The signature may be made by the
obligor personally or by an agent authorized to act for the
obligor. Signature by agents is covered by Section 3-402. It is
not necessary that the name of the obligor appear on the
instrument, so long as there is a signature that binds the obligor.
Signature includes an indorsement.
2. A signature may be handwritten, typed, printed or made
in any other manner. It need not be subscribed, and may appear
in the body of the instrument, as in the case of "I, John
Doe, promise to pay * * *" without any other signature.
It may be made by mark, or even by thumbprint. It may be
made in any name, including any trade name or assumed name,
however false and fictitious, which is adopted for the purpose.
Parol evidence is admissible to identify the signer, and when
the signer is identified the signature is effective. Indorsement
in a name other than that of the indorser is governed by Section
3-204(d).
This section is not intended to affect any other law requiring
a signature by mark to be witnessed, or any signature to be
otherwise authenticated, or requiring any form of proof.
Section 36-3-402. SIGNATURE BY
REPRESENTATIVE.
(a) If a person acting, or purporting to act, as a
representative signs an instrument by signing either the name
of the represented person or the name of the signer, the
represented person is bound by the signature to the same extent
the represented person would be bound if the signature were on
a simple contract. If the represented person is bound, the
signature of the representative is the `authorized signature of
the represented person' and the represented person is liable on
the instrument, whether or not identified in the instrument.
(b) If a representative signs the name of the representative
to an instrument and the signature is an authorized signature of
the represented person, the following rules apply:
(1) If the form of the signature shows unambiguously
that the signature is made on behalf of the represented person
who is identified in the instrument, the representative is not
liable on the instrument.
(2) Subject to subsection (c), if (i) the form of the
signature does not show unambiguously that the signature is
made in a representative capacity or (ii) the represented person
is not identified in the instrument, the representative is liable on
the instrument to a holder in due course that took the instrument
without notice that the representative was not intended to be
liable on the instrument. With respect to any other person, the
representative is liable on the instrument unless the
representative proves that the original parties did not intend the
representative to be liable on the instrument.
(c) If a representative signs the name of the representative
as drawer of a check without indication of the representative
status and the check is payable from an account of the
represented person who is identified on the check, the signer is
not liable on the check if the signature is an authorized
signature of the represented person.
OFFICIAL COMMENT
1. Subsection (a) states when the represented person is
bound on an instrument if the instrument is signed by a
representative. If under the law of agency the represented
person would be bound by the act of the representative in
signing either the name of the represented person or that of the
representative, the signature is the authorized signature of the
represented person. Former Section 3-401(1) stated that
"no person is liable on an instrument unless his signature
appears thereon." This was interpreted as meaning that
an undisclosed principal is not liable on an instrument. This
interpretation provided an exception to ordinary agency law
that binds an undisclosed principal on a simple contract.
It is questionable whether this exception was justified by the
language of former Article 3 and there is no apparent policy
justification for it. The exception is rejected by subsection (a)
which returns to ordinary rules of agency. If P, the principal,
authorized A, the agent, to borrow money on P's behalf and A
signed A's name to a note without disclosing that the signature
was on behalf of P, A is liable on the instrument. But if the
person entitled to enforce the note can also prove that P
authorized A to sign on P's behalf, why shouldn't P also be
liable on the instrument? To recognize the liability of P takes
nothing away from the utility of negotiable instruments.
Furthermore, imposing liability on P has the merit of making it
impossible to have an instrument on which nobody is liable
even though it was authorized by P. That result could occur
under former Section 3-401(1) if an authorized agent signed
"as agent" but the note did not identify the
principal. If the dispute was between the agent and the payee
of the note, the agent could escape liability on the note by
proving that the agent and the payee did not intend that the
agent be liable on the note when the note was issued. Former
Section 3-403(2)(b). Under the prevailing interpretation of
former Section 3-401(1), the principal was not liable on the
note under former Section 3-401(1) because the principal's
name did not appear on the note. Thus, nobody was liable on
the note even though all parties knew that the note was signed
by the agent on behalf of the principal. Under Section 3-402(a)
the principal would be liable on the note.
2. Subsection (b) concerns the question of when an agent
who signs an instrument on behalf of a principal is bound on
the instrument. The approach followed by former Section
3-403 was to specify the form of signature that imposed or
avoided liability. This approach was unsatisfactory. There are
many ways in which there can be ambiguity about a signature.
It is better to state a general rule. Subsection (b)(1) states that
if the form of the signature unambiguously shows that it is
made on behalf of an identified represented person (for
example, "P, by A, Treasurer") the agent is not
liable. This is a workable standard for a court to apply.
Subsection (b)(2) partly changes former Section 3-403(2).
Subsection (b)(2) relates to cases in which the agent signs on
behalf of a principal but the form of the signature does not fall
within subsection (b)(1). The following cases are illustrative.
In each case John Doe is the authorized agent of Richard Roe
and John Doe signs a note on behalf of Richard Roe. In each
case the intention of the original parties to the instrument is that
Roe is to be liable on the instrument but Doe is not to be liable.
Case #1. Doe signs "John
Doe" without indicating in the note that Doe is
signing as agent. The note does not identify Richard Roe
as the represented person.
Case #2. Doe signs "John Doe,
Agent" but the note does not identify Richard Roe
as the represented person.
Case #3. The name "Richard
Roe" is written on the note and immediately below
that name Doe signs "John Doe" without
indicating that Doe signed as agent.
In each case Doe is liable on the instrument to a holder in
due course without notice that Doe was not intended to be
liable. In none of the cases does Doe's signature
unambiguously show that Doe was signing as agent for an
identified principal. A holder in due course should be able to
resolve any ambiguity against Doe.
But the situation is different if a holder in due course is not
involved. In each case Roe is liable on the note. Subsection
(a). If the original parties to the note did not intend that Doe
also be liable, imposing liability on Doe is a windfall to the
person enforcing the note. Under subsection (b)(2) Doe is
prima facie liable because his signature appears on the note and
the form of the signature does not unambiguously refute
personal liability. But Doe can escape liability by proving that
the original parties did not intend that he be liable on the note.
This is a change from former Section 3-403(2)(a).
A number of cases under former Article 3 involved
situations in which an agent signed the agent's name to a note,
without qualification and without naming the person
represented, intending to bind the principal but not the agent.
The agent attempted to prove that the other party had the same
intention. Some of these cases involved mistake, and in some
there was evidence that the agent may have been deceived into
signing in that manner. In some of the cases the court refused
to allow proof of the intention of the parties and imposed
liability on the agent based on former Section 3-403(2)(a) even
though both parties to the instrument may have intended that
the agent not be liable. Subsection (b)(2) changes the result of
those cases, and is consistent with Section 3-117 which allows
oral or written agreements to modify or nullify apparent
obligations on the instrument.
Former Section 3-403 spoke of the represented person being
"named" in the instrument. Section 3-402 speaks
of the represented person being "identified" in the
instrument. This change in terminology is intended to reject
decisions under former Section 3-403(2) requiring that the
instrument state the legal name of the represented person.
3. Subsection (c) is directed at the check cases. It states that
if the check identifies the represented person the agent who
signs on the signature line does not have to indicate agency
status. Virtually all checks used today are in personalized form
which identify the person on whose account the check is drawn.
In this case, nobody is deceived into thinking that the person
signing the check is meant to be liable. This subsection is
meant to overrule cases decided under former Article 3 such as
Griffin v. Ellinger, 538 S.W.2d 97 (Texas 1976).
Section 36-3-403. UNAUTHORIZED SIGNATURE.
(a) Unless otherwise provided in this chapter or Chapter
4, an unauthorized signature is ineffective except as the
signature of the unauthorized signer in favor of a person who in
good faith pays the instrument or takes it for value. An
unauthorized signature may be ratified for all purposes of this
chapter.
(b) If the signature of more than one person is required to
constitute the authorized signature of an organization, the
signature of the organization is unauthorized if one of the
required signatures is lacking.
(c) The civil or criminal liability of a person who makes
an unauthorized signature is not affected by any provision of
this chapter which makes the unauthorized signature effective
for the purposes of this chapter.
OFFICIAL COMMENT
1. "Unauthorized" signature is defined in
Section 1-201(43) as one that includes a forgery as well as a
signature made by one exceeding actual or apparent authority.
Former Section 3-404(1) stated that an unauthorized signature
was inoperative as the signature of the person whose name was
signed unless that person "is precluded from denying
it." Under former Section 3-406 if negligence by the
person whose name was signed contributed to an unauthorized
signature, that person "is precluded from asserting the
* * * lack of authority." Both of these sections were
applied to cases in which a forged signature appeared on an
instrument and the person asserting rights on the instrument
alleged that the negligence of the purported signer contributed
to the forgery. Since the standards for liability between the two
sections differ, the overlap between the sections caused
confusion. Section 3-403(a) deals with the problem by
removing the preclusion language that appeared in former
Section 3-404.
2. The except clause of the first sentence of subsection (a)
states the generally accepted rule that the unauthorized
signature, while it is wholly inoperative as that of the person
whose name is signed, is effective to impose liability upon the
signer or to transfer any rights that the signer may have in the
instrument. The signer's liability is not in damages for breach
of warranty of authority, but is full liability on the instrument
in the capacity in which the signer signed. It is, however,
limited to parties who take or pay the instrument in good faith;
and one who knows that the signature is unauthorized cannot
recover from the signer on the instrument.
3. The last sentence of subsection (a) allows an
unauthorized signature to be ratified. Ratification is a
retroactive adoption of the unauthorized signature by the person
whose name is signed and may be found from conduct as well
as from express statements. For example, it may be found from
the retention of benefits received in the transaction with
knowledge of the unauthorized signature. Although the forger
is not an agent, ratification is governed by the rules and
principles applicable to ratification of unauthorized acts of an
agent.
Ratification is effective for all purposes of this Article. The
unauthorized signature becomes valid so far as its effect as a
signature is concerned. Although the ratification may relieve
the signer of liability on the instrument, it does not of itself
relieve the signer of liability to the person whose name is
signed. It does not in any way affect the criminal law. No
policy of the criminal law prevents a person whose name is
forged to assume liability to others on the instrument by
ratifying the forgery, but the ratification cannot affect the rights
of the state. While the ratification may be taken into account
with other relevant facts in determining punishment, it does not
relieve the signer of criminal liability.
4. Subsection (b) clarifies the meaning of
"unauthorized" in cases in which an instrument
contains less than all of the signatures that are required as
authority to pay a check. Judicial authority was split on the
issue whether the one-year notice period under former Section
4-406(4) (now Section 4-406(f)) barred a customer's suit
against a payor bank that paid a check containing less than all
of the signatures required by the customer to authorize payment
of the check. Some cases took the view that if a customer
required that a check contain the signatures of both A and B to
authorize payment and only A signed, there was no
unauthorized signature within the meaning of that term in
former Section 4-406(4) because A's signature was neither
unauthorized nor forged. The other cases correctly pointed out
that it was the customer's signature at issue and not that of A;
hence, the customer's signature was unauthorized if all
signatures required to authorize payment of the check were not
on the check. Subsection (b) follows the latter line of cases.
The same analysis applies if A forged the signature of B.
Because the forgery is not effective as a signature of B, the
required signature of B is lacking.
Subsection (b) refers to "the authorized signature of an
organization." The definition of
"organization" in Section 1-201(28) is very broad.
It covers not only commercial entities but also "two or
more persons having a joint or common interest." Hence
subsection (b) would apply when a husband and wife are both
required to sign an instrument.
Section 36-3-404. IMPOSTORS; FICTITIOUS
PAYEES.
(a) If an impostor, by use of the mails or otherwise,
induces the issuer of an instrument to issue the instrument to
the impostor, or to a person acting in concert with the impostor,
by impersonating the payee of the instrument or a person
authorized to act for the payee, an indorsement of the
instrument by any person in the name of the payee is effective
as the indorsement of the payee in favor of a person who, in
good faith, pays the instrument or takes it for value or for
collection.
(b) If (i) a person whose intent determines to whom an
instrument is payable (Section 36-3-110(a) or (b)) does not
intend the person identified as payee to have any interest in the
instrument, or (ii) the person identified as payee of an
instrument is a fictitious person, the following rules apply until
the instrument is negotiated by special indorsement:
(1) Any person in possession of the instrument is its
holder.
(2) An indorsement by any person in the name of the
payee stated in the instrument is effective as the indorsement of
the payee in favor of a person who, in good faith, pays the
instrument or takes it for value or for collection.
(c) Under subsection (a) or (b), an indorsement is made in
the name of a payee if (i) it is made in a name substantially
similar to that of the payee or (ii) the instrument, whether or not
indorsed, is deposited in a depositary bank to an account in a
name substantially similar to that of the payee.
(d) With respect to an instrument to which subsection (a)
or (b) applies, if a person paying the instrument or taking it for
value or for collection fails to exercise ordinary care in paying
or taking the instrument and that failure substantially
contributes to loss resulting from payment of the instrument,
the person bearing the loss may recover from the person failing
to exercise ordinary care to the extent the failure to exercise
ordinary care contributed to the loss.
OFFICIAL COMMENT
1. Under former Article 3, the impostor cases were
governed by former Section 3-405(1)(a) and the fictitious payee
cases were governed by Section 3-405(1)(b). Section 3-404
replaces former Section 3-405(1)(a) and (b) and modifies the
previous law in some respects. Former Section 3-405 was read
by some courts to require that the indorsement be in the exact
name of the named payee. Revised Article 3 rejects this result.
Section 3-404(c) requires only that the indorsement be made in
a name "substantially similar" to that of the payee.
Subsection (c) also recognizes the fact that checks may be
deposited without indorsement. Section 4-205(a).
Subsection (a) changes the former law in a case in which the
impostor is impersonating an agent. Under former Section
3-405(1)(a), if Impostor impersonated Smith and induced the
drawer to draw a check to the order of Smith, Impostor could
negotiate the check. If Impostor impersonated Smith, the
president of Smith Corporation, and the check was payable to
the order of Smith Corporation, the section did not apply. See
the last paragraph of Comment 2 to former Section 3-405. In
revised Article 3, Section 3-404(a) gives Impostor the power to
negotiate the check in both cases.
2. Subsection (b) is based in part on former Section
3-405(1)(b) and in part on N.I.L. Section 9(3). It covers cases
in which an instrument is payable to a fictitious or nonexisting
person and to cases in which the payee is a real person but the
drawer or maker does not intend the payee to have any interest
in the instrument. Subsection (b) applies to any instrument, but
its primary importance is with respect to checks of corporations
and other organizations. It also applies to forged check cases.
The following cases illustrate subsection (b):
Case #1. Treasurer is authorized to draw
checks in behalf of Corporation. Treasurer fraudulently
draws a check of Corporation payable to Supplier Co., a
non-existent company. Subsection (b) applies because
Supplier Co. is a fictitious person and because Treasurer
did not intend Supplier Co. to have any interest in the
check. Under subsection (b)(1) Treasurer, as the person
in possession of the check, becomes the holder of the
check. Treasurer indorses the check in the name
"Supplier Co." and deposits it in Depositary
Bank. Under subsection (b)(2) and (c)(i), the
indorsement is effective to make Depositary Bank the
holder and therefore a person entitled to enforce the
instrument. Section 3-301.
Case #2. Same facts as Case #1 except that
Supplier Co. is an actual company that does business
with Corporation. If Treasurer intended to steal the
check when the check was drawn, the result in Case #2 is
the same as the result in Case #1. Subsection (b) applies
because Treasurer did not intend Supplier Co. to have
any interest in the check. It does not make any difference
whether Supplier Co. was or was not a creditor of
Corporation when the check was drawn. If Treasurer did
not decide to steal the check until after the check was
drawn, the case is covered by Section 3-405 rather than
Section 3-404(b), but the result is the same. See Case #6
in Comment 3 to Section 3-405.
Case #3. Checks of Corporation must be
signed by two officers. President and Treasurer both sign
a check of Corporation payable to Supplier Co., a
company that does business with Corporation from time
to time but to which Corporation does not owe any
money. Treasurer knows that no money is owed to
Supplier Co. and does not intend that Supplier Co. have
any interest in the check. President believes that money
is owed to Supplier Co. Treasurer obtains possession of
the check after it is signed. Subsection (b) applies
because Treasurer is "a person whose intent
determines to whom an instrument is payable" and
Treasurer does not intend Supplier Co. to have any
interest in the check. Treasurer becomes the holder of
the check and may negotiate it by indorsing it in the
name "Supplier Co."
Case #4. Checks of Corporation are signed
by a check-writing machine. Names of payees of checks
produced by the machine are determined by information
entered into the computer that operates the machine.
Thief, a person who is not an employee or other agent of
Corporation, obtains access to the computer and causes
the check-writing machine to produce a check payable to
Supplier Co., a non-existent company. Subsection (b)(ii)
applies. Thief then obtains possession of the check. At
that point Thief becomes the holder of the check because
Thief is the person in possession of the instrument.
Subsection (b)(1). Under Section 3-301 Thief, as holder,
is the "person entitled to enforce the
instrument" even though Thief does not have title
to the check and is in wrongful possession of it. Thief
indorses the check in the name "Supplier
Co." and deposits it in an account in Depositary
Bank which Thief opened in the name "Supplier
Co." Depositary Bank takes the check in good
faith and credits the "Supplier Co." account.
Under subsection (b)(2) and (c)(i), the indorsement is
effective. Depositary Bank becomes the holder and the
person entitled to enforce the check. The check is
presented to the drawee bank for payment and payment
is made. Thief then withdraws the credit to the account.
Although the check was issued without authority given
by Corporation, the drawee bank is entitled to pay the
check and charge Corporation's account if there was an
agreement with Corporation allowing the bank to debit
Corporation's account for payment of checks produced by
the check-writing machine whether or not authorized.
The indorsement is also effective if Supplier Co. is a real
person. In that case subsection (b)(i) applies. Under
Section 3-110(b) Thief is the person whose intent
determines to whom the check is payable, and Thief did
not intend Supplier Co. to have any interest in the check.
When the drawee bank pays the check, there is no breach
of warranty under Section 3-417(a)(1) or 4-208(a)(1)
because Depositary Bank was a person entitled to enforce
the check when it was forwarded for payment.
Case #5. Thief, who is not an employee or
agent of Corporation, steals check forms of Corporation.
John Doe is president of Corporation and is authorized to
sign checks on behalf of Corporation as drawer. Thief
draws a check in the name of Corporation as drawer by
forging the signature of Doe. Thief makes the check
payable to the order of Supplier Co. with the intention of
stealing it. Whether Supplier Co. is a fictitious person or
a real person, Thief becomes the holder of the check and
the person entitled to enforce it. The analysis is the same
as that in Case #4. Thief deposits the check in an account
in Depositary Bank which Thief opened in the name
"Supplier Co." Thief either indorses the
check in a name other than "Supplier Co." or
does not indorse the check at all. Under Section 4-205(a)
a depositary bank may become holder of a check
deposited to the account of a customer if the customer
was a holder, whether or not the customer indorses.
Subsection (c)(ii) treats deposit to an account in a name
substantially similar to that of the payee as the equivalent
of indorsement in the name of the payee. Thus, the
deposit is an effective indorsement of the check.
Depositary Bank becomes the holder of the check and the
person entitled to enforce the check. If the check is paid
by the drawee bank, there is no breach of warranty under
Section 3-417(a)(1) or 4-208(a)(1) because Depositary
Bank was a person entitled to enforce the check when it
was forwarded for payment and, unless Depositary Bank
knew about the forgery of Doe's signature, there is no
breach of warranty under Section 3-417(a)(3) or
4-208(a)(3). Because the check was a forged check the
drawee bank is not entitled to charge Corporation's
account unless Section 3-406 or Section 4-406 applies.
3. In cases governed by subsection (a) the dispute will
normally be between the drawer of the check that was obtained
by the impostor and the drawee bank that paid it. The drawer
is precluded from obtaining recredit of the drawer's account by
arguing that the check was paid on a forged indorsement so
long as the drawee bank acted in good faith in paying the
check. Cases governed by subsection (b) are illustrated by
Cases #1 through #5 in Comment 2. In Cases #1, #2, and #3
there is no forgery of the check, thus the drawer of the check
takes the loss if there is no lack of good faith by the banks
involved. Cases #4 and #5 are forged check cases. Depositary
Bank is entitled to retain the proceeds of the check if it didn't
know about the forgery. Under Section 3-418 the drawee bank
is not entitled to recover from Depositary Bank on the basis of
payment by mistake because Depositary Bank took the check
in good faith and gave value for the check when the credit
given for the check was withdrawn. And there is no breach of
warranty under Section 3-417(a)(1) or (3) or 4-208(a)(1) or (3).
Unless Section 3-406 applies the loss is taken by the drawee
bank if a forged check is paid, and that is the result in Case #5.
In Case #4 the loss is taken by Corporation, the drawer, because
an agreement between Corporation and the drawee bank
allowed the bank to debit Corporation's account despite the
unauthorized use of the check-writing machine.
If a check payable to an impostor, fictitious payee, or payee
not intended to have an interest in the check is paid, the effect
of subsections (a) and (b) is to place the loss on the drawer of
the check rather than on the drawee or the depositary bank that
took the check for collection. Cases governed by subsection (a)
always involve fraud, and fraud is almost always involved in
cases governed by subsection (b). The drawer is in the best
position to avoid the fraud and thus should take the loss. This
is true in Case #1, Case #2, and Case #3. But in some cases the
person taking the check might have detected the fraud and thus
have prevented the loss by the exercise of ordinary care. In
those cases, if that person failed to exercise ordinary care, it is
reasonable that that person bear loss to the extent the failure
contributed to the loss. Subsection (d) is intended to reach that
result. It allows the person who suffers loss as a result of
payment of the check to recover from the person who failed to
exercise ordinary care. In Case #1, Case #2, and Case #3, the
person suffering the loss is Corporation, the drawer of the
check. In each case the most likely defendant is the depositary
bank that took the check and failed to exercise ordinary care.
In those cases, the drawer has a cause of action against the
offending bank to recover a portion of the loss. The amount of
loss to be allocated to each party is left to the trier of fact.
Ordinary care is defined in Section 3-103(a)(7). An example of
the type of conduct by a depositary bank that could give rise to
recovery under subsection (d) is discussed in Comment 4 to
Section 3-405. That Comment addresses the last sentence of
Section 3-405(b) which is similar to Section 3-404(d).
In Case #1, Case #2, and Case #3, there was no forgery of
the drawer's signature. But cases involving checks payable to
a fictitious payee or a payee not intended to have an interest in
the check are often forged check cases as well. Examples are
Case #4 and Case #5. Normally, the loss in forged check cases
is on the drawee bank that paid the check. Case #5 is an
example. In Case #4 the risk with respect to the forgery is
shifted to the drawer because of the agreement between the
drawer and the drawee bank. The doctrine that prevents a
drawee bank from recovering payment with respect to a forged
check if the payment was made to a person who took the check
for value and in good faith is incorporated into Section 3-418
and Sections 3-417(a)(3) and 4-208(a)(3). This doctrine is
based on the assumption that the depositary bank normally has
no way of detecting the forgery because the drawer is not that
bank's customer. On the other hand, the drawee bank, at least
in some cases, may be able to detect the forgery by comparing
the signature on the check with the specimen signature that the
drawee has on file. But in some forged check cases the
depositary bank is in a position to detect the fraud. Those cases
typically involve a check payable to a fictitious payee or a
payee not intended to have an interest in the check. Subsection
(d) applies to those cases. If the depositary bank failed to
exercise ordinary care and the failure substantially contributed
to the loss, the drawer in Case #4 or the drawee bank in Case #5
has a cause of action against the depositary bank under
subsection (d). Comment 4 to Section 3-405 can be used as a
guide to the type of conduct that could give rise to recovery
under Section 3-404(d).
Section 36-3-405. EMPLOYER'S RESPONSIBILITY
FOR FRAUDULENT INDORSEMENT BY EMPLOYEE.
(a) In this section:
(1) `Employee' includes an independent contractor and
employee of an independent contractor retained by the
employer.
(2) `Fraudulent indorsement' means (i) in the case of an
instrument payable to the employer, a forged indorsement
purporting to be that of the employer, or (ii) in the case of an
instrument with respect to which the employer is the issuer, a
forged indorsement purporting to be that of the person
identified as payee.
(3) `Responsibility' with respect to instruments means
authority (i) to sign or indorse instruments on behalf of the
employer, (ii) to process instruments received by the employer
for bookkeeping purposes, for deposit to an account, or for
other disposition, (iii) to prepare or process instruments for
issue in the name of the employer, (iv) to supply information
determining the names or addresses of payees of instruments to
be issued in the name of the employer, (v) to control the
disposition of instruments to be issued in the name of the
employer, or (vi) to act otherwise with respect to instruments
in a responsible capacity. `Responsibility' does not include
authority that merely allows an employee to have access to
instruments or blank or incomplete instrument forms that are
being stored or transported or are part of incoming or outgoing
mail, or similar access.
(b) For the purpose of determining the rights and
liabilities of a person who, in good faith, pays an instrument or
takes it for value or for collection, if an employer entrusted an
employee with responsibility with respect to the instrument and
the employee or a person acting in concert with the employee
makes a fraudulent indorsement of the instrument, the
indorsement is effective as the indorsement of the person to
whom the instrument is payable if it is made in the name of that
person. If the person paying the instrument or taking it for
value or for collection fails to exercise ordinary care in paying
or taking the instrument and that failure substantially
contributes to loss resulting from the fraud, the person bearing
the loss may recover from the person failing to exercise
ordinary care to the extent the failure to exercise ordinary care
contributed to the loss.
(c) Under subsection (b), an indorsement is made in the
name of the person to whom an instrument is payable if (i) it is
made in a name substantially similar to the name of that person
or (ii) the instrument, whether or not indorsed, is deposited in
a depositary bank to an account in a name substantially similar
to the name of that person.
OFFICIAL COMMENT
1. Section 3-405 is addressed to fraudulent indorsements
made by an employee with respect to instruments with respect
to which the employer has given responsibility to the employee.
It covers two categories of fraudulent indorsements:
indorsements made in the name of the employer to instruments
payable to the employer and indorsements made in the name of
payees of instruments issued by the employer. This section
applies to instruments generally but normally the instrument
will be a check. Section 3-405 adopts the principle that the risk
of loss for fraudulent indorsements by employees who are
entrusted with responsibility with respect to checks should fall
on the employer rather than the bank that takes the check or
pays it, if the bank was not negligent in the transaction. Section
3-405 is based on the belief that the employer is in a far better
position to avoid the loss by care in choosing employees, in
supervising them, and in adopting other measures to prevent
forged indorsements on instruments payable to the employer or
fraud in the issuance of instruments in the name of the
employer. If the bank failed to exercise ordinary care,
subsection (b) allows the employer to shift loss to the bank to
the extent the bank's failure to exercise ordinary care
contributed to the loss. "Ordinary care" is defined
in Section 3-103(a)(7). The provision applies regardless of
whether the employer is negligent.
The first category of cases governed by Section 3-405 are
those involving indorsements made in the name of payees of
instruments issued by the employer. In this category, Section
3-405 includes cases that were covered by former Section
3-405(1)(c). The scope of Section 3-405 in revised Article 3 is,
however, somewhat wider. It covers some cases not covered by
former Section 3-405(1)(c) in which the entrusted employee
makes a forged indorsement to a check drawn by the employer.
An example is Case #6 in Comment 3. Moreover, a larger
group of employees is included in revised Section 3-405. The
key provision is the definition of "responsibility"
in subsection (a)(1) which identifies the kind of responsibility
delegated to an employee which will cause the employer to take
responsibility for the fraudulent acts of that employee. An
employer can insure this risk by employee fidelity bonds.
The second category of cases governed by Section 3-405 --
fraudulent indorsements of the name of the employer to
instruments payable to the employer -- were covered in former
Article 3 by Section 3-406. Under former Section 3-406, the
employer took the loss only if negligence of the employer could
be proved. Under revised Article 3, Section 3-406 need not be
used with respect to forgeries of the employer's indorsement.
Section 3-405 imposes the loss on the employer without proof
of negligence.
2. With respect to cases governed by former Section
3-405(1)(c), Section 3-405 is more favorable to employers in
one respect. The bank was entitled to the preclusion provided
by former Section 3-405(1)(c) if it took the check in good faith.
The fact that the bank acted negligently did not shift the loss to
the bank so long as the bank acted in good faith. Under revised
Section 3-405 the loss may be recovered from the bank to the
extent the failure of the bank to exercise ordinary care
contributed to the loss.
3. Section 3-404(b) and Section 3-405 both apply to cases
of employee fraud. Section 3-404(b) is not limited to cases of
employee fraud, but most of the cases to which it applies will
be cases of employee fraud. The following cases illustrate the
application of Section 3-405. In each case it is assumed that the
bank that took the check acted in good faith and was not
negligent.
Case #1. Janitor, an employee of
Employer, steals a check for a very large amount payable
to Employer after finding it on a desk in one of
Employer's offices. Janitor forges Employer's
indorsement on the check and obtains payment. Since
Janitor was not entrusted with
"responsibility" with respect to the check,
Section 3-405 does not apply. Section 3-406 might apply
to this case. The issue would be whether Employer was
negligent in safeguarding the check. If not, Employer
could assert that the indorsement was forged and bring an
action for conversion against the depositary or payor
bank under Section 3-420.
Case #2. X is Treasurer of Corporation
and is authorized to write checks on behalf of
Corporation by signing X's name as Treasurer. X draws
a check in the name of Corporation and signs X's name as
Treasurer. The check is made payable to X. X then
indorses the check and obtains payment. Assume that
Corporation did not owe any money to X and did not
authorize X to write the check. Although the writing of
the check was not authorized, Corporation is bound as
drawer of the check because X had authority to sign
checks on behalf of Corporation. This result follows
from agency law and Section 3-402(a). Section 3-405
does not apply in this case because there is no forged
indorsement. X was payee of the check so the
indorsement is valid. Section 3-110(a).
Case #3. The duties of Employee, a
bookkeeper, include posting the amounts of checks
payable to Employer to the accounts of the drawers of the
checks. Employee steals a check payable to Employer
which was entrusted to Employee and forges Employer's
indorsement. The check is deposited by Employee to an
account in Depositary Bank which Employee opened in
the same name as Employer, and the check is honored by
the drawee bank. The indorsement is effective as
Employer's indorsement because Employee's duties
include processing checks for bookkeeping purposes.
Thus, Employee is entrusted with
"responsibility" with respect to the check.
Neither Depositary Bank nor the drawee bank is liable to
Employer for conversion of the check. The same result
follows if Employee deposited the check in the account
in Depositary Bank without indorsement. Section
4-205(a). Under subsection (c) deposit in a depositary
bank in an account in a name substantially similar to that
of Employer is the equivalent of an indorsement in the
name of Employer.
Case #4. Employee's duties include
stamping Employer's unrestricted blank indorsement on
checks received by Employer and depositing them in
Employer's bank account. After stamping Employer's
unrestricted blank indorsement on a check, Employee
steals the check and deposits it in Employee's personal
bank account. Section 3-405 doesn't apply because there
is no forged indorsement. Employee is authorized by
Employer to indorse Employer's checks. The fraud by
Employee is not the indorsement but rather the theft of
the indorsed check. Whether Employer has a cause of
action against the bank in which the check was deposited
is determined by whether the bank had notice of the
breach of fiduciary duty by Employee. The issue is
determined under Section 3-307.
Case #5. The computer that controls
Employer's check-writing machine was programmed to
cause a check to be issued to Supplier Co. to which
money was owed by Employer. The address of Supplier
Co. was included in the information in the computer.
Employee is an accounts payable clerk whose duties
include entering information into the computer.
Employee fraudulently changed the address of Supplier
Co. in the computer data bank to an address of Employee.
The check was subsequently produced by the
check-writing machine and mailed to the address that
Employee had entered into the computer. Employee
obtained possession of the check, indorsed it in the name
of Supplier Co, and deposited it to an account in
Depositary Bank which Employee opened in the name
"Supplier Co." The check was honored by
the drawee bank. The indorsement is effective under
Section 3-405(b) because Employee's duties allowed
Employee to supply information determining the address
of the payee of the check. An employee that is entrusted
with duties that enable the employee to determine the
address to which a check is to be sent controls the
disposition of the check and facilitates forgery of the
indorsement. The employer is held responsible. The
drawee may debit the account of Employer for the
amount of the check. There is no breach of warranty by
Depositary Bank under Section 3-417(a)(1) or
4-208(a)(1).
Case #6. Treasurer is authorized to draw
checks in behalf of Corporation. Treasurer draws a check
of Corporation payable to Supplier Co., a company that
sold goods to Corporation. The check was issued to pay
the price of these goods. At the time the check was
signed Treasurer had no intention of stealing the check.
Later, Treasurer stole the check, indorsed it in the name
"Supplier Co." and obtained payment by
depositing it to an account in Depositary Bank which
Treasurer opened in the name "Supplier Co.".
The indorsement is effective under Section 3-405(b).
Section 3-404(b) does not apply to this case.
Case #7. Checks of Corporation are signed
by Treasurer in behalf of Corporation as drawer. Clerk's
duties include the preparation of checks for issue by
Corporation. Clerk prepares a check payable to the order
of Supplier Co. for Treasurer's signature. Clerk
fraudulently informs Treasurer that the check is needed
to pay a debt owed to Supplier Co, a company that does
business with Corporation. No money is owed to
Supplier Co. and Clerk intends to steal the check.
Treasurer signs it and returns it to Clerk for mailing.
Clerk does not indorse the check but deposits it to an
account in Depositary Bank which Clerk opened in the
name "Supplier Co.". The check is honored
by the drawee bank. Section 3-404(b)(i) does not apply
to this case because Clerk, under Section 3-110(a), is not
the person whose intent determines to whom the check is
payable. But Section 3-405 does apply and it treats the
deposit by Clerk as an effective indorsement by Clerk
because Clerk was entrusted with responsibility with
respect to the check. If Supplier Co. is a fictitious person
Section 3-404(b)(ii) applies. But the result is the same.
Clerk's deposit is treated as an effective indorsement of
the check whether Supplier Co. is a fictitious or a real
person or whether money was or was not owing to
Supplier Co. The drawee bank may debit the account of
Corporation for the amount of the check and there is no
breach of warranty by Depositary Bank under Section
3-417(1)(a).
4. The last sentence of subsection (b) is similar to
subsection (d) of Section 3-404 which is discussed in Comment
3 to Section 3-404. In Case #5, Case #6, or Case #7 the
depositary bank may have failed to exercise ordinary care when
it allowed the employee to open an account in the name
"Supplier Co.," to deposit checks payable to
"Supplier Co." in that account, or to withdraw
funds from that account that were proceeds of checks payable
to Supplier Co. Failure to exercise ordinary care is to be
determined in the context of all the facts relating to the bank's
conduct with respect to the bank's collection of the check. If
the trier of fact finds that there was such a failure and that the
failure substantially contributed to loss, it could find the
depositary bank liable to the extent the failure contributed to
the loss. The last sentence of subsection (b) can be illustrated
by an example. Suppose in Case #5 that the check is not
payable to an obscure "Supplier Co." but rather to
a well-known national corporation. In addition, the check is for
a very large amount of money. Before depositing the check,
Employee opens an account in Depositary Bank in the name of
the corporation and states to the person conducting the
transaction for the bank that Employee is manager of a new
office being opened by the corporation. Depositary Bank opens
the account without requiring Employee to produce any
resolutions of the corporation's board of directors or other
evidence of authorization of Employee to act for the
corporation. A few days later, the check is deposited, the
account is credited, and the check is presented for payment.
After Depositary Bank receives payment, it allows Employee
to withdraw the credit by a wire transfer to an account in a bank
in a foreign country. The trier of fact could find that
Depositary Bank did not exercise ordinary care and that the
failure to exercise ordinary care contributed to the loss suffered
by Employer. The trier of fact could allow recovery by
Employer from Depositary Bank for all or part of the loss
suffered by Employer.
Section 36-3-406. NEGLIGENCE CONTRIBUTING
TO FORGED SIGNATURE OR ALTERATION OF
INSTRUMENT.
(a) A person whose failure to exercise ordinary care
substantially contributes to an alteration of an instrument or to
the making of a forged signature on an instrument is precluded
from asserting the alteration or the forgery against a person
who, in good faith, pays the instrument or takes it for value or
for collection.
(b) Under subsection (a), if the person asserting the
preclusion fails to exercise ordinary care in paying or taking the
instrument and that failure substantially contributes to loss, the
loss is allocated between the person precluded and the person
asserting the preclusion according to the extent to which the
failure of each to exercise ordinary care contributed to the loss.
(c) Under subsection (a), the burden of proving failure to
exercise ordinary care is on the person asserting the preclusion.
Under subsection (b), the burden of proving failure to exercise
ordinary care is on the person precluded.
OFFICIAL COMMENT
1. Section 3-406(a) is based on former Section 3-406. With
respect to alteration, Section 3-406 adopts the doctrine of
Young v. Grote, 4 Bing. 253 (1827), which held that
a drawer who so negligently draws an instrument as to facilitate
its material alteration is liable to a drawee who pays the altered
instrument in good faith. Under Section 3-406 the doctrine is
expanded to apply not only to drafts but to all instruments. It
includes in the protected class any "person who, in good
faith, pays the instrument or takes it for value or for
collection." Section 3-406 rejects decisions holding that
the maker of a note owes no duty of care to the holder because
at the time the instrument is issued there is no contract between
them. By issuing the instrument and "setting it afloat
upon a sea of strangers' the maker or drawer voluntarily enters
into a relation with later holders which justifies imposition of
a duty of care. In this respect an instrument so negligently
drawn as to facilitate alteration does not differ in principle from
an instrument containing blanks which may be filled. Under
Section 3-407 a person paying an altered instrument or taking
it for value, in good faith and without notice of the alteration
may enforce rights with respect to the instrument according to
its original terms. If negligence of the obligor substantially
contributes to an alteration, this section gives the holder or the
payor the alternative right to treat the altered instrument as
though it had been issued in the altered form.
No attempt is made to define particular conduct that will
constitute "failure to exercise ordinary care [that]
substantially contributes to an alteration." Rather,
"ordinary care" is defined in Section 3-103(a)(7) in
general terms. The question is left to the court or the jury for
decision in the light of the circumstances in the particular case
including reasonable commercial standards that may apply.
Section 3-406 does not make the negligent party liable in
tort for damages resulting from the alteration. If the negligent
party is estopped from asserting the alteration the person taking
the instrument is fully protected because the taker can treat the
instrument as having been issued in the altered form.
2. Section 3-406 applies equally to a failure to exercise
ordinary care that substantially contributes to the making of a
forged signature on an instrument. Section 3-406 refers to
"forged signature" rather than "unauthorized
signature" that appeared in former Section 3-406 because
it more accurately describes the scope of the provision.
Unauthorized signature is a broader concept that includes not
only forgery but also the signature of an agent which does not
bind the principal under the law of agency. The agency cases
are resolved independently under agency law. Section 3-406 is
not necessary in those cases.
The "substantially contributes" test of former
Section 3-406 is continued in this section in preference to a
"direct and proximate cause" test. The
"substantially contributes" test is meant to be less
stringent than a "direct and proximate cause" test.
Under the less stringent test the preclusion should be easier to
establish. Conduct "substantially contributes" to a
material alteration or forged signature if it is a contributing
cause of the alteration or signature and a substantial factor in
bringing it about. The analysis of "substantially
contributes" in former Section 3-406 by the court in
Thompson Maple Products v. Citizens National Bank of
Corry, 234 A.2d 32 (Pa. Super. Ct. 1967), states what is
intended by the use of the same words in revised Section
3-406(b). Since Section 3-404(d) and Section 3-405(b) also use
the words "substantially contributes" the analysis
of these words also applies to those provisions.
3. The following cases illustrate the kind of conduct that can
be the basis of a preclusion under Section 3-406(a):
Case #1. Employer signs checks drawn on
Employer's account by use of a rubber stamp of
Employer's signature. Employer keeps the rubber stamp
along with Employer's personalized blank check forms in
an unlocked desk drawer. An unauthorized person
fraudulently uses the check forms to write checks on
Employer's account. The checks are signed by use of the
rubber stamp. If Employer demands that Employer's
account in the drawee bank be recredited because the
forged check was not properly payable, the drawee bank
may defend by asserting that Employer is precluded from
asserting the forgery. The trier of fact could find that
Employer failed to exercise ordinary care to safeguard
the rubber stamp and the check forms and that the failure
substantially contributed to the forgery of Employer's
signature by the unauthorized use of the rubber stamp.
Case #2. An insurance company draws a
check to the order of Sarah Smith in payment of a claim
of a policyholder, Sarah Smith, who lives in Alabama.
The insurance company also has a policyholder with the
same name who lives in Illinois. By mistake, the
insurance company mails the check to the Illinois Sarah
Smith who indorses the check and obtains payment.
Because the payee of the check is the Alabama Sarah
Smith, the indorsement by the Illinois Sarah Smith is a
forged indorsement. Section 3-110(a). The trier of fact
could find that the insurance company failed to exercise
ordinary care when it mailed the check to the wrong
person and that the failure substantially contributed to the
making of the forged indorsement. In that event the
insurance company could be precluded from asserting the
forged indorsement against the drawee bank that honored
the check.
Case #3. A company writes a check for
$10. The figure "10" and the word
"ten" are typewritten in the appropriate
spaces on the check form. A large blank space is left
after the figure and the word. The payee of the check,
using a typewriter with a typeface similar to that used on
the check, writes the word "thousand" after
the word "ten" and a comma and three zeros
after the figure "10". The drawee bank in
good faith pays $10,000 when the check is presented for
payment and debits the account of the drawer in that
amount. The trier of fact could find that the drawer failed
to exercise ordinary care in writing the check and that the
failure substantially contributed to the alteration. In that
case the drawer is precluded from asserting the alteration
against the drawee if the check was paid in good faith.
4. Subsection (b) differs from former Section 3-406 in that
it adopts a concept of comparative negligence. If the person
precluded under subsection (a) proves that the person asserting
the preclusion failed to exercise ordinary care and that failure
substantially contributed to the loss, the loss may be allocated
between the two parties on a comparative negligence basis. In
the case of a forged indorsement the litigation is usually
between the payee of the check and the depositary bank that
took the check for collection. An example is a case like Case
#1 of Comment 3 to Section 3-405. If the trier of fact finds that
Employer failed to exercise ordinary care in safeguarding the
check and that the failure substantially contributed to the
making of the forged indorsement, subsection (a) of Section
3-406 applies. If Employer brings an action for conversion
against the depositary bank that took the checks from the
forger, the depositary bank could assert the preclusion under
subsection (a). But suppose the forger opened an account in the
depositary bank in a name identical to that of Employer, the
payee of the check, and then deposited the check in the account.
Subsection (b) may apply. There may be an issue whether the
depositary bank should have been alerted to possible fraud
when a new account was opened for a corporation shortly
before a very large check payable to a payee with the same
name is deposited. Circumstances surrounding the opening of
the account may have suggested that the corporation to which
the check was payable may not be the same as the corporation
for which the account was opened. If the trier of fact finds that
collecting the check under these circumstances was a failure to
exercise ordinary care, it could allocate the loss between the
depositary bank and Employer, the payee.
Section 36-3-407. ALTERATION.
(a) `Alteration' means (i) an unauthorized change in an
instrument that purports to modify in any respect the obligation
of a party, or (ii) an unauthorized addition of words or numbers
or other change to an incomplete instrument relating to the
obligation of a party.
(b) Except as provided in subsection (c), an alteration
fraudulently made discharges a party whose obligation is
affected by the alteration unless that party assents or is
precluded from asserting the alteration. No other alteration
discharges a party, and the instrument may be enforced
according to its original terms.
(c) A payor bank or drawee paying a fraudulently altered
instrument or a person taking it for value, in good faith and
without notice of the alteration, may enforce rights with respect
to the instrument (i) according to its original terms, or (ii) in the
case of an incomplete instrument altered by unauthorized
completion, according to its terms as completed.
OFFICIAL COMMENT
1. This provision restates former Section 3-407. Former
Section 3-407 defined a "material" alteration as any
alteration that changes the contract of the parties in any respect.
Revised Section 3-407 refers to such a change as an alteration.
As under subsection (2) of former Section 3-407, discharge
because of alteration occurs only in the case of an alteration
fraudulently made. There is no discharge if a blank is filled in
the honest belief that it is authorized or if a change is made with
a benevolent motive such as a desire to give the obligor the
benefit of a lower interest rate. Changes favorable to the
obligor are unlikely to be made with any fraudulent intent, but
if such an intent is found the alteration may operate as a
discharge.
Discharge is a personal defense of the party whose
obligation is modified and anyone whose obligation is not
affected is not discharged. But if an alteration discharges a
party there is also discharge of any party having a right of
recourse against the discharged party because the obligation of
the party with the right of recourse is affected by the alteration.
Assent to the alteration given before or after it is made will
prevent the party from asserting the discharge. The phrase `or
is precluded from asserting the alteration" in subsection
(b) recognizes the possibility of an estoppel or other ground
barring the defense which does not rest on assent.
2. Under subsection (c) a person paying a fraudulently
altered instrument or taking it for value, in good faith and
without notice of the alteration, is not affected by a discharge
under subsection (b). The person paying or taking the
instrument may assert rights with respect to the instrument
according to its original terms or, in the case of an incomplete
instrument that is altered by unauthorized completion,
according to its terms as completed. If blanks are filled or an
incomplete instrument is otherwise completed, subsection (c)
places the loss upon the party who left the instrument
incomplete by permitting enforcement in its completed form.
This result is intended even though the instrument was stolen
from the issuer and completed after the theft.
Section 36-3-408. DRAWEE NOT LIABLE ON
UNACCEPTED DRAFT.
A check or other draft does not of itself operate as an
assignment of funds in the hands of the drawee available for its
payment, and the drawee is not liable on the instrument until
the drawee accepts it.
OFFICIAL COMMENT
1. This section is a restatement of former Section 3-409(1).
Subsection (2) of former Section 3-409 is deleted as misleading
and superfluous. Comment 3 says of subsection (2): "It
is intended to make it clear that this section does not in any way
affect any liability which may arise apart from the
instrument." In reality subsection (2) did not make
anything clear and was a source of confusion. If all it meant
was that a bank that has not certified a check may engage in
other conduct that might make it liable to a holder, it stated the
obvious and was superfluous. Section 1-103 is adequate to
cover those cases.
2. Liability with respect to drafts may arise under other law.
For example, Section 4-302 imposes liability on a payor bank
for late return of an item.
Section 36-3-409. ACCEPTANCE OF DRAFT;
CERTIFIED CHECK.
(a) `Acceptance' means the drawee's signed agreement to
pay a draft as presented. It must be written on the draft and
may consist of the drawee's signature alone. Acceptance may
be made at any time and becomes effective when notification
pursuant to instructions is given or the accepted draft is
delivered for the purpose of giving rights on the acceptance to
any person.
(b) A draft may be accepted although it has not been
signed by the drawer, is otherwise incomplete, is overdue, or
has been dishonored.
(c) If a draft is payable at a fixed period after sight and the
acceptor fails to date the acceptance, the holder may complete
the acceptance by supplying a date in good faith.
(d) `Certified check' means a check accepted by the bank
on which it is drawn. Acceptance may be made as stated in
subsection (a) or by a writing on the check which indicates that
the check is certified. The drawee of a check has no obligation
to certify the check, and refusal to certify is not dishonor of the
check.
OFFICIAL COMMENT
1. The first three subsections of Section 3-409 are a
restatement of former Section 3-410. Subsection (d) adds a
definition of certified check which is a type of accepted draft.
2. Subsection (a) states the generally recognized rule that
the mere signature of the drawee on the instrument is a
sufficient acceptance. Customarily the signature is written
vertically across the face of the instrument, but since the
drawee has no reason to sign for any other purpose a signature
in any other place, even on the back of the instrument, is
sufficient. It need not be accompanied by such words as
"Accepted," "Certified," or
"Good." It must not, however, bear any words
indicating an intent to refuse to honor the draft. The last
sentence of subsection (a) states the generally recognized rule
that an acceptance written on the draft takes effect when the
drawee notifies the holder or gives notice according to
instructions.
3. The purpose of subsection (c) is to provide a definite date
of payment if none appears on the instrument. An undated
acceptance of a draft payable "thirty days after
sight" is incomplete. Unless the acceptor writes in a
different date the holder is authorized to complete the
acceptance according to the terms of the draft by supplying a
date of acceptance. Any date supplied by the holder is effective
if made in good faith.
4. The last sentence of subsection (d) states the generally
recognized rule that in the absence of agreement a bank is
under no obligation to certify a check. A check is a demand
instrument calling for payment rather than acceptance. The
bank may be liable for breach of any agreement with the
drawer, the holder, or any other person by which it undertakes
to certify. Its liability is not on the instrument, since the drawee
is not so liable until acceptance. Section 3-408. Any liability
is for breach of the separate agreement.
Section 36-3-410. ACCEPTANCE VARYING
DRAFT.
(a) If the terms of a drawee's acceptance vary from the
terms of the draft as presented, the holder may refuse the
acceptance and treat the draft as dishonored. In that case, the
drawee may cancel the acceptance.
(b) The terms of a draft are not varied by an acceptance to
pay at a particular bank or place in the United States, unless the
acceptance states that the draft is to be paid only at that bank or
place.
(c) If the holder assents to an acceptance varying the
terms of a draft, the obligation of each drawer and indorser that
does not expressly assent to the acceptance is discharged.
OFFICIAL COMMENT
1. This section is a restatement of former Section 3-412. It
applies to conditional acceptances, acceptances for part of the
amount, acceptances to pay at a different time from that
required by the draft, or to the acceptance of less than all of the
drawees. It applies to any other engagement changing the
essential terms of the draft. If the drawee makes a varied
acceptance the holder may either reject it or assent to it. The
holder may reject by insisting on acceptance of the draft as
presented. Refusal by the drawee to accept the draft as
presented is dishonor. In that event the drawee is not bound by
the varied acceptance and is entitled to have it canceled.
If the holder assents to the varied acceptance, the drawee's
obligation as acceptor is according to the terms of the varied
acceptance. Under subsection (c) the effect of the holder's
assent is to discharge any drawer or indorser who does not also
assent. The assent of the drawer or indorser must be
affirmatively expressed. Mere failure to object within a
reasonable time is not assent which will prevent the discharge.
2. Under subsection (b) an acceptance does not vary from
the terms of the draft if it provides for payment at any particular
bank or place in the United States unless the acceptance states
that the draft is to be paid only at such bank or place. Section
3-501(b)(1) states that if an instrument is payable at a bank in
the United States presentment must be made at the place of
payment (Section 3-111) which in this case is at the designated
bank.
Section 36-3-411. REFUSAL TO PAY CASHIER'S
CHECKS, TELLER'S CHECKS, AND CERTIFIED CHECKS.
(a) In this section, `obligated bank' means the acceptor of
a certified check or the issuer of a cashier's check or teller's
check bought from the issuer.
(b) If the obligated bank wrongfully (i) refuses to pay a
cashier's check or certified check, (ii) stops payment of a teller's
check, or (iii) refuses to pay a dishonored teller's check, the
person asserting the right to enforce the check is entitled to
compensation for expenses and loss of interest resulting from
the nonpayment and may recover consequential damages if the
obligated bank refuses to pay after receiving notice of particular
circumstances giving rise to the damages.
(c) Expenses or consequential damages under subsection
(b) are not recoverable if the refusal of the obligated bank to
pay occurs because (i) the bank suspends payments, (ii) the
obligated bank asserts a claim or defense of the bank that it has
reasonable grounds to believe is available against the person
entitled to enforce the instrument, (iii) the obligated bank has
a reasonable doubt whether the person demanding payment is
the person entitled to enforce the instrument, or (iv) payment is
prohibited by law.
OFFICIAL COMMENT
1. In some cases a creditor may require that the debt be paid
by an obligation of a bank. The debtor may comply by
obtaining certification of the debtor's check, but more
frequently the debtor buys from a bank a cashier's check or
teller's check payable to the creditor. The check is taken by the
creditor as a cash equivalent on the assumption that the bank
will pay the check. Sometimes, the debtor wants to retract
payment by inducing the obligated bank not to pay. The typical
case involves a dispute between the parties to the transaction in
which the check is given in payment. In the case of a certified
check or cashier's check, the bank can safely pay the holder of
the check despite notice that there may be an adverse claim to
the check (Section 3-602). It is also clear that the bank that
sells a teller's check has no duty to order the bank on which it
is drawn not to pay it. A debtor using any of these types of
checks has no right to stop payment. Nevertheless, some banks
will refuse payment as an accommodation to a customer.
Section 3-411 is designed to discourage this practice.
2. The term "obligated bank" refers to the issuer
of the cashier's check or teller's check and the acceptor of the
certified check. If the obligated bank wrongfully refuses to
pay, it is liable to pay for expenses and loss of interest resulting
from the refusal to pay. There is no express provision for
attorney's fees, but attorney's fees are not meant to be
necessarily excluded. They could be granted because they fit
within the language "expenses * * * resulting from the
nonpayment." In addition the bank may be liable to pay
consequential damages if it has notice of the particular
circumstances giving rise to the damages.
3. Subsection (c) provides that expenses or consequential
damages are not recoverable if the refusal to pay is because of
the reasons stated. The purpose is to limit that recovery to
cases in which the bank refuses to pay even though its
obligation to pay is clear and it is able to pay. Subsection (b)
applies only if the refusal to honor the check is wrongful. If the
bank is not obliged to pay there is no recovery. The bank may
assert any claim or defense that it has, but normally the bank
would not have a claim or defense. In the usual case it is a
remitter that is asserting a claim to the check on the basis of a
rescission of negotiation to the payee under Section 3-202. See
Comment 2 to Section 3-201. The bank can assert that claim if
there is compliance with Section 3-305(c), but the bank is not
protected from damages under subsection (b) if the claim of the
remitter is not upheld. In that case, the bank is insulated from
damages only if payment is enjoined under Section 3-602(b)(1).
Subsection (c)(iii) refers to cases in which the bank may have
a reasonable doubt about the identity of the person demanding
payment. For example, a cashier's check is payable to
"Supplier Co." The person in possession of the
check presents it for payment over the counter and claims to be
an officer of Supplier Co. The bank may refuse payment until
it has been given adequate proof that the presentment in fact is
being made for Supplier Co., the person entitled to enforce the
check.
Section 36-3-412. OBLIGATION OF ISSUER OF
NOTE OR CASHIER'S CHECK.
The issuer of a note or cashier's check or other draft drawn
on the drawer is obliged to pay the instrument (i) according to
its terms at the time it was issued or, if not issued, at the time it
first came into possession of a holder, or (ii) if the issuer signed
an incomplete instrument, according to its terms when
completed, to the extent stated in Sections 36-3-115 and
36-3-407. The obligation is owed to a person entitled to
enforce the instrument or to an indorser who paid the
instrument under Section 36-3-415.
OFFICIAL COMMENT
1. The obligations of the maker, acceptor, drawer, and
indorser are stated in four separate sections. Section 3-412
states the obligation of the maker of a note and is consistent
with former Section 3-413(1). Section 3-412 also applies to the
issuer of a cashier's check or other draft drawn on the drawer.
Under former Section 3-118(a), since a cashier's check or other
draft drawn on the drawer was "effective as a note,"
the drawer was liable under former Section 3-413(1) as a
maker. Under Section 3-103(a)(6) and 3-104(f) a cashier's
check or other draft drawn on the drawer is treated as a draft to
reflect common commercial usage, but the liability of the
drawer is stated by Section 3-412 as being the same as that of
the maker of a note rather than that of the drawer of a draft.
Thus, Section 3-412 does not in substance change former law.
2. Under Section 3-105(b) nonissuance of either a complete
or incomplete instrument is a defense by a maker or drawer
against a person that is not a holder in due course.
3. The obligation of the maker may be modified in the case
of alteration if, under Section 3-406, the maker is precluded
from asserting the alteration.
Section 36-3-413. OBLIGATION OF ACCEPTOR.
(a) The acceptor of a draft is obliged to pay the draft (i)
according to its terms at the time it was accepted, even though
the acceptance states that the draft is payable `as originally
drawn' or equivalent terms, (ii) if the acceptance varies the
terms of the draft, according to the terms of the draft as varied,
or (iii) if the acceptance is of a draft that is an incomplete
instrument, according to its terms when completed, to the
extent stated in Sections 36-3-115 and 36-3-407. The
obligation is owed to a person entitled to enforce the draft or to
the drawer or an indorser who paid the draft under Section
36-3-414 or 36-3-415.
(b) If the certification of a check or other acceptance of a
draft states the amount certified or accepted, the obligation of
the acceptor is that amount. If (i) the certification or
acceptance does not state an amount, (ii) the amount of the
instrument is subsequently raised, and (iii) the instrument is
then negotiated to a holder in due course, the obligation of the
acceptor is the amount of the instrument at the time it was taken
by the holder in due course.
OFFICIAL COMMENT
Subsection (a) is consistent with former Section 3-413(1).
Subsection (b) has primary importance with respect to certified
checks. It protects the holder in due course of a certified check
that was altered after certification and before negotiation to the
holder in due course. A bank can avoid liability for the altered
amount by stating on the check the amount the bank agrees to
pay. The subsection applies to other accepted drafts as well.
Section 36-3-414. OBLIGATION OF DRAWER.
(a) This section does not apply to cashier's checks or other
drafts drawn on the drawer.
(b) If an unaccepted draft is dishonored, the drawer is
obliged to pay the draft (i) according to its terms at the time it
was issued or, if not issued, at the time it first came into
possession of a holder, or (ii) if the drawer signed an
incomplete instrument, according to its terms when completed,
to the extent stated in Sections 36-3-115 and 36-3-407. The
obligation is owed to a person entitled to enforce the draft or to
an indorser who paid the draft under Section 36-3-415.
(c) If a draft is accepted by a bank, the drawer is
discharged, regardless of when or by whom acceptance was
obtained.
(d) If a draft is accepted and the acceptor is not a bank, the
obligation of the drawer to pay the draft if the draft is
dishonored by the acceptor is the same as the obligation of an
indorser under Section 36-3-415(a) and (c).
(e) If a draft states that it is drawn `without recourse' or
otherwise disclaims liability of the drawer to pay the draft, the
drawer is not liable under subsection (b) to pay the draft if the
draft is not a check. A disclaimer of the liability stated in
subsection (b) is not effective if the draft is a check.
(f) If (i) a check is not presented for payment or given to
a depositary bank for collection within 30 days after its date,
(ii) the drawee suspends payments after expiration of the
30-day period without paying the check, and (iii) because of the
suspension of payments, the drawer is deprived of funds
maintained with the drawee to cover payment of the check, the
drawer to the extent deprived of funds may discharge its
obligation to pay the check by assigning to the person entitled
to enforce the check the rights of the drawer against the drawee
with respect to the funds.
OFFICIAL COMMENT
1. Subsection (a) excludes cashier's checks because the
obligation of the issuer of a cashier's check is stated in Section
3-412.
2. Subsection (b) states the obligation of the drawer on an
unaccepted draft. It replaces former Section 3-413(2). The
requirement under former Article 3 of notice of dishonor or
protest has been eliminated. Under revised Article 3, notice of
dishonor is necessary only with respect to indorser's liability.
The liability of the drawer of an unaccepted draft is treated as
a primary liability. Under former Section 3-102(1)(d) the term
"secondary party" was used to refer to a drawer or
indorser. The quoted term is not used in revised Article 3. The
effect of a draft drawn without recourse is stated in subsection
(e).
3. Under subsection (c) the drawer is discharged of liability
on a draft accepted by a bank regardless of when acceptance
was obtained. This changes former Section 3-411(1) which
provided that the drawer is discharged only if the holder obtains
acceptance. Holders that have a bank obligation do not
normally rely on the drawer to guarantee the bank's solvency.
A holder can obtain protection against the insolvency of a bank
acceptor by a specific guaranty of payment by the drawer or by
obtaining an indorsement by the drawer. Section 3-205(d).
4. Subsection (d) states the liability of the drawer if a draft
is accepted by a drawee other than a bank and the acceptor
dishonors. The drawer of an unaccepted draft is the only party
liable on the instrument. The drawee has no liability on the
draft. Section 3-408. When the draft is accepted, the
obligations change. The drawee, as acceptor, becomes
primarily liable and the drawer's liability is that of a person
secondarily liable as a guarantor of payment. The drawer's
liability is identical to that of an indorser, and subsection (d)
states the drawer's liability that way. The drawer is liable to
pay the person entitled to enforce the draft or any indorser that
pays pursuant to Section 3-415. The drawer in this case is
discharged if notice of dishonor is required by Section 3-503
and is not given in compliance with that section. A drawer that
pays has a right of recourse against the acceptor. Section
3-413(a).
5. Subsection (e) does not permit the drawer of a check to
avoid liability under subsection (b) by drawing the check
without recourse. There is no legitimate purpose served by
issuing a check on which nobody is liable. Drawing without
recourse is effective to disclaim liability of the drawer if the
draft is not a check. Suppose, in a documentary sale, Seller
draws a draft on Buyer for the price of goods shipped to Buyer.
The draft is payable upon delivery to the drawee of an order bill
of lading covering the goods. Seller delivers the draft with the
bill of lading to Finance Company that is named as payee of the
draft. If Seller draws without recourse Finance Company takes
the risk that Buyer will dishonor. If Buyer dishonors, Finance
Company has no recourse against Seller but it can obtain
reimbursement by selling the goods which it controls through
the bill of lading.
6. Subsection (f) is derived from former Section
3-502(1)(b). It is designed to protect the drawer of a check
against loss resulting from suspension of payments by the
drawee bank when the holder of the check delays collection of
the check. For example, X writes a check payable to Y for
$1,000. The check is covered by funds in X's account in the
drawee bank. Y delays initiation of collection of the check for
more than 30 days after the date of the check. The drawee bank
suspends payments after the 30-day period and before the check
is presented for payment. If the $1,000 of funds in X's account
have not been withdrawn, X has a claim for those funds against
the drawee bank and, if subsection (e) were not in effect, X
would be liable to Y on the check because the check was
dishonored. Section 3-502(e). If the suspension of payments
by the drawee bank will result in payment to X of less than the
full amount of the $1,000 in the account or if there is a
significant delay in payment to X, X will suffer a loss which
would not have been suffered if Y had promptly initiated
collection of the check. In most cases, X will not suffer any
loss because of the existence of federal bank deposit insurance
that covers accounts up to $100,000. Thus, subsection (e) has
relatively little importance. There might be some cases,
however, in which the account is not fully insured because it
exceeds $100,000 or because the account doesn't qualify for
deposit insurance. Subsection (f) retains the phrase
"deprived of funds maintained with the drawee' appearing
in former Section 3-502(1)(b). The quoted phrase applies if the
suspension of payments by the drawee prevents the drawer
from receiving the benefit of funds which would have paid the
check if the holder had been timely in initiating collection.
Thus, any significant delay in obtaining full payment of the
funds is a deprivation of funds. The drawer can discharge
drawer's liability by assigning rights against the drawee with
respect to the funds to the holder.
Section 36-3-415. OBLIGATION OF INDORSER.
(a) Subject to subsections (b), (c), and (d) and to Section
36-3-419(d), if an instrument is dishonored, an indorser is
obliged to pay the amount due on the instrument (i) according
to the terms of the instrument at the time it was indorsed, or (ii)
if the indorser indorsed an incomplete instrument, according to
its terms when completed, to the extent stated in Sections
36-3-115 and 36-3-407. The obligation of the indorser is owed
to a person entitled to enforce the instrument or to a subsequent
indorser who paid the instrument under this section.
(b) If an indorsement states that it is made `without
recourse' or otherwise disclaims liability of the indorser, the
indorser is not liable under subsection (a) to pay the instrument.
(c) If notice of dishonor of an instrument is required by
Section 36-3-503 and notice of dishonor complying with that
section is not given to an indorser, the liability of the indorser
under subsection (a) is discharged.
(d) If a draft is accepted by a bank after an indorsement is
made, the liability of the indorser under subsection (a) is
discharged.
(e) If an indorser of a check is liable under subsection (a)
and the check is not presented for payment, or given to a
depositary bank for collection, within 30 days after the day the
indorsement was made, the liability of the indorser under
subsection (a) is discharged.
OFFICIAL COMMENT
1. Subsection (a) and (b) restate the substance of former
Section 3-414(1). Subsection (2) of former Section 3-414 has
been dropped because it is superfluous. Although notice of
dishonor is not mentioned in subsection (a), it must be given in
some cases to charge an indorser. It is covered in subsection
(c). Regulation CC Section 229.35(b) provides that a bank
handling a check for collection or return is liable to a bank that
subsequently handles the check to the extent the latter bank
does not receive payment for the check. This liability applies
whether or not the bank incurring the liability indorsed the
check.
2. Section 3-503 states when notice of dishonor is required
and how it must be given. If required notice of dishonor is not
given in compliance with Section 3-503, subsection (c) of
Section 3-415 states that the effect is to discharge the indorser's
obligation.
3. Subsection (d) is similar in effect to Section 3-414(c) if
the draft is accepted by a bank after the indorsement is made.
See Comment 3 to Section 3-414. If a draft is accepted by a
bank before the indorsement is made, the indorser incurs the
obligation stated in subsection (a).
4. Subsection (e) modifies former Sections 3-503(2)(b) and
3-502(1)(a) by stating a 30-day rather than a seven-day period,
and stating it as an absolute rather than a presumptive period.
Section 36-3-416. TRANSFER WARRANTIES.
(a) A person who transfers an instrument for
consideration warrants to the transferee and, if the transfer is by
indorsement, to any subsequent transferee that:
(1) the warrantor is a person entitled to enforce the
instrument;
(2) all signatures on the instrument are authentic and
authorized;
(3) the instrument has not been altered;
(4) the instrument is not subject to a defense or claim
in recoupment of any party which can be asserted against the
warrantor; and
(5) the warrantor has no knowledge of any insolvency
proceeding commenced with respect to the maker or acceptor
or, in the case of an unaccepted draft, the drawer.
(b) A person to whom the warranties under subsection (a)
are made and who took the instrument in good faith may
recover from the warrantor as damages for breach of warranty
an amount equal to the loss suffered as a result of the breach,
but not more than the amount of the instrument plus expenses
and loss of interest incurred as a result of the breach.
(c) The warranties stated in subsection (a) cannot be
disclaimed with respect to checks. Unless notice of a claim for
breach of warranty is given to the warrantor within 30 days
after the claimant has reason to know of the breach and the
identity of the warrantor, the liability of the warrantor under
subsection (b) is discharged to the extent of any loss caused by
the delay in giving notice of the claim.
(d) A cause of action for breach of warranty under this
section accrues when the claimant has reason to know of the
breach.
OFFICIAL COMMENT
1. Subsection (a) is taken from subsection (2) of former
Section 3-417. Subsections (3) and (4) of former Section 3-417
are deleted. Warranties under subsection (a) in favor of the
immediate transferee apply to all persons who transfer an
instrument for consideration whether or not the transfer is
accompanied by indorsement. Any consideration sufficient to
support a simple contract will support those warranties. If there
is an indorsement the warranty runs with the instrument and the
remote holder may sue the indorser-warrantor directly and thus
avoid a multiplicity of suits.
2. Since the purpose of transfer (Section 3-203(a)) is to give
the transferee the right to enforce the instrument, subsection
(a)(1) is a warranty that the transferor is a person entitled to
enforce the instrument (Section 3-301). Under Section
3-203(b) transfer gives the transferee any right of the transferor
to enforce the instrument. Subsection (a)(1) is in effect a
warranty that there are no unauthorized or missing
indorsements that prevent the transferor from making the
transferee a person entitled to enforce the instrument.
3. The rationale of subsection (a)(4) is that the transferee
does not undertake to buy an instrument that is not enforceable
in whole or in part, unless there is a contrary agreement. Even
if the transferee takes as a holder in due course who takes free
of the defense or claim in recoupment, the warranty gives the
transferee the option of proceeding against the transferor rather
than litigating with the obligor on the instrument the issue of
the holder-in-due-course status of the transferee. Subsection
(3) of former Section 3-417 which limits this warranty is
deleted. The rationale is that while the purpose of a "no
recourse" indorsement is to avoid a guaranty of payment,
the indorsement does not clearly indicate an intent to disclaim
warranties.
4. Under subsection (a)(5) the transferor does not warrant
against difficulties of collection, impairment of the credit of the
obligor or even insolvency. The transferee is expected to
determine such questions before taking the obligation. If
insolvency proceedings as defined in Section 1-201(22) have
been instituted against the party who is expected to pay and the
transferor knows it, the concealment of that fact amounts to a
fraud upon the transferee, and the warranty against knowledge
of such proceedings is provided accordingly.
5. Transfer warranties may be disclaimed with respect to
any instrument except a check. Between the immediate parties
disclaimer may be made by agreement. In the case of an
indorser, disclaimer of transferor's liability, to be effective,
must appear in the indorsement with words such as
"without warranties" or some other specific
reference to warranties. But in the case of a check, subsection
(c) of Section 3-416 provides that transfer warranties cannot be
disclaimed at all. In the check collection process the banking
system relies on these warranties.
6. Subsection (b) states the measure of damages for breach
of warranty. There is no express provision for attorney's fees,
but attorney's fees are not meant to be necessarily excluded.
They could be granted because they fit within the phrase
"expenses * * * incurred as a result of the breach."
The intention is to leave to other state law the issue as to when
attorney's fees are recoverable.
7. Since the traditional term "cause of action"
may have been replaced in some states by "claim for
relief" or some equivalent term, the words "cause
of action" in subsection (d) have been bracketed to
indicate that the words may be replaced by an appropriate
substitute to conform to local practice.
Section 36-3-417. PRESENTMENT WARRANTIES.
(a) If an unaccepted draft is presented to the drawee for
payment or acceptance and the drawee pays or accepts the
draft, (i) the person obtaining payment or acceptance, at the
time of presentment, and (ii) a previous transferor of the draft,
at the time of transfer, warrant to the drawee making payment
or accepting the draft in good faith that:
(1) the warrantor is, or was, at the time the warrantor
transferred the draft, a person entitled to enforce the draft or
authorized to obtain payment or acceptance of the draft on
behalf of a person entitled to enforce the draft;
(2) the draft has not been altered; and
(3) the warrantor has no knowledge that the signature
of the drawer of the draft is unauthorized.
(b) A drawee making payment may recover from any
warrantor damages for breach of warranty equal to the amount
paid by the drawee less the amount the drawee received or is
entitled to receive from the drawer because of the payment. In
addition, the drawee is entitled to compensation for expenses
and loss of interest resulting from the breach. The right of the
drawee to recover damages under this subsection is not affected
by any failure of the drawee to exercise ordinary care in making
payment. If the drawee accepts the draft, breach of warranty is
a defense to the obligation of the acceptor. If the acceptor
makes payment with respect to the draft, the acceptor is entitled
to recover from any warrantor for breach of warranty the
amounts stated in this subsection.
(c) If a drawee asserts a claim for breach of warranty
under subsection (a) based on an unauthorized indorsement of
the draft or an alteration of the draft, the warrantor may defend
by proving that the indorsement is effective under Section
36-3-404 or 36-3-405 or the drawer is precluded under Section
36-3-406 or 36-4-406 from asserting against the drawee the
unauthorized indorsement or alteration.
(d) If (i) a dishonored draft is presented for payment to the
drawer or an indorser or (ii) any other instrument is presented
for payment to a party obliged to pay the instrument, and (iii)
payment is received, the following rules apply:
(1) The person obtaining payment and a prior
transferor of the instrument warrant to the person making
payment in good faith that the warrantor is, or was, at the time
the warrantor transferred the instrument, a person entitled to
enforce the instrument or authorized to obtain payment on
behalf of a person entitled to enforce the instrument.
(2) The person making payment may recover from any
warrantor for breach of warranty an amount equal to the
amount paid plus expenses and loss of interest resulting from
the breach.
(e) The warranties stated in subsections (a) and (d) cannot
be disclaimed with respect to checks. Unless notice of a claim
for breach of warranty is given to the warrantor within 30 days
after the claimant has reason to know of the breach and the
identity of the warrantor, the liability of the warrantor under
subsection (b) or (d) is discharged to the extent of any loss
caused by the delay in giving notice of the claim.
(f) A cause of action for breach of warranty under this
section accrues when the claimant has reason to know of the
breach.
OFFICIAL COMMENT
1. This section replaces subsection (1) of former Section
3-417. The former provision was difficult to understand
because it purported to state in one subsection all warranties
given to any person paying any instrument. The result was a
provision replete with exceptions that could not be readily
understood except after close scrutiny of the language. In
revised Section 3-417, presentment warranties made to drawees
of uncertified checks and other unaccepted drafts are stated in
subsection (a). All other presentment warranties are stated in
subsection (d).
2. Subsection (a) states three warranties. Subsection (a)(1)
in effect is a warranty that there are no unauthorized or missing
indorsements. "Person entitled to enforce" is
defined in Section 3-301. Subsection (a)(2) is a warranty that
there is no alteration. Subsection (a)(3) is a warranty of no
knowledge that there is a forged drawer's signature. Subsection
(a) states that the warranties are made to the drawee and
subsections (b) and (c) identify the drawee as the person
entitled to recover for breach of warranty. There is no warranty
made to the drawer under subsection (a) when presentment is
made to the drawee. Warranty to the drawer is governed by
subsection (d) and that applies only when presentment for
payment is made to the drawer with respect to a dishonored
draft. In Sun 'N Sand, Inc. v. United California Bank,
582 P.2d 920 (Cal. 1978), the court held that under former
Section 3-417(1) a warranty was made to the drawer of a check
when the check was presented to the drawee for payment. The
result in that case is rejected.
3. Subsection (a)(1) retains the rule that the drawee does not
admit the authenticity of indorsements and subsection (a)(3)
retains the rule of Price v. Neal, 3 Burr. 1354 (1762),
that the drawee takes the risk that the drawer's signature is
unauthorized unless the person presenting the draft has
knowledge that the drawer's signature is unauthorized. Under
subsection (a)(3) the warranty of no knowledge that the
drawer's signature is unauthorized is also given by prior
transferors of the draft.
4. Subsection (d) applies to presentment for payment in all
cases not covered by subsection (a). It applies to presentment
of notes and accepted drafts to any party obliged to pay the
instrument, including an indorser, and to presentment of
dishonored drafts if made to the drawer or an indorser. In cases
covered by subsection (d), there is only one warranty and it is
the same as that stated in subsection (a)(1). There are no
warranties comparable to subsections (a)(2) and (a)(3) because
they are appropriate only in the case of presentment to the
drawee of an unaccepted draft. With respect to presentment of
an accepted draft to the acceptor, there is no warranty with
respect to alteration or knowledge that the signature of the
drawer is unauthorized. Those warranties were made to the
drawee when the draft was presented for acceptance (Section
3-417(a)(2) and (3)) and breach of that warranty is a defense to
the obligation of the drawee as acceptor to pay the draft. If the
drawee pays the accepted draft the drawee may recover the
payment from any warrantor who was in breach of warranty
when the draft was accepted. Section 3-417(b). Thus, there is
no necessity for these warranties to be repeated when the
accepted draft is presented for payment. Former Section
3-417(1)(b)(iii) and (c)(iii) are not included in revised Section
3-417 because they are unnecessary. Former Section
3-417(1)(c)(iv) is not included because it is also unnecessary.
The acceptor should know what the terms of the draft were at
the time acceptance was made.
If presentment is made to the drawer or maker, there is no
necessity for a warranty concerning the signature of that person
or with respect to alteration. If presentment is made to an
indorser, the indorser had itself warranted authenticity of
signatures and that the instrument was not altered. Section
3-416(a)(2) and (3).
5. The measure of damages for breach of warranty under
subsection (a) is stated in subsection (b). There is no express
provision for attorney's fees, but attorney's fees are not meant
to be necessarily excluded. They could be granted because they
fit within the language "expenses * * * resulting from the
breach." Subsection (b) provides that the right of the
drawee to recover for breach of warranty is not affected by a
failure of the drawee to exercise ordinary care in paying the
draft. This provision follows the result reached under former
Article 3 in Hartford Accident & Indemnity Co. v.
First Pennsylvania Bank, 859 F.2d 295 (3d Cir. 1988).
6. Subsection (c) applies to checks and other unaccepted
drafts. It gives to the warrantor the benefit of rights that the
drawee has against the drawer under Section 3-404, 3-405,
3-406, or 4-406. If the drawer's conduct contributed to a loss
from forgery or alteration, the drawee should not be allowed to
shift the loss from the drawer to the warrantor.
7. The first sentence of subsection (e) recognizes that
checks are normally paid by automated means and that payor
banks rely on warranties in making payment. Thus, it is not
appropriate to allow disclaimer of warranties appearing on
checks that normally will not be examined by the payor bank.
The second sentence requires a breach of warranty claim to be
asserted within 30 days after the drawee learns of the breach
and the identity of the warrantor.
8. Since the traditional term "cause of action' may
have been replaced in some states by "claim for
relief" or some equivalent term, the words "cause
of action" in subsection (f) have been bracketed to
indicate that the words may be replaced by an appropriate
substitute to conform to local practice.
Section 36-3-418. PAYMENT OR ACCEPTANCE BY
MISTAKE.
(a) Except as provided in subsection (c), if the drawee of
a draft pays or accepts the draft and the drawee acted on the
mistaken belief that (i) payment of the draft had not been
stopped pursuant to Section 36-4-403 or (ii) the signature of the
drawer of the draft was authorized, the drawee may recover the
amount of the draft from the person to whom or for whose
benefit payment was made or, in the case of acceptance, may
revoke the acceptance. Rights of the drawee under this
subsection are not affected by failure of the drawee to exercise
ordinary care in paying or accepting the draft.
(b) Except as provided in subsection (c), if an instrument
has been paid or accepted by mistake and the case is not
covered by subsection (a), the person paying or accepting may,
to the extent permitted by the law governing mistake and
restitution, (i) recover the payment from the person to whom or
for whose benefit payment was made or (ii) in the case of
acceptance, may revoke the acceptance.
(c) The remedies provided by subsection (a) or (b) may
not be asserted against a person who took the instrument in
good faith and for value or who in good faith changed position
in reliance on the payment or acceptance. This subsection does
not limit remedies provided by Section 36-3-417 or 36-4-407.
(d) Notwithstanding Section 36-4-215, if an instrument is
paid or accepted by mistake and the payor or acceptor recovers
payment or revokes acceptance under subsection (a) or (b), the
instrument is deemed not to have been paid or accepted and is
treated as dishonored, and the person from whom payment is
recovered has rights as a person entitled to enforce the
dishonored instrument.
OFFICIAL COMMENT
1. This section covers payment or acceptance by mistake
and replaces former Section 3-418. Under former Article 3, the
remedy of a drawee that paid or accepted a draft by mistake
was based on the law of mistake and restitution, but that
remedy was not specifically stated. It was provided by Section
1-103. Former Section 3-418 was simply a limitation on the
unstated remedy under the law of mistake and restitution.
Under revised Article 3, Section 3-418 specifically states the
right of restitution in subsections (a) and (b). Subsection (a)
allows restitution in the two most common cases in which the
problem is presented: payment or acceptance of forged checks
and checks on which the drawer has stopped payment. If the
drawee acted under a mistaken belief that the check was not
forged or had not been stopped, the drawee is entitled to
recover the funds paid or to revoke the acceptance whether or
not the drawee acted negligently. But in each case, by virtue of
subsection (c), the drawee loses the remedy if the person
receiving payment or acceptance was a person who took the
check in good faith and for value or who in good faith changed
position in reliance on the payment or acceptance. Subsections
(a) and (c) are consistent with former Section 3-418 and the
rule of Price v. Neal. The result in the two cases
covered by subsection (a) is that the drawee in most cases will
not have a remedy against the person paid because there is
usually a person who took the check in good faith and for value
or who in good faith changed position in reliance on the
payment or acceptance.
2. If a check has been paid by mistake and the payee
receiving payment did not give value for the check or did not
change position in reliance on the payment, the drawee bank is
entitled to recover the amount of the check under subsection (a)
regardless of how the check was paid. The drawee bank
normally pays a check by a credit to an account of the
collecting bank that presents the check for payment. The payee
of the check normally receives the payment by a credit to the
payee's account in the depositary bank. But in some cases the
payee of the check may have received payment directly from
the drawee bank by presenting the check for payment over the
counter. In those cases the payee is entitled to receive cash, but
the payee may prefer another form of payment such as a
cashier's check or teller's check issued by the drawee bank.
Suppose Seller contracted to sell goods to Buyer. The contract
provided for immediate payment by Buyer and delivery of the
goods 20 days after payment. Buyer paid by mailing a check
for $10,000 drawn on Bank payable to Seller. The next day
Buyer gave a stop payment order to Bank with respect to the
check Buyer had mailed to Seller. A few days later Seller
presented Buyer's check to Bank for payment over the counter
and requested a cashier's check as payment. Bank issued and
delivered a cashier's check for $10,000 payable to Seller. The
teller failed to discover Buyer's stop order. The next day Bank
discovered the mistake and immediately advised Seller of the
facts. Seller refused to return the cashier's check and did not
deliver any goods to Buyer.
Under Section 4-215, Buyer's check was paid by Bank at the
time it delivered its cashier's check to Seller. See Comment 3
to Section 4-215. Bank is obliged to pay the cashier's check
and has no defense to that obligation. The cashier's check was
issued for consideration because it was issued in payment of
Buyer's check. Although Bank has no defense on its cashier's
check it may have a right to recover $10,000, the amount of
Buyer's check, from Seller under Section 3-418(a). Bank paid
Buyer's check by mistake. Seller did not give value for Buyer's
check because the promise to deliver goods to Buyer was never
performed. Section 3-303(a)(1). And, on these facts, Seller did
not change position in reliance on the payment of Buyer's
check. Thus, the first sentence of Section 3-418(c) does not
apply and Seller is obliged to return $10,000 to Bank. Bank is
obliged to pay the cashier's check but it has a counterclaim
against Seller based on its rights under Section 3-418(a). This
claim can be asserted against Seller, but it cannot be asserted
against some other person with rights of a holder in due course
of the cashier's check. A person without rights of a holder in
due course of the cashier's check would take subject to Bank's
claim against Seller because it is a claim in recoupment.
Section 3-305(a)(3).
If Bank recovers from Seller under Section 3-418(a), the
payment of Buyer's check is treated as unpaid and dishonored.
Section 3-418(d). One consequence is that Seller may enforce
Buyer's obligation as drawer to pay the check. Section 3-414.
Another consequence is that Seller's rights against Buyer on the
contract of sale are also preserved. Under Section 3-310(b)
Buyer's obligation to pay for the goods was suspended when
Seller took Buyer's check and remains suspended until the
check is either dishonored or paid. Under Section 3-310(b)(2)
the obligation is discharged when the check is paid. Since
Section 3-418(d) treats Buyer's check as unpaid and
dishonored, Buyer's obligation is not discharged and suspension
of the obligation terminates. Under Section 3-310(b)(3), Seller
may enforce either the contract of sale or the check subject to
defenses and claims of Buyer.
If Seller had released the goods to Buyer before learning
about the stop order, Bank would have no recovery against
Seller under Section 3-418(a) because Seller in that case gave
value for Buyer's check. Section 3-418(c). In this case Bank's
sole remedy is under Section 4-407 by subrogation.
3. Subsection (b) covers cases of payment or acceptance by
mistake that are not covered by subsection (a). It directs courts
to deal with those cases under the law governing mistake and
restitution. Perhaps the most important class of cases that falls
under subsection (b), because it is not covered by subsection
(a), is that of payment by the drawee bank of a check with
respect to which the bank has no duty to the drawer to pay
either because the drawer has no account with the bank or
because available funds in the drawer's account are not
sufficient to cover the amount of the check. With respect to
such a case, under Restatement of Restitution Section 29, if the
bank paid because of a mistaken belief that there were available
funds in the drawer's account sufficient to cover the amount of
the check, the bank is entitled to restitution. But Section 29 is
subject to Restatement of Restitution Section 33 which denies
restitution if the holder of the check receiving payment paid
value in good faith for the check and had no reason to know
that the check was paid by mistake when payment was
received.
The result in some cases is clear. For example, suppose
Father gives Daughter a check for $10,000 as a birthday gift.
The check is drawn on Bank in which both Father and Daughter
have accounts. Daughter deposits the check in her account in
Bank. An employee of Bank, acting under the belief that there
were available funds in Father's account to cover the check,
caused Daughter's account to be credited for $10,000. In fact,
Father's account was overdrawn and Father did not have
overdraft privileges. Since Daughter received the check
gratuitously there is clear unjust enrichment if she is allowed to
keep the $10,000 and Bank is unable to obtain reimbursement
from Father. Thus, Bank should be permitted to reverse the
credit to Daughter's account. But this case is not typical. In
most cases the remedy of restitution will not be available
because the person receiving payment of the check will have
given value for it in good faith.
In some cases, however, it may not be clear whether a
drawee bank should have a right of restitution. For example, a
check-kiting scheme may involve a large number of checks
drawn on a number of different banks in which the drawer's
credit balances are based on uncollected funds represented by
fraudulently drawn checks. No attempt is made in Section
3-418 to state rules for determining the conflicting claims of the
various banks that may be victimized by such a scheme.
Rather, such cases are better resolved on the basis of general
principles of law and the particular facts presented in the
litigation.
4. The right of the drawee to recover a payment or to revoke
an acceptance under Section 3-418 is not affected by the rules
under Article 4 that determine when an item is paid. Even
though a payor bank may have paid an item under Section
4-215, it may have a right to recover the payment under Section
3-418. National Savings & Trust Co. v. Park
Corp., 722 F.2d 1303 (6th Cir. 1983), cert. denied, 466
U.S. 939 (1984), correctly states the law on the issue under
former Article 3. Revised Article 3 does not change the
previous law.
Section 36-3-419. INSTRUMENTS SIGNED FOR
ACCOMMODATION.
(a) If an instrument is issued for value given for the
benefit of a party to the instrument (accommodated party) and
another party to the instrument (accommodation party) signs
the instrument for the purpose of incurring liability on the
instrument without being a direct beneficiary of the value given
for the instrument, the instrument is signed by the
accommodation party `for accommodation'.
(b) An accommodation party may sign the instrument as
maker, drawer, acceptor, or indorser and, subject to subsection
(d), is obliged to pay the instrument in the capacity in which the
accommodation party signs. The obligation of an
accommodation party may be enforced notwithstanding any
statute of frauds and whether or not the accommodation party
receives consideration for the accommodation.
(c) A person signing an instrument is presumed to be an
accommodation party and there is notice that the instrument is
signed for accommodation if the signature is an anomalous
indorsement or is accompanied by words indicating that the
signer is acting as surety or guarantor with respect to the
obligation of another party to the instrument. Except as
provided in Section 36-3-605, the obligation of an
accommodation party to pay the instrument is not affected by
the fact that the person enforcing the obligation had notice
when the instrument was taken by that person that the
accommodation party signed the instrument for
accommodation.
(d) If the signature of a party to an instrument is
accompanied by words indicating unambiguously that the party
is guaranteeing collection rather than payment of the obligation
of another party to the instrument, the signer is obliged to pay
the amount due on the instrument to a person entitled to enforce
the instrument only if (i) execution of judgment against the
other party has been returned unsatisfied, (ii) the other party is
insolvent or in an insolvency proceeding, (iii) the other party
cannot be served with process, or (iv) it is otherwise apparent
that payment cannot be obtained from the other party.
(e) An accommodation party who pays the instrument is
entitled to reimbursement from the accommodated party and is
entitled to enforce the instrument against the accommodated
party. An accommodated party who pays the instrument has no
right of recourse against, and is not entitled to contribution
from, an accommodation party.
OFFICIAL COMMENT
1. Section 3-419 replaces former Sections 3-415 and 3-416.
An accommodation party is a person who signs an instrument
to benefit the accommodated party either by signing at the time
value is obtained by the accommodated party or later, and who
is not a direct beneficiary of the value obtained. An
accommodation party will usually be a co-maker or anomalous
indorser. Subsection (a) distinguishes between direct and
indirect benefit. For example, if X cosigns a note of
Corporation that is given for a loan to Corporation, X is an
accommodation party if no part of the loan was paid to X or for
X's direct benefit. This is true even though X may receive
indirect benefit from the loan because X is employed by
Corporation or is a stockholder of Corporation, or even if X is
the sole stockholder so long as Corporation and X are
recognized as separate entities.
2. It does not matter whether an accommodation party signs
gratuitously either at the time the instrument is issued or after
the instrument is in the possession of a holder. Subsection (b)
of Section 3-419 takes the view stated in Comment 3 to former
Section 3-415 that there need be no consideration running to
the accommodation party: "The obligation of the
accommodation party is supported by any consideration for
which the instrument is taken before it is due. Subsection (2)
is intended to change occasional decisions holding that there is
no sufficient consideration where an accommodation party
signs a note after it is in the hands of a holder who has given
value. The [accommodation] party is liable to the holder in
such a case even though there is no extension of time or other
concession.'
3. As stated in Comment 1, whether a person is an
accommodation party is a question of fact. But it is almost
always the case that a co-maker who signs with words of
guaranty after the signature is an accommodation party. The
same is true of an anomalous indorser. In either case a person
taking the instrument is put on notice of the accommodation
status of the co-maker or indorser. This is relevant to Section
3-605(h). But, under subsection (c), signing with words of
guaranty or as an anomalous indorser also creates a
presumption that the signer is an accommodation party. A
party challenging accommodation party status would have to
rebut this presumption by producing evidence that the signer
was in fact a direct beneficiary of the value given for the
instrument.
4. Subsection (b) states that an accommodation party is
liable on the instrument in the capacity in which the party
signed the instrument. In most cases that capacity will be either
that of a maker or indorser of a note. But subsection (d)
provides a limitation on subsection (b). If the signature of the
accommodation party is accompanied by words indicating
unambiguously that the party is guaranteeing collection rather
than payment of the instrument, liability is limited to that stated
in subsection (d), which is based on former Section 3-416(2).
Former Article 3 was confusing because the obligation of a
guarantor was covered both in Section 3-415 and in Section
3-416. The latter section suggested that a signature
accompanied by words of guaranty created an obligation
distinct from that of an accommodation party. Revised Article
3 eliminates that confusion by stating in Section 3-419 the
obligation of a person who uses words of guaranty. Portions of
former Section 3-416 are preserved. Former Section 3-416(2)
is reflected in Section 3-419(d) and former Section 3-416(4) is
reflected in Section 3-419(c).
5. Subsection (e) restates subsection (5) of present Section
3-415. Since the accommodation party that pays the instrument
is entitled to enforce the instrument against the accommodated
party, the accommodation party also obtains rights to any
security interest or other collateral that secures payment of the
instrument.
Section 36-3-420. CONVERSION OF
INSTRUMENT.
(a) The law applicable to conversion of personal property
applies to instruments. An instrument is also converted if it is
taken by transfer, other than a negotiation, from a person not
entitled to enforce the instrument or a bank makes or obtains
payment with respect to the instrument for a person not entitled
to enforce the instrument or receive payment. An action for
conversion of an instrument may not be brought by (i) the
issuer or acceptor of the instrument or (ii) a payee or indorsee
who did not receive delivery of the instrument either directly or
through delivery to an agent or a co-payee.
(b) In an action under subsection (a), the measure of
liability is presumed to be the amount payable on the
instrument, but recovery may not exceed the amount of the
plaintiff's interest in the instrument.
(c) A representative, other than a depositary bank, who
has in good faith dealt with an instrument or its proceeds on
behalf of one who was not the person entitled to enforce the
instrument is not liable in conversion to that person beyond the
amount of any proceeds that it has not paid out.
OFFICIAL COMMENT
1. Section 3-420 is a modification of former Section 3-419.
The first sentence of Section 3-420(a) states a general rule that
the law of conversion applicable to personal property also
applies to instruments. Paragraphs (a) and (b) of former
Section 3-419(1) are deleted as inappropriate in cases of
noncash items that may be delivered for acceptance or payment
in collection letters that contain varying instructions as to what
to do in the event of nonpayment on the day of delivery. It is
better to allow such cases to be governed by the general law of
conversion that would address the issue of when, under the
circumstances prevailing, the presenter's right to possession has
been denied. The second sentence of Section 3-420(a) states
that an instrument is converted if it is taken by transfer other
than a negotiation from a person not entitled to enforce the
instrument or taken for collection or payment from a person not
entitled to enforce the instrument or receive payment. This
covers cases in which a depositary or payor bank takes an
instrument bearing a forged indorsement. It also covers cases
in which an instrument is payable to two persons and the two
persons are not alternative payees, e.g. a check payable to John
and Jane Doe. Under Section 3-110(d) the check can be
negotiated or enforced only by both persons acting jointly.
Thus, neither payee acting without the consent of the other, is
a person entitled to enforce the instrument. If John indorses the
check and Jane does not, the indorsement is not effective to
allow negotiation of the check. If Depositary Bank takes the
check for deposit to John's account, Depositary Bank is liable
to Jane for conversion of the check if she did not consent to the
transaction. John, acting alone, is not the person entitled to
enforce the check because John is not the holder of the check.
Section 3-110(d) and Comment 4 to Section 3-110. Depositary
Bank does not get any greater rights under Section 4-205(1).
If it acted for John as its customer, it did not become holder of
the check under that provision because John, its customer, was
not a holder.
Under former Article 3, the cases were divided on the issue
of whether the drawer of a check with a forged indorsement can
assert rights against a depositary bank that took the check. The
last sentence of Section 3-420(a) resolves the conflict by
following the rule stated in Stone & Webster
Engineering Corp. v. First National Bank & Trust
Co., 184 N.E.2d 358 (Mass. 1962). There is no reason
why a drawer should have an action in conversion. The check
represents an obligation of the drawer rather than property of
the drawer. The drawer has an adequate remedy against the
payor bank for recredit of the drawer's account for unauthorized
payment of the check.
There was also a split of authority under former Article 3 on
the issue of whether a payee who never received the instrument
is a proper plaintiff in a conversion action. The typical case
was one in which a check was stolen from the drawer or in
which the check was mailed to an address different from that of
the payee and was stolen after it arrived at that address. The
thief forged the indorsement of the payee and obtained payment
by depositing the check to an account in a depositary bank.
The issue was whether the payee could bring an action in
conversion against the depositary bank or the drawee bank. In
revised Article 3, under the last sentence of Section 3-420(a),
the payee has no conversion action because the check was
never delivered to the payee. Until delivery, the payee does not
have any interest in the check. The payee never became the
holder of the check nor a person entitled to enforce the check.
Section 3-301. Nor is the payee injured by the fraud. Normally
the drawer of a check intends to pay an obligation owed to the
payee. But if the check is never delivered to the payee, the
obligation owed to the payee is not affected. If the check falls
into the hands of a thief who obtains payment after forging the
signature of the payee as an indorsement, the obligation owed
to the payee continues to exist after the thief receives payment.
Since the payee's right to enforce the underlying obligation is
unaffected by the fraud of the thief, there is no reason to give
any additional remedy to the payee. The drawer of the check
has no conversion remedy, but the drawee is not entitled to
charge the drawer's account when the drawee wrongfully
honored the check. The remedy of the drawee is against the
depositary bank for breach of warranty under Section
3-417(a)(1) or 4-208(a)(1). The loss will fall on the person
who gave value to the thief for the check.
The situation is different if the check is delivered to the
payee. If the check is taken for an obligation owed to the
payee, the last sentence of Section 3-310(b)(4) provides that the
obligation may not be enforced to the extent of the amount of
the check. The payee's rights are restricted to enforcement of
the payee's rights in the instrument. In this event the payee is
injured by the theft and has a cause of action for conversion.
The payee receives delivery when the check comes into the
payee's possession, as for example when it is put into the
payee's mailbox. Delivery to an agent is delivery to the payee.
If a check is payable to more than one payee, delivery to one of
the payees is deemed to be delivery to all of the payees.
Occasionally, the person asserting a conversion cause of action
is an indorsee rather than the original payee. If the check is
stolen before the check can be delivered to the indorsee and the
indorsee's indorsement is forged, the analysis is similar. For
example, a check is payable to the order of A. A indorses it to
B and puts it into an envelope addressed to B. The envelope is
never delivered to B. Rather, Thief steals the envelope, forges
B's indorsement to the check and obtains payment. Because the
check was never delivered to B, the indorsee, B has no cause of
action for conversion, but A does have such an action. A is the
owner of the check. B never obtained rights in the check. If A
intended to negotiate the check to B in payment of an
obligation, that obligation was not affected by the conduct of
Thief. B can enforce that obligation. Thief stole A's property
not B's.
2. Subsection (2) of former Section 3-419 is amended
because it is not clear why the former law distinguished
between the liability of the drawee and that of other converters.
Why should there be a conclusive presumption that the liability
is face amount if a drawee refuses to pay or return an
instrument or makes payment on a forged indorsement, while
the liability of a maker who does the same thing is only
presumed to be the face amount? Moreover, it was not clear
under former Section 3-419(2) what face amount meant. If a
note for $10,000 is payable in a year at 10% interest, it is
common to refer to $10,000 as the face amount, but if the note
is converted the loss to the owner also includes the loss of
interest. In revised Article 3, Section 3-420(b), by referring to
"amount payable on the instrument," allows the full
amount due under the instrument to be recovered.
The "but" clause in subsection (b) addresses the
problem of conversion actions in multiple payee checks.
Section 3-110(d) states that an instrument cannot be enforced
unless all payees join in the action. But an action for
conversion might be brought by a payee having no interest or
a limited interest in the proceeds of the check. This clause
prevents such a plaintiff from receiving a windfall. An
example is a check payable to a building contractor and a
supplier of building material. The check is not payable to the
payees alternatively. Section 3-110(d). The check is delivered
to the contractor by the owner of the building. Suppose the
contractor forges supplier's signature as an indorsement of the
check and receives the entire proceeds of the check. The
supplier should not, without qualification, be able to recover the
entire amount of the check from the bank that converted the
check. Depending upon the contract between the contractor
and the supplier, the amount of the check may be due entirely
to the contractor, in which case there should be no recovery,
entirely to the supplier, in which case recovery should be for
the entire amount, or part may be due to one and the rest to the
other, in which case recovery should be limited to the amount
due to the supplier.
3. Subsection (3) of former Section 3-419 drew criticism
from the courts, that saw no reason why a depositary bank
should have the defense stated in the subsection. See
Knesz v. Central Jersey Bank & Trust Co., 477
A.2d 806 (N.J. 1984). The depositary bank is ultimately liable
in the case of a forged indorsement check because of its
warranty to the payor bank under Section 4-208(a)(1) and it is
usually the most convenient defendant in cases involving
multiple checks drawn on different banks. There is no basis for
requiring the owner of the check to bring multiple actions
against the various payor banks and to require those banks to
assert warranty rights against the depositary bank. In revised
Article 3, the defense provided by Section 3-420(c) is limited
to collecting banks other than the depositary bank. If suit is
brought against both the payor bank and the depositary bank,
the owner, of course, is entitled to but one recovery.
PART 5
DISHONOR
Section 36-3-501. PRESENTMENT.
(a) `Presentment' means a demand made by or on behalf
of a person entitled to enforce an instrument (i) to pay the
instrument made to the drawee or a party obliged to pay the
instrument or, in the case of a note or accepted draft payable at
a bank, to the bank, or (ii) to accept a draft made to the drawee.
(b) The following rules are subject to Chapter 4,
agreement of the parties, and clearing-house rules, and similar
provisions:
(1) Presentment may be made at the place of payment
of the instrument and must be made at the place of payment if
the instrument is payable at a bank in the United States; may be
made by any commercially reasonable means, including an
oral, written, or electronic communication; is effective when
the demand for payment or acceptance is received by the person
to whom presentment is made; and is effective if made to any
one of two or more makers, acceptors, drawees, or other payors.
(2) Upon demand of the person to whom presentment
is made, the person making presentment must (i) exhibit the
instrument, (ii) give reasonable identification and, if
presentment is made on behalf of another person, reasonable
evidence of authority to do so, and (iii) sign a receipt on the
instrument for any payment made or surrender the instrument
if full payment is made.
(3) Without dishonoring the instrument, the party to
whom presentment is made may (i) return the instrument for
lack of a necessary indorsement, or (ii) refuse payment or
acceptance for failure of the presentment to comply with the
terms of the instrument, an agreement of the parties, or other
applicable law or rule.
(4) The party to whom presentment is made may treat
presentment as occurring on the next business day after the day
of presentment if the party to whom presentment is made has
established a cut-off hour not earlier than two o'clock p.m. for
the receipt and processing of instruments presented for payment
or acceptance and presentment is made after the cut-off hour.
OFFICIAL COMMENT
Subsection (a) defines presentment. Subsection (b)(1) states
the place and manner of presentment. Electronic presentment
is authorized. The communication of the demand for payment
or acceptance is effective when received. Subsection (b)(2)
restates former Section 3-505. Subsection (b)(2)(i) allows the
person to whom presentment is made to require exhibition of
the instrument, unless the parties have agreed otherwise as in
an electronic presentment agreement. Former Section 3-507(3)
is the antecedent of subsection (b)(3)(i). Since a payor must
decide whether to pay or accept on the day of presentment,
subsection (b)(4) allows the payor to set a cut-off hour for
receipt of instruments presented.
Section 36-3-502. DISHONOR.
(a) Dishonor of a note is governed by the following rules:
(1) If the note is payable on demand, the note is
dishonored if presentment is properly made to the maker and
the note is not paid on the day of presentment.
(2) If the note is not payable on demand and is payable
at or through a bank or the terms of the note require
presentment, the note is dishonored if presentment is properly
made and the note is not paid on the day it becomes payable or
the day of presentment, whichever is later.
(3) If the note is not payable on demand and item (2)
does not apply, the note is dishonored if it is not paid on the day
it becomes payable.
(b) Dishonor of an unaccepted draft other than a
documentary draft is governed by the following rules:
(1) If a check is properly presented for payment to the
payor bank otherwise than for immediate payment over the
counter, the check is dishonored if the payor bank makes timely
return of the check or sends timely notice of dishonor or
nonpayment under Section 36-04-301 or 36-4-302, or becomes
accountable for the amount of the check under Section
36-4-302.
(2) If a draft is payable on demand and item (1) does
not apply, the draft is dishonored if presentment for payment is
properly made to the drawee and the draft is not paid on the day
of presentment.
(3) If a draft is payable on a date stated in the draft, the
draft is dishonored if (i) presentment for payment is properly
made to the drawee and payment is not made on the day the
draft becomes payable or the day of presentment, whichever is
later, or (ii) presentment for acceptance is properly made before
the day the draft becomes payable and the draft is not accepted
on the day of presentment.
(4) If a draft is payable on elapse of a period of time
after sight or acceptance, the draft is dishonored if presentment
for acceptance is properly made and the draft is not accepted on
the day of presentment.
(c) Dishonor of an unaccepted documentary draft occurs
according to the rules stated in subsections (b)(2), (b)(3), and
(b)(4), except that payment or acceptance may be delayed
without dishonor until no later than the close of the third
business day of the drawee following the day on which
payment or acceptance is required by those paragraphs.
(d) Dishonor of an accepted draft is governed by the
following rules:
(1) If the draft is payable on demand, the draft is
dishonored if presentment for payment is properly made to the
acceptor and the draft is not paid on the day of presentment.
(2) If the draft is not payable on demand, the draft is
dishonored if presentment for payment is properly made to the
acceptor and payment is not made on the day it becomes
payable or the day of presentment, whichever is later.
(e) In any case in which presentment is otherwise required
for dishonor under this section and presentment is excused
under Section 36-3-504, dishonor occurs without presentment
if the instrument is not properly accepted or paid.
(f) If a draft is dishonored because timely acceptance of
the draft was not made and the person entitled to demand
acceptance consents to a late acceptance, from the time of
acceptance the draft is treated as never having been dishonored.
OFFICIAL COMMENT
1. Section 3-415 provides that an indorser is obliged to pay
an instrument if the instrument is dishonored and is discharged
if the indorser is entitled to notice of dishonor and notice is not
given. Under Section 3-414, the drawer is obliged to pay an
unaccepted draft if it is dishonored. The drawer, however, is
not entitled to notice of dishonor except to the extent required
in a case governed by Section 3-414(d). Part 5 tells when an
instrument is dishonored (Section 3-502) and what it means to
give notice of dishonor (Section 3-503). Often dishonor does
not occur until presentment (Section 3-501), and frequently
presentment and notice of dishonor are excused (Section
3-504).
2. In the great majority of cases presentment and notice of
dishonor are waived with respect to notes. In most cases a
formal demand for payment to the maker of the note is not
contemplated. Rather, the maker is expected to send payment
to the holder of the note on the date or dates on which payment
is due. If payment is not made when due, the holder usually
makes a demand for payment, but in the normal case in which
presentment is waived, demand is irrelevant and the holder can
proceed against indorsers when payment is not received. Under
former Article 3, in the small minority of cases in which
presentment and dishonor were not waived with respect to
notes, the indorser was discharged from liability (former
Section 3-502(1)(a)) unless the holder made presentment to the
maker on the exact day the note was due (former Section
3-503(1)(c)) and gave notice of dishonor to the indorser before
midnight of the third business day after dishonor (former
Section 3-508(2)). These provisions are omitted from Revised
Article 3 as inconsistent with practice which seldom involves
face-to-face dealings.
3. Subsection (a) applies to notes. Subsection (a)(1) applies
to notes payable on demand. Dishonor requires presentment,
and dishonor occurs if payment is not made on the day of
presentment. There is no change from previous Article 3.
Subsection (a)(2) applies to notes payable at a definite time if
the note is payable at or through a bank or, by its terms,
presentment is required. Dishonor requires presentment, and
dishonor occurs if payment is not made on the due date or the
day of presentment if presentment is made after the due date.
Subsection (a)(3) applies to all other notes. If the note is not
paid on its due date it is dishonored. This allows holders to
collect notes in ways that make sense commercially without
having to be concerned about a formal presentment on a given
day.
4. Subsection (b) applies to unaccepted drafts other than
documentary drafts. Subsection (b)(1) applies to checks.
Except for checks presented for immediate payment over the
counter, which are covered by subsection (b)(2), dishonor
occurs according to rules stated in Article 4. When a check is
presented for payment through the check-collection system, the
drawee bank normally makes settlement for the amount of the
check to the presenting bank. Under Section 4-301 the drawee
bank may recover this settlement if it returns the check within
its midnight deadline (Section 4-104). In that case the check is
not paid and dishonor occurs under Section 3-502(b)(1). If the
drawee bank does not return the check or give notice of
dishonor or nonpayment within the midnight deadline, the
settlement becomes final payment of the check. Section 4-215.
Thus, no dishonor occurs regardless of whether the check is
retained or is returned after the midnight deadline. In some
cases the drawee bank might not settle for the check when it is
received. Under Section 4-302 if the drawee bank is not also
the depositary bank and retains the check without settling for it
beyond midnight of the day it is presented for payment, the
bank becomes "accountable" for the amount of the
check, i.e. it is obliged to pay the amount of the check. If the
drawee bank is also the depositary bank, the bank is
accountable for the amount of the check if the bank does not
pay the check or return it or send notice of dishonor within the
midnight deadline. In all cases in which the drawee bank
becomes accountable, the check has not been paid and, under
Section 3-502(b)(1), the check is dishonored. The fact that the
bank is obliged to pay the check does not mean that the check
has been paid. When a check is presented for payment, the
person presenting the check is entitled to payment not just the
obligation of the drawee to pay. Until that payment is made,
the check is dishonored. To say that the drawee bank is obliged
to pay the check necessarily means that the check has not been
paid. If the check is eventually paid, the drawee bank no longer
is accountable.
Subsection (b)(2) applies to demand drafts other than those
governed by subsection (b)(1). It covers checks presented for
immediate payment over the counter and demand drafts other
than checks. Dishonor occurs if presentment for payment is
made and payment is not made on the day of presentment.
Subsection (b)(3) and (4) applies to time drafts. An
unaccepted time draft differs from a time note. The maker of
a note knows that the note has been issued, but the drawee of a
draft may not know that a draft has been drawn on it. Thus,
with respect to drafts, presentment for payment or acceptance
is required. Subsection (b)(3) applies to drafts payable on a
date stated in the draft. Dishonor occurs if presentment for
payment is made and payment is not made on the day the draft
becomes payable or the day of presentment if presentment is
made after the due date. The holder of an unaccepted draft
payable on a stated date has the option of presenting the draft
for acceptance before the day the draft becomes payable to
establish whether the drawee is willing to assume liability by
accepting. Under subsection (b)(3)(ii) dishonor occurs when
the draft is presented and not accepted. Subsection (b)(4)
applies to unaccepted drafts payable on elapse of a period of
time after sight or acceptance. If the draft is payable 30 days
after sight, the draft must be presented for acceptance to start
the running of the 30-day period. Dishonor occurs if it is not
accepted. The rules in subsection (b)(3) and (4) follow former
Section 3-501(1)(a).
5. Subsection (c) gives drawees an extended period to pay
documentary drafts because of the time that may be needed to
examine the documents. The period prescribed is that given by
Section 5-112 in cases in which a letter of credit is involved.
6. Subsection (d) governs accepted drafts. If the acceptor's
obligation is to pay on demand the rule, stated in subsection
(d)(1), is the same as for that of a demand note stated in
subsection (a)(1). If the acceptor's obligation is to pay at a
definite time the rule, stated in subsection (d)(2), is the same as
that of a time note payable at a bank stated in subsection (b)(2).
7. Subsection (e) is a limitation on subsection (a)(1) and (2),
subsection (b), subsection (c), and subsection (d). Each of
those provisions states dishonor as occurring after presentment.
If presentment is excused under Section 3-504, dishonor occurs
under those provisions without presentment if the instrument is
not duly accepted or paid.
8. Under subsection (b)(3)(ii) and (4) if a draft is presented
for acceptance and the draft is not accepted on the day of
presentment, there is dishonor. But after dishonor, the holder
may consent to late acceptance. In that case, under subsection
(f), the late acceptance cures the dishonor. The draft is treated
as never having been dishonored. If the draft is subsequently
presented for payment and payment is refused dishonor occurs
at that time.
Section 36-3-503. NOTICE OF DISHONOR.
(a) The obligation of an indorser stated in Section
36-3-415(a) and the obligation of a drawer stated in Section
36-3-414(d) may not be enforced unless (i) the indorser or
drawer is given notice of dishonor of the instrument complying
with this section or (ii) notice of dishonor is excused under
Section 36-3-504(b).
(b) Notice of dishonor may be given by any person; may
be given by any commercially reasonable means, including an
oral, written, or electronic communication; and is sufficient if
it reasonably identifies the instrument and indicates that the
instrument has been dishonored or has not been paid or
accepted. Return of an instrument given to a bank for
collection is sufficient notice of dishonor.
(c) Subject to Section 36-3-504(c), with respect to an
instrument taken for collection by a collecting bank, notice of
dishonor must be given (i) by the bank before midnight of the
next banking day following the banking day on which the bank
receives notice of dishonor of the instrument, or (ii) by any
other person within 30 days following the day on which the
person receives notice of dishonor. With respect to any other
instrument, notice of dishonor must be given within 30 days
following the day on which dishonor occurs.
OFFICIAL COMMENT
1. Subsection (a) is consistent with former Section
3-501(2)(a), but notice of dishonor is no longer relevant to the
liability of a drawer except for the case of a draft accepted by
an acceptor other than a bank. Comments 2 and 4 to Section
3-414. There is no reason why drawers should be discharged
on instruments they draw until payment or acceptance. They
are entitled to have the instrument presented to the drawee and
dishonored (Section 3-414(b)) before they are liable to pay, but
no notice of dishonor need be made to them as a condition of
liability. Subsection (b), which states how notice of dishonor
is given, is based on former Section 3-508(3).
2. Subsection (c) replaces former Section 3-508(2). It
differs from that section in that it provides a 30-day period for
a person other than a collecting bank to give notice of dishonor
rather than the three-day period allowed in former Article 3.
Delay in giving notice of dishonor may be excused under
Section 3-504(c).
Section 36-3-504. EXCUSED PRESENTMENT AND
NOTICE OF DISHONOR.
(a) Presentment for payment or acceptance of an
instrument is excused if (i) the person entitled to present the
instrument cannot with reasonable diligence make presentment,
(ii) the maker or acceptor has repudiated an obligation to pay
the instrument or is dead or in insolvency proceedings, (iii) by
the terms of the instrument presentment is not necessary to
enforce the obligation of indorsers or the drawer, (iv) the
drawer or indorser whose obligation is being enforced has
waived presentment or otherwise has no reason to expect or
right to require that the instrument be paid or accepted, or (v)
the drawer instructed the drawee not to pay or accept the draft
or the drawee was not obligated to the drawer to pay the draft.
(b) Notice of dishonor is excused if (i) by the terms of the
instrument notice of dishonor is not necessary to enforce the
obligation of a party to pay the instrument, or (ii) the party
whose obligation is being enforced waived notice of dishonor.
A waiver of presentment is also a waiver of notice of dishonor.
(c) Delay in giving notice of dishonor is excused if the
delay was caused by circumstances beyond the control of the
person giving the notice and the person giving the notice
exercised reasonable diligence after the cause of the delay
ceased to operate.
OFFICIAL COMMENT
Section 3-504 is largely a restatement of former Section
3-511. Subsection (4) of former Section 3-511 is replaced by
Section 3-502(f).
Section 36-3-505. EVIDENCE OF DISHONOR.
(a) The following are admissible as evidence and create
a presumption of dishonor and of any notice of dishonor stated:
(1) a document regular in form as provided in
subsection (b) which purports to be a protest;
(2) a purported stamp or writing of the drawee, payor
bank, or presenting bank on or accompanying the instrument
stating that acceptance or payment has been refused unless
reasons for the refusal are stated and the reasons are not
consistent with dishonor;
(3) a book or record of the drawee, payor bank, or
collecting bank, kept in the usual course of business which
shows dishonor, even if there is no evidence of who made the
entry.
(b) A protest is a certificate of dishonor made by a United
States consul or vice consul, or a notary public or other person
authorized to administer oaths by the law of the place where
dishonor occurs. It may be made upon information satisfactory
to that person. The protest must identify the instrument and
certify either that presentment has been made or, if not made,
the reason why it was not made, and that the instrument has
been dishonored by nonacceptance or nonpayment. The protest
may also certify that notice of dishonor has been given to some
or all parties.
OFFICIAL COMMENT
Protest is no longer mandatory and must be requested by the
holder. Even if requested, protest is not a condition to the
liability of indorsers or drawers. Protest is a service provided
by the banking system to establish that dishonor has occurred.
Like other services provided by the banking system, it will be
available if market incentives, interbank agreements, or
governmental regulations require it, but liabilities of parties no
longer rest on it. Protest may be a requirement for liability on
international drafts governed by foreign law which this Article
cannot affect.
PART 6
DISCHARGE AND PAYMENT
Section 36-3-601. DISCHARGE AND EFFECT OF
DISCHARGE.
(a) The obligation of a party to pay the instrument is
discharged as stated in this chapter or by an act or agreement
with the party which would discharge an obligation to pay
money under a simple contract.
(b) Discharge of the obligation of a party is not effective
against a person acquiring rights of a holder in due course of
the instrument without notice of the discharge.
OFFICIAL COMMENT
Subsection (a) replaces subsections (1) and (2) of former
Section 3-601. Subsection (b) restates former Section 3-602.
Notice of discharge is not treated as notice of a defense that
prevents holder in due course status. Section 3-302(b).
Discharge is effective against a holder in due course only if the
holder had notice of the discharge when holder in due course
status was acquired. For example, if an instrument bearing a
canceled indorsement is taken by a holder, the holder has notice
that the indorser has been discharged. Thus, the discharge is
effective against the holder even if the holder is a holder in due
course.
Section 36-3-602. PAYMENT.
(a) Subject to subsection (b), an instrument is paid to the
extent payment is made (i) by or on behalf of a party obliged to
pay the instrument, and (ii) to a person entitled to enforce the
instrument. To the extent of the payment, the obligation of the
party obliged to pay the instrument is discharged even though
payment is made with knowledge of a claim to the instrument
under Section 36-3-306 by another person.
(b) The obligation of a party to pay the instrument is not
discharged under subsection (a) if:
(1) a claim to the instrument under Section 36-3-306 is
enforceable against the party receiving payment and (i)
payment is made with knowledge by the payor that payment is
prohibited by injunction or similar process of a court of
competent jurisdiction, or (ii) in the case of an instrument other
than a cashier's check, teller's check, or certified check, the
party making payment accepted, from the person having a
claim to the instrument, indemnity against loss resulting from
refusal to pay the person entitled to enforce the instrument; or
(2) the person making payment knows that the
instrument is a stolen instrument and pays a person it knows is
in wrongful possession of the instrument.
OFFICIAL COMMENT
This section replaces former Section 3-603(1). The phrase
"claim to the instrument" in subsection (a) means,
by reference to Section 3-306, a claim of ownership or
possession and not a claim in recoupment. Subsection (b)(1)(ii)
is added to conform to Section 3-411. Section 3-411 is
intended to discourage an obligated bank from refusing
payment of a cashier's check, certified check, or dishonored
teller's check at the request of a claimant to the check who
provided the bank with indemnity against loss. See Comment
1 to Section 3-411. An obligated bank that refuses payment
under those circumstances not only remains liable on the check
but may also be liable to the holder of the check for
consequential damages. Section 3-602(b)(1)(ii) and Section
3-411, read together, change the rule of former Section
3-603(1) with respect to the obligation of the obligated bank on
the check. Payment to the holder of a cashier's check, teller's
check, or certified check discharges the obligation of the
obligated bank on the check to both the holder and the claimant
even though indemnity has been given by the person asserting
the claim. If the obligated bank pays the check in violation of
an agreement with the claimant in connection with the
indemnity agreement, any liability that the bank may have for
violation of the agreement is not governed by Article 3, but is
left to other law. This section continues the rule that the
obligor is not discharged on the instrument if payment is made
in violation of an injunction against payment. See Section
3-411(c)(iv).
Section 36-3-603. TENDER OF PAYMENT.
(a) If tender of payment of an obligation to pay an
instrument is made to a person entitled to enforce the
instrument, the effect of tender is governed by principles of law
applicable to tender of payment under a simple contract.
(b) If tender of payment of an obligation to pay an
instrument is made to a person entitled to enforce the
instrument and the tender is refused, there is discharge, to the
extent of the amount of the tender, of the obligation of an
indorser or accommodation party having a right of recourse
with respect to the obligation to which the tender relates.
(c) If tender of payment of an amount due on an
instrument is made to a person entitled to enforce the
instrument, the obligation of the obligor to pay interest after the
due date on the amount tendered is discharged. If presentment
is required with respect to an instrument and the obligor is able
and ready to pay on the due date at every place of payment
stated in the instrument, the obligor is considered to have made
tender of payment on the due date to the person entitled to
enforce the instrument.
OFFICIAL COMMENT
Section 3-603 replaces former Section 3-604. Subsection (a)
generally incorporates the law of tender of payment applicable
to simple contracts. Subsections (b) and (c) state particular
rules. Subsection (b) replaces former Section 3-604(2). Under
subsection (b) refusal of a tender of payment discharges any
indorser or accommodation party having a right of recourse
against the party making the tender. Subsection (c) replaces
former Section 3-604(1) and (3).
Section 36-3-604. DISCHARGE BY
CANCELLATION OR RENUNCIATION.
(a) A person entitled to enforce an instrument, with or
without consideration, may discharge the obligation of a party
to pay the instrument (i) by an intentional voluntary act, such
as surrender of the instrument to the party, destruction,
mutilation, or cancellation of the instrument, cancellation or
striking out of the party's signature, or the addition of words to
the instrument indicating discharge, or (ii) by agreeing not to
sue or otherwise renouncing rights against the party by a signed
writing.
(b) Cancellation or striking out of an indorsement
pursuant to subsection (a) does not affect the status and rights
of a party derived from the indorsement.
OFFICIAL COMMENT
Section 3-604 replaces former Section 3-605.
Section 36-3-605. DISCHARGE OF INDORSERS
AND ACCOMMODATION PARTIES.
(a) In this section, the term `indorser' includes a drawer
having the obligation described in Section 36-3-414(d).
(b) Discharge, under Section 36-3-604, of the obligation
of a party to pay an instrument does not discharge the
obligation of an indorser or accommodation party having a
right of recourse against the discharged party.
(c) If a person entitled to enforce an instrument agrees,
with or without consideration, to an extension of the due date
of the obligation of a party to pay the instrument, the extension
discharges an indorser or accommodation party having a right
of recourse against the party whose obligation is extended to
the extent the indorser or accommodation party proves that the
extension caused loss to the indorser or accommodation party
with respect to the right of recourse.
(d) If a person entitled to enforce an instrument agrees,
with or without consideration, to a material modification of the
obligation of a party other than an extension of the due date, the
modification discharges the obligation of an indorser or
accommodation party having a right of recourse against the
person whose obligation is modified to the extent the
modification causes loss to the indorser or accommodation
party with respect to the right of recourse. The loss suffered by
the indorser or accommodation party as a result of the
modification is equal to the amount of the right of recourse
unless the person enforcing the instrument proves that no loss
was caused by the modification or that the loss caused by the
modification was an amount less than the amount of the right
of recourse.
(e) If the obligation of a party to pay an instrument is
secured by an interest in collateral and a person entitled to
enforce the instrument impairs the value of the interest in
collateral, the obligation of an indorser or accommodation party
having a right of recourse against the obligor is discharged to
the extent of the impairment. The value of an interest in
collateral is impaired to the extent (i) the value of the interest
is reduced to an amount less than the amount of the right of
recourse of the party asserting discharge, or (ii) the reduction
in value of the interest causes an increase in the amount by
which the amount of the right of recourse exceeds the value of
the interest. The burden of proving impairment is on the party
asserting discharge.
(f) If the obligation of a party is secured by an interest in
collateral not provided by an accommodation party and a
person entitled to enforce the instrument impairs the value of
the interest in collateral, the obligation of any party who is
jointly and severally liable with respect to the secured
obligation is discharged to the extent the impairment causes the
party asserting discharge to pay more than that party would
have been obliged to pay, taking into account rights of
contribution, if impairment had not occurred. If the party
asserting discharge is an accommodation party not entitled to
discharge under subsection (e), the party is deemed to have a
right to contribution based on joint and several liability rather
than a right to reimbursement. The burden of proving
impairment is on the party asserting discharge.
(g) Under subsection (e) or (f), impairing value of an
interest in collateral includes (i) failure to obtain or maintain
perfection or recordation of the interest in collateral, (ii) release
of collateral without substitution of collateral of equal value,
(iii) failure to perform a duty to preserve the value of collateral
owed, under Chapter 9 or other law, to a debtor or surety or
other person secondarily liable, or (iv) failure to comply with
applicable law in disposing of collateral.
(h) An accommodation party is not discharged under
subsection (c), (d), or (e) unless the person entitled to enforce
the instrument knows of the accommodation or has notice
under Section 36-3-419(c) that the instrument was signed for
accommodation.
(i) A party is not discharged under this section if (i) the party
asserting discharge consents to the event or conduct that is the
basis of the discharge, or (ii) the instrument or a separate
agreement of the party provides for waiver of discharge under
this section either specifically or by general language indicating
that parties waive defenses based on suretyship or impairment
of collateral."
OFFICIAL COMMENT
1. Section 3-605, which replaces former Section 3-606, can
be illustrated by an example. Bank lends $10,000 to Borrower
who signs a note under which Borrower is obliged to pay
$10,000 to Bank on a due date stated in the note. Bank insists,
however, that Accommodation Party also become liable to pay
the note. Accommodation Party can incur this liability by
signing the note as a co-maker or by indorsing the note. In
either case the note is signed for accommodation and Borrower
is the accommodated party. Rights and obligations of
Accommodation Party in this case are stated in Section 3-419.
Suppose that after the note is signed, Bank agrees to a
modification of the rights and obligations between Bank and
Borrower. For example, Bank agrees that Borrower may pay
the note at some date after the due date, or that Borrower may
discharge Borrower's $10,000 obligation to pay the note by
paying Bank $3,000, or that Bank releases collateral given by
Borrower to secure the note. Under the law of suretyship
Borrower is usually referred to as the principal debtor and
Accommodation Party is referred to as the surety. Under that
law, the surety can be discharged under certain circumstances
if changes of this kind are made by Bank, the creditor, without
the consent of Accommodation Party, the surety. Rights of the
surety to discharge in such cases are commonly referred to as
suretyship defenses. Section 3-605 is concerned with this kind
of problem in the context of a negotiable instrument to which
the principal debtor and the surety are parties. But Section
3-605 has a wider scope. It also applies to indorsers who are
not accommodation parties. Unless an indorser signs without
recourse, the indorser's liability under Section 3-415 (a) is that
of a guarantor of payment. If Bank in our hypothetical case
indorsed the note and transferred it to Second Bank, Bank has
rights given to an indorser under Section 3-605 if it is Second
Bank that modifies rights and obligations of Borrower. Both
accommodation parties and indorsers will be referred to in
these Comments as sureties. The scope of Section 3-605 is also
widened by subsection (e) which deals with rights of a
non-accommodation party co-maker when collateral is
impaired.
2. The importance of suretyship defenses is greatly
diminished by the fact that they can be waived. The waiver is
usually made by a provision in the note or other writing that
represents the obligation of the principal debtor. It is standard
practice to include a waiver of suretyship defenses in notes
given to financial institutions or other commercial creditors.
Section 3-605(i) allows waiver. Thus, Section 3-605 applies to
the occasional case in which the creditor did not include a
waiver clause in the instrument or in which the creditor did not
obtain the permission of the surety to take the action that
triggers the suretyship defense.
3. Subsection (b) addresses the effect of discharge under
Section 3-604 of the principal debtor. In the hypothetical case
stated in Comment 1, release of Borrower by Bank does not
release Accommodation Party. As a practical matter, Bank will
not gratuitously release Borrower. Discharge of Borrower
normally would be part of a settlement with Borrower if
Borrower is insolvent or in financial difficulty. If Borrower is
unable to pay all creditors, it may be prudent for Bank to take
partial payment, but Borrower will normally insist on a release
of the obligation. If Bank takes $3,000 and releases Borrower
from the $10,000 debt, Accommodation Party is not injured.
To the extent of the payment Accommodation Party's obligation
to Bank is reduced. The release of Borrower by Bank does not
affect the right of Accommodation Party to obtain
reimbursement from Borrower if Accommodation Party pays
Bank. Section 3-419(e). Subsection (b) is designed to allow a
creditor to settle with the principal debtor without risk of losing
rights against sureties. Settlement is in the interest of sureties
as well as the creditor. Subsection (b) changes the law stated
in former Section 3-606 but the change relates largely to
formalities rather than substance. Under former Section 3-606,
Bank could settle with and release Borrower without releasing
Accommodation Party, but to accomplish that result Bank had
to either obtain the consent of Accommodation Party or make
an express reservation of rights against Accommodation Party
at the time it released Borrower. The reservation of rights was
made in the agreement between Bank and Borrower by which
the release of Borrower was made. There was no requirement
in former Section 3-606 that any notice be given to
Accommodation Party. The reservation of rights doctrine is
abolished in Section 3-605 with respect to rights on
instruments.
4. Subsection (c) relates to extensions of the due date of the
instrument. In most cases an extension of time to pay a note is
a benefit to both the principal debtor and sureties having
recourse against the principal debtor. In relatively few cases
the extension may cause loss if deterioration of the financial
condition of the principal debtor reduces the amount that the
surety will be able to recover on its right of recourse when
default occurs. Former Section 3-606(1)(a) did not take into
account the presence or absence of loss to the surety. For
example, suppose the instrument is an installment note and the
principal debtor is temporarily short of funds to pay a monthly
installment. The payee agrees to extend the due date of the
installment for a month or two to allow the debtor to pay when
funds are available. Under former Section 3-606 surety was
discharged if consent was not given unless the payee expressly
reserved rights against the surety. It did not matter that the
extension of time was a trivial change in the guaranteed
obligation and that there was no evidence that the surety
suffered any loss because of the extension. Wilmington
Trust Co. v. Gesullo, 29 U.C.C. Rep. 144 (Del. Super. Ct.
1980). Under subsection (c) an extension of time results in
discharge only to the extent the surety proves that the extension
caused loss. For example, if the extension is for a long period
the surety might be able to prove that during the period of
extension the principal debtor became insolvent, thus reducing
the value of the right of recourse of the surety. By putting the
burden on the surety to prove loss, subsection (c) more
accurately reflects what the parties would have done by
agreement, and it facilitates workouts.
5. Former Section 3-606 applied to extensions of the due
date of a note but not to other modifications of the obligation of
the principal debtor. There was no apparent reason why former
Section 3-606 did not follow general suretyship law in covering
both. Under Section 3-605(d) a material modification of the
obligation of the principal debtor, other than an extension of the
due date, will result in discharge of the surety to the extent the
modification caused loss to the surety with respect to the right
of recourse. The loss caused by the modification is deemed to
be the entire amount of the right of recourse unless the person
seeking enforcement of the instrument proves that no loss
occurred or that the loss was less than the full amount of the
right of recourse. In the absence of that proof, the surety is
completely discharged. The rationale for having different rules
with respect to loss for extensions of the due date and other
modifications is that extensions are likely to be beneficial to the
surety and they are often made. Other modifications are less
common and they may very well be detrimental to the surety.
Modification of the obligation of the principal debtor without
permission of the surety is unreasonable unless the
modification is benign. Subsection (d) puts the burden on the
person seeking enforcement of the instrument to prove the
extent to which loss was not caused by the modification.
6. Subsection (e) deals with discharge of sureties by
impairment of collateral. It generally conforms to former
Section 3-606(1)(b). Subsection (g) states common examples
of what is meant by impairment. By using the term
"includes," it allows a court to find impairment in
other cases as well. There is extensive case law on impairment
of collateral. The surety is discharged to the extent the surety
proves that impairment was caused by a person entitled to
enforce the instrument. For example, suppose the payee of a
secured note fails to perfect the security interest. The collateral
is owned by the principal debtor who subsequently files in
bankruptcy. As a result of the failure to perfect, the security
interest is not enforceable in bankruptcy. If the payee obtains
payment from the surety, the surety is subrogated to the payee's
security interest in the collateral. In this case the value of the
security interest is impaired completely because the security
interest is unenforceable. If the value of the collateral is as
much or more than the amount of the note there is a complete
discharge.
In some states a real property grantee who assumes the
obligation of the grantor as maker of a note secured by the real
property becomes by operation of law a principal debtor and
the grantor becomes a surety. The meager case authority was
split on whether former Section 3-606 applied to release the
grantor if the holder released or extended the obligation of the
grantee. Revised Article 3 takes no position on the effect of the
release of the grantee in this case. Section 3-605(e) does not
apply because the holder has not discharged the obligation of
a "party," a term defined in Section 3-103(a)(8) as
"party to an instrument." The assuming grantee is
not a party to the instrument.
7. Subsection (f) is illustrated by the following case. X and
Y sign a note for $1,000 as co-makers. Neither is an
accommodation party. X grants a security interest in X's
property to secure the note. The collateral is worth more than
$1,000. Payee fails to perfect the security interest in X's
property before X files in bankruptcy. As a result the security
interest is not enforceable in bankruptcy. Had Payee perfected
the security interest, Y could have paid the note and gained
rights to X's collateral by subrogation. If the security interest
had been perfected, Y could have realized on the collateral to
the extent of $500 to satisfy its right of contribution against X.
Payee's failure to perfect deprived Y of the benefit of the
collateral. Subsection (f) discharges Y to the extent of its loss.
If there are no assets in the bankruptcy for unsecured claims,
the loss is $500, the amount of Y's contribution claim against
X which now has a zero value. If some amount is payable on
unsecured claims, the loss is reduced by the amount receivable
by Y. The same result follows if Y is an accommodation party
but Payee has no knowledge of the accommodation or notice
under Section 3-419(c). In that event Y is not discharged under
subsection (e), but subsection (f) applies because X and Y are
jointly and severally liable on the note. Under subsection (f),
Y is treated as a co-maker with a right of contribution rather
than an accommodation party with a right of reimbursement.
Y is discharged to the extent of $500. If Y is the principal
debtor and X is the accommodation party subsection (f) doesn't
apply. Y, as principal debtor, is not injured by the impairment
of collateral because Y would have been obliged to reimburse
X for the entire $1,000 even if Payee had obtained payment
from sale of the collateral.
8. Subsection (i) is a continuation of former law which
allowed suretyship defenses to be waived.
SECTION 2. Chapter 4 of Title 36 of the 1976 Code is
amended to read:
"CHAPTER 4
Commercial Code - Bank Deposits and
Collections
Section 36-4-101. This chapter shall be known and may
be cited as Uniform Commercial Code Bank Deposits and
Collections.
Section 36-4-102. (1) To the extent that items within this
chapter are also within the scope of Chapters 3 and 8, they are
subject to the provisions of those Chapters. In the event of
conflict the provisions of this chapter govern those of Chapter
3 but the provisions of Chapter 8 govern those of this chapter.
(2) The liability of a bank for action or nonaction with
respect to any item handled by it for purposes of presentment,
payment or
collection is governed by the law of the place where the bank
is located. In the case of action or nonaction by or at a branch
or separate office of a bank, its liability is governed by the law
of the place where the branch or separate office is located.
Section 36-4-103. (1) The effect of the provisions of this
chapter may be varied by agreement except that no agreement
can disclaim a bank's responsibility for its own lack of good
faith or failure to exercise ordinary care or can limit the
measure of damages for such lack or failure; but the parties
may by agreement determine the standards by which such
responsibility is to be measured if such standards are not
manifestly unreasonable.
(2) Federal reserve regulations and operating letters, clearing
house rules, and the like, have the effect of agreements under
subsection (1), whether or not specifically assented to by all
parties interested in items handled.
(3) Action or nonaction approved by this chapter or pursuant
to Federal reserve regulations or operating letters constitutes
the exercise of ordinary care and, in the absence of special
instructions, action or nonaction consistent with clearing house
rules and the like or with a general banking usage not
disapproved by this chapter, prima facie constitutes the exercise
of ordinary care.
(4) The specification or approval of certain procedures by
this chapter does not constitute disapproval of other procedures
which may be reasonable under the circumstances.
(5) The measure of damages for failure to exercise ordinary
care in handling an item is the amount of the item reduced by
an amount which could not have been realized by the use of
ordinary care, and where there is bad faith it includes other
damages, if any, suffered by the party as a proximate
consequence.
Section 36-4-104. (1) In this chapter unless the context
otherwise requires
(a) "Account" means any account with a bank
and includes a checking, time, interest or savings account;
(b) "Afternoon" means the period of a day
between noon and midnight;
(c) "Banking day" means that part of any day
on which a bank is open to the public for carrying on
substantially all of its banking functions;
(d) "Clearing house" means any association
of banks or other payors regularly clearing items;
(e) "Customer" means any person having an
account with a bank or for whom a bank has agreed to collect
items and includes a bank carrying an account with another
bank;
(f) "Documentary draft" means any
negotiable or nonnegotiable draft with accompanying
documents, securities or other papers to be delivered against
honor of the draft;
(g) "Item" means any instrument for the
payment of money even though it is not negotiable but does not
include money;
(h) "Midnight deadline" with respect to a
bank is midnight on its next banking day following the banking
day on which it receives the relevant item or notice or from
which the time for taking action commences to run, whichever
is later;
(i) "Properly payable" includes the
availability of funds for payment at the time of decision to pay
or dishonor;
(j) "Settle" means to pay in cash, by clearing
house settlement, in a charge or credit or by remittance, or
otherwise as instructed. A settlement may be either provisional
or final;
(k) "Suspends payments" with respect to a
bank means that it has been closed by order of the supervisory
authorities, that a public officer has been appointed to take it
over or that it ceases or refuses to make payments in the
ordinary course of business.
(2) Other definitions applying to this chapter and the
sections in which they appear are:
"Collecting bank" Section 36-4-105.
"Depositary bank" Section 36-4-105.
"Intermediary bank" Section 36-4-105.
"Payor bank" Section 36-4-105.
"Presenting bank" Section 36-4-105.
"Remitting bank" Section 36-4-105.
(3) The following definitions in other chapters apply to this
chapter:
"Acceptance" Section 36-3-410.
"Certificate of deposit" Section 36-3-104.
"Certification" Section 36-3-411.
"Check" Section 36-3-104.
"Draft" Section 36-3-104.
"Holder in due course" Section 36-3-302.
"Notice of dishonor" Section 36-3-508.
"Presentment" Section 36-3-504.
"Protest" Section 36-3-509.
"Secondary party" Section 36-3-102.
(4) In addition Chapter 1 of Title 36 contains general
definitions and principles of construction and interpretation
applicable throughout this chapter.
Section 36-4-105. In this chapter unless the context
otherwise requires:
(a) "Depositary bank" means the first bank to
which an item is transferred for collection even though it is also
the payor bank;
(b) "Payor bank" means a bank by which an item
is payable as drawn or accepted;
(c) "Intermediary bank" means any bank to
which an item is transferred for collection even though it is also
the payor bank;
(d) "Collecting bank" means any bank handling
the item for collection except the payor bank;
(e) "Presenting bank" means any bank
presenting an item except a payor bank;
(f) "Remitting bank" means any payor or
intermediary bank remitting for an item.
Section 36-4-106. A branch or separate office of a bank
maintaining its own deposit ledgers is a separate bank for the
purpose of computing the time within which and determining
the place at or to which action may be taken or notices or orders
shall be given under this chapter and under Chapter 3.
Section 36-4-107. (1) For the purpose of allowing time to
process items, prove balances and make the necessary entries
on its books to determine its position for the day, a bank may
fix an afternoon hour of two P.M. or later as a cutoff hour for
the handling of money and items and the making of entries on
its books.
(2) Any item or deposit of money received on any day after
a cutoff hour so fixed or after the close of the banking day may
be treated as being received at the opening of the next banking
day.
Section 36-4-108. (1) Unless otherwise instructed, a
collecting bank in a good faith effort to secure payment may, in
the case of specific items and with or without the approval of
any person involved, waive, modify or extend time limits
imposed or permitted by this act for a period not in excess of an
additional banking day without discharge of secondary parties
and without liability to its transferor or any prior party.
(2) Delay by a collecting bank or payor bank beyond time
limits prescribed or permitted by this act or by instructions is
excused if caused by interruption of communication facilities,
suspension of payments by another bank, war, emergency
conditions or other circumstances beyond the control of the
bank provided it exercises such diligence as the circumstances
require.
Section 36-4-109. The "process of posting"
means the usual procedure followed by a payor bank in
determining to pay an item and in recording the payment
including one or more of the following or other steps as
determined by the bank:
(a) verification of any signature;
(b) ascertaining that sufficient funds are available;
(c) affixing a "paid" or other stamp;
(d) entering a charge or entry to a customer's account;
(e) correcting or reversing an entry or erroneous action with
respect to the item.
Section 36-4-201. (1) Unless a contrary intent clearly
appears and prior to the time that a settlement given by a
collecting bank for an item is or becomes final (subsection (3)
of Section 36-4-211 and Sections 36-4-212 and 36-4-213) the
bank is an agent or subagent of the owner of the item and any
settlement given for the item is provisional. This provision
applies regardless of the form of indorsement or lack of
indorsement and even though credit given for the item is
subject to immediate withdrawal as of right or is in fact
withdrawn; but the continuance of ownership of an item by its
owner and any rights of the owner to proceeds of the item are
subject to rights of a collecting bank such as those resulting
from outstanding advances on the item and valid rights of
setoff. When an item is handled by banks for purposes of
presentment, payment and collection, the relevant provisions of
this chapter apply even though action of parties clearly
establishes that a particular bank has purchased the item and is
the owner of it.
(2) After an item has been indorsed with the words
"pay any bank" or the like, only a bank may acquire
the rights of a holder
(a) until the item has been returned to the customer
initiating collection; or
(b) until the item has been specially indorsed by a bank
to a person who is not a bank.
Section 36-4-202. (1) A collecting bank must use ordinary
care in
(a) presenting an item or sending it for presentment; and
(b) sending notice of dishonor or nonpayment or
returning an item other than a documentary draft to the bank's
transferor or directly to the depositary bank under subsection
(2) of Section 36-4-212 after learning that the item has not been
paid or accepted, as the case may be; and
(c) settling for an item when the bank receives final
settlement; and
(d) making or providing for any necessary protest; and
(e) notifying its transferor of any loss or delay in transit
within a reasonable time after discovery thereof.
(2) A collecting bank taking proper action before its
midnight deadline following receipt of an item, notice or
payment acts seasonably; taking proper action within a
reasonably longer time may be seasonable but the bank has the
burden of so establishing.
(3) Subject to subsection (1)(a), a bank is not liable for the
insolvency, neglect, misconduct, mistake or default of another
bank or person or for loss or destruction of an item in transit or
in the possession of others.
Section 36-4-203. Subject to the provisions of Chapter 3
concerning conversion of instruments (Section 36-3-419) and
the provisions of both Chapter 3 and this Chapter concerning
restrictive indorsements only a collecting bank's transferor can
give instructions which affect the bank or constitute notice to
it and a collecting bank is not liable to prior parties for any
action taken pursuant to such instructions or in accordance with
any agreement with its transferor.
Section 36-4-204. (1) A collecting bank must send items by
reasonably prompt method taking into consideration any
relevant instructions, the nature of the item, the number of such
items on hand, and the cost of collection involved and the
method generally used by it or others to present such items.
(2) A collecting bank may send
(a) any item direct to the payor bank;
(b) any item to any nonbank payor if authorized by its
transferor; and
(c) any item other than documentary drafts to any
nonbank payor, if authorized by Federal reserve regulation or
operating letter, clearing house rule or the like.
(3) Presentment may be made by a presenting bank at a
place where the payor bank has requested that presentment be
made.
Section 36-4-205. (1) A depositary bank which has taken an
item for collection may supply any indorsement of the customer
which is necessary to title unless the item contains the words
"payee's indorsement required" or the like. In the
absence of such a requirement a statement placed on the item
by the depositary bank to the effect that the item was deposited
by a customer or credited to his account is effective as the
customer's indorsement.
(2) An intermediary bank, or payor bank which is not a
depositary bank, is neither given notice nor otherwise affected
by a restrictive indorsement of any person except the bank's
immediate transferor.
Section 36-4-206. Any agreed method which identifies the
transferor bank is sufficient for the item's further transfer to
another bank.
Section 36-4-207. (1) Each customer or collecting bank who
obtains payment or acceptance of an item and each prior
customer and collecting bank warrants to the payor bank or
other payor who in good faith pays or accepts the item that
(a) he has a good title to the item or is authorized to
obtain payment or acceptance on behalf of one who has a good
title;
(b) he has no knowledge that the signature of the maker
or drawer is unauthorized, except that this warranty is not given
by any customer or collecting bank that is a holder in due
course and acts in good faith
(i) to a maker with respect to the maker's own
signature; or
(ii) to a drawer with respect to the drawer's own
signature, whether or not the drawer is also the drawee; or
(iii) to an acceptor of an item if the holder in due
course took the item after the acceptance or obtained the
acceptance without knowledge that the drawer's signature was
unauthorized; and
(c) the item has not been materially altered, except that
this warranty is not given by any customer or collecting bank
that is a holder in due course and acts in good faith
(i) to the maker of a note; or
(ii) to the drawer of a draft whether or not the drawer
is also the drawee; or
(iii) to the acceptor of an item with respect to an
alteration made prior to the acceptance if the holder in due
course took the item after the acceptance, even though the
acceptance provided "payable as originally drawn"
or equivalent terms; or
(iv) to the acceptor of an item with respect to an
alteration made after the acceptance.
(2) Each customer and collecting bank who transfers an item
and receives a settlement or other consideration for it warrants
to his transferee and to any subsequent collecting bank who
takes the item in good faith that
(a) he has a good title to the item or is authorized to
obtain payment or acceptance on behalf of one who has a good
title and the transfer is otherwise rightful; and
(b) all signatures are genuine or authorized; and
(c) the item has not been materially altered; and
(d) no defense of any party is good against him; and
(e) he has no knowledge of any insolvency proceeding
instituted with respect to the maker or acceptor or the drawer of
an unaccepted item.
In addition each customer and collecting bank so
transferring an item and receiving a settlement or other
consideration engages that upon dishonor and any necessary
notice of dishonor and protest he will take up the item.
(3) The warranties and the engagement to honor set forth in
the two preceding subsections arise notwithstanding the
absence of indorsement or words of guaranty or warranty in the
transfer or presentment and a collecting bank remains liable for
their breach despite remittance to its transferor. Damages for
breach of such warranties or engagement to honor shall not
exceed the consideration received by the customer or collecting
bank responsible plus finance charges and expenses related to
the item, if any.
(4) Unless a claim for breach of warranty under this section
is made within a reasonable time after the person claiming
learns of the breach, the person liable is discharged to the
extent of any loss caused by the delay in making claim.
Section 36-4-208. (1) A bank has a security interest in an
item and any accompanying documents or the proceeds of
either
(a) in case of an item deposited in an account to the
extent to which credit given for the item has been withdrawn or
applied;
(b) in case of an item for which it has given credit
available for withdrawal as of right, to the extent of the credit
given whether or not the credit is drawn upon and whether or
not there is a right of charge-back; or
(c) if it makes an advance on or against the item.
(2) When credit which has been given for several items
received at one time or pursuant to a single agreement is
withdrawn or applied in part the security interest remains upon
all the items, any accompanying documents or the proceeds of
either. For the purpose of this section, credits first given are
first withdrawn.
(3) Receipt by a collecting bank of a final settlement for an
item is a realization on its security interest in the item,
accompanying documents and proceeds. To the extent and so
long as the bank does not receive final settlement for the item
or give up possession of the item or accompanying documents
for purposes other than collection, the security interest
continues and is subject to the provisions of Chapter 9 except
that
(a) no security agreement is necessary to make the
security interest enforceable (subsection (1)(b) of Section
36-9-2031); and
(b) no filing is required to perfect the security interest;
and
(c) the security interest has priority over conflicting
perfected security interests in the item, accompanying
documents or proceeds.
Section 36-4-209. For purposes of determining its status as
a holder in due course, the bank has given value to the extent
that it has a security interest in an item provided that the bank
otherwise complies with the requirements of Section 36-3-302
on what constitutes a holder in due course.
Section 36-4-210. (1) Unless otherwise instructed, a
collecting bank may present an item not payable by, through or
at a bank by sending to the party to accept or pay a written
notice that the bank holds the item for acceptance or payment.
The notice must be sent in time to be received on or before the
day when presentment is due and the bank must meet any
requirement of the party to accept or pay under Section
36-3-505 by the close of the bank's next banking day after it
knows of the requirement.
(2) Where presentment is made by notice and neither honor
nor request for compliance with a requirement under Section
36-3-505 is received by the close of business on the day after
maturity or in the case of demand items by the close of business
on the third banking day after notice was sent, the presenting
bank may treat the item as dishonored and charge any
secondary party by sending him notice of the facts.
Section 36-4-211. (1) A collecting bank may take in
settlement of an item
(a) a check of the remitting bank or of another bank on
any bank except the remitting bank; or
(b) a cashier's check or similar primary obligation of a
remitting bank which is a member of or clears through a
member of the same clearing house or group as the collecting
bank; or
(c) appropriate authority to charge an account of the
remitting bank or of another bank with the collecting bank; or
(d) if the item is drawn upon or payable by a person other
than a bank, a cashier's check, certified check or other bank
check or obligation.
(2) If before its midnight deadline the collecting bank
properly dishonors a remittance check or authorization to
charge on itself or presents or forwards for collection a
remittance instrument of or on another bank which is of a kind
approved by subsection (1) or has not been authorized by it, the
collecting bank is not liable to prior parties in the event of the
dishonor of such check, instrument or authorization.
(3) A settlement for an item by means of a remittance
instrument or authorization to charge is or becomes a final
settlement as to both the person making and the person
receiving the settlement
(a) if the remittance instrument or authorization to charge
is of a kind approved by subsection (1) or has not been
authorized by the person receiving the settlement and in either
case the person receiving the settlement acts seasonably before
its midnight deadline in presenting, forwarding for collection
or paying the instrument or authorization, at the time the
remittance instrument or authorization is finally paid by the
payor by which it is payable;
(b) if the person receiving the settlement has authorized
remittance by a nonbank check or obligation or by a cashier's
check or similar primary obligation of or a check upon the
payor or other remitting bank which is not of a kind approved
by subsection (1)(b), at the time of the receipt of such
remittance check or obligation; or
(c) if in a case not covered by subparagraphs (a) or (b) the
person receiving the settlement fails to seasonably present,
forward for collection, pay or return a remittance instrument or
authorization to it to charge before its midnight deadline, at
such midnight deadline.
Section 36-4-212. (1) If a collecting bank has made
provisional settlement with its customer for an item and itself
fails by reason of dishonor, suspension of payments by a bank
or otherwise to receive a settlement for the item which is or
becomes final, the bank may revoke the settlement given by it,
charge back the amount of any credit given for the item to its
customer's account or obtain refund from its customer whether
or not it is able to return the items if by its midnight deadline or
within a longer reasonable time after it learns the facts it returns
the item or sends notification of the facts. These rights to
revoke, charge-back and obtain refund terminate if and when a
settlement for the item received by the bank is or becomes final
(subsection (3) of Section 36-4-211 and subsections (2) and (3)
of Section 36-4-213).
(2) Within the time and manner prescribed by this section
and Section 36-4-301, an intermediary or payor bank, as the
case may be, may return an unpaid item directly to the
depositary bank and may send for collection a draft on the
depositary bank and obtain reimbursement. In such case, if the
depositary bank has received provisional settlement for the
item, it must reimburse the bank drawing the draft and any
provisional credits for the item between banks shall become
and remain final.
(3) A depositary bank which is also the payor may charge
back the amount of an item to its customer's account or obtain
refund in accordance with the section governing return of an
item received by a payor bank for credit on its books (Section
36-4-301).
(4) The right to charge-back is not affected by
(a) prior use of the credit given for the item; or
(b) failure by any bank to exercise ordinary care with
respect to the item but any bank so failing remains liable.
(5) A failure to charge-back or claim refund does not affect
other rights of the bank against the customer or any other party.
(6) If credit is given in dollars as the equivalent of the value
of an item payable in a foreign currency the dollar amount of
any charge-back or refund shall be calculated on the basis of
the buying sight rate for the foreign currency prevailing on the
day when the person entitled to the charge-back or refund
learns that it will not receive payment in ordinary course.
Section 36-4-213. (1) An item is finally paid by a payor
bank when the bank has done any of the following, whichever
happens first:
(a) paid the item in cash; or
(b) settled for the item without reserving a right to revoke
the settlement and without having such right under statute,
clearing house rule or agreement; or
(c) completed the process of posting the item to the
indicated account of the drawer, maker or other person to be
charged therewith; or
(d) made a provisional settlement for the item and failed
to revoke the settlement in the time and manner permitted by
statute, clearing house rule or agreement.
Upon a final payment under subparagraphs (b), (c) or (d) the
payor bank shall be accountable for the amount of the item.
(2) If provisional settlement for an item between the
presenting and payor banks is made through a clearing house or
by debits or credits in an account between them, then to the
extent that provisional debits or credits for the item are entered
in accounts between the presenting and payor banks or between
the presenting and successive prior collecting bank seriatim,
they become final upon final payment of the item by the payor
bank.
(3) If a collecting bank receives a settlement for an item
which is or becomes final (subsection (3) of Section 36-4-211,
subsection (2) of Section 36-4-213) the bank is accountable to
its customer for the amount of the item and any provisional
credit given for the item in an account with its customer
becomes final.
(4) Subject to any right of the bank to apply the credit to an
obligation of the customer, credit given by a bank for an item
in an account with its customer becomes available for
withdrawal as of right
(a) in any case where the bank has received a provisional
settlement for the item, when such settlement becomes final and
the bank has had a reasonable time to learn that the settlement
is final;
(b) in any case where the bank is both a depositary bank
and a payor bank and the item is finally paid, at the opening of
the bank's second banking day following receipt of the item.
(5) A deposit of money in a bank is final when made but,
subject to any right of the bank to apply the deposit to an
obligation of the customer, the deposit becomes available for
withdrawal as of right at the opening of the bank's next banking
day following receipt of the deposit.
Section 36-4-214. (1) Any item in or coming into the
possession of a payor or collecting bank which suspends
payment and which item is not finally paid shall be returned by
the receiver, trustee or agent in charge of the closed bank to the
presenting bank or the closed bank's customer.
(2) If a payor bank finally pays an item and suspends
payments without making a settlement for the item with its
customer or the presenting bank which settlement is or becomes
final, the owner of the item has a preferred claim against the
payor bank.
(3) If a payor bank gives or a collecting bank gives or
receives a provisional settlement for an item and thereafter
suspends payments, the suspension does not prevent or interfere
with the settlement becoming final if such finality occurs
automatically upon the lapse of certain time or the happening
of certain events (subsection (3) of Section 36-4-211,
subsections (1)(d), (2) and (3) of Section 36-4-213).
(4) If a collecting bank receives from subsequent parties
settlement for an item which settlement is or becomes final and
suspends payments without making a settlement for the item
with its customer which is or becomes final, the owner of the
item has a preferred claim against such collecting bank.
Section 36-4-301. (1) Where an authorized settlement for a
demand item (other than a documentary draft) received by a
payor bank otherwise than for immediate payment over the
counter has been made before midnight of the banking day of
receipt the payor bank may revoke the settlement and recover
any payment if before it has made final payment (subsection (1)
of Section 36-4-213) and before its midnight deadline it
(a) returns the item; or
(b) sends written notice of dishonor or nonpayment if the
item is held for protest or is otherwise unavailable for return.
(2) If a demand item is received by a payor bank for credit
on its books it may return such item or send notice of dishonor
and may revoke any credit given or recover the amount thereof
withdrawn by its customer, if it acts within the time limit and
in the manner specified in the preceding subsection.
(3) Unless previous notice of dishonor has been sent an item
is dishonored at the time when for purposes of dishonor it is
returned or notice sent in accordance with this section.
(4) An item is returned:
(a) as to an item received through a clearing house, when
it is delivered to the presenting or last collecting bank or to the
clearing house or is sent or delivered in accordance with its
rules; or
(b) in all other cases, when it is sent or delivered to the
bank's customer or transferor or pursuant to his instructions.
Section 36-4-302. In the absence of a valid defense such as
breach of a presentment warranty (subsection (1) of Section
36-4-207), a settlement effected or the like, if an item is
presented on and received by a payor bank the bank is
accountable for the amount of
(a) a demand item other than a documentary draft whether
properly payable or not if the bank, in any case where it is not
also the depositary bank, retains the item beyond midnight of
the banking day of receipt without settling for it or, regardless
of whether it is also the depositary bank, does not pay or return
the item or send notice of dishonor until after its midnight
deadline; or
(b) any other properly payable item unless within the time
allowed for acceptance or payment of that item the bank either
accepts or pays the item or returns it and accompanying
documents.
Section 36-4-303. (1) Any knowledge, notice or stop-order
received by, legal process served upon or setoff exercised by a
payor bank, whether or not effective under other rules of law to
terminate, suspend or modify the bank's right or duty to pay an
item or to charge its customer's account for the item, comes too
late to so terminate, suspend or modify such right or duty if the
knowledge, notice, stop-order or legal process is received or
served and a reasonable time for the bank to act thereon expires
or the setoff is exercised after the bank has done any of the
following:
(a) accepted or certified the item;
(b) paid the item in cash;
(c) settled for the item without reserving a right to revoke
the settlement and without having such right under statute,
clearing house rule or agreement;
(d) completed the process of posting the item to the
indicated account of the drawer, maker or other person to be
charged therewith or otherwise has evidenced by examination
of such indicated account and by action its decision to pay the
item; or
(e) become accountable for the amount of the item under
subsection (1)(d) of Section 36-4-213 and Section 36-4-302
dealing with the payor bank's responsibility for late return of
items.
(2) Subject to the provisions of subsection (1) items may be
accepted, paid, certified or charged to the indicated account of
its customer in any order convenient to the bank.
Section 36-4-401. (1) As against its customer, a bank may
charge against his account any item which is otherwise properly
payable from that account even though the charge creates an
overdraft.
(2) a bank which in good faith makes payment to a holder
may charge the indicated account of its customer according to
(a) the original tenor of his altered item;
(b) the tenor of his completed item, even though the bank
knows the item has been completed unless the bank has notice
that the completion was improper.
Section 36-4-402. A payor bank is liable to its customer for
damages proximately caused by the wrongful dishonor of an
item. When the dishonor occurs through mistake liability is
limited to actual damages proved. If so proximately caused and
proved damages may include damages for an arrest or
prosecution of the customer or other consequential damages.
Whether any consequential damages are proximately caused by
the wrongful dishonor is a question of fact to be determined in
each case.
Section 36-4-403. (1) A customer may by order to his bank
stop payment of any item payable for his account but the order
must be received at such time and in such manner as to afford
the bank a reasonable opportunity to act on it prior to any
action by the bank with respect to the item described in Section
36-4-303.
(2) An oral order is binding upon the bank only for fourteen
calendar days unless confirmed in writing within that period.
A written order is effective for only six months unless renewed
in writing.
(3) The burden of establishing the fact and amount of loss
resulting from the payment of an item contrary to a binding
stop payment order is on the customer.
Section 36-4-404. A bank is under no obligation to a
customer having a checking account to pay a check, other than
a certified check, which is presented more than six months after
its date, but it may charge its customer's account for a payment
made thereafter in good faith.
Section 36-4-405. (1) A payor or collecting bank's authority
to accept, pay or collect an item or to account for proceeds of
its collection if otherwise effective is not rendered ineffective
by incompetence of a customer of either bank existing at the
time the item is issued or its collection is undertaken if the bank
does not know of an adjudication of incompetence. Neither
death nor incompetence of a customer revokes such authority
to accept, pay, collect or account until the bank knows of the
fact of death or of an adjudication of incompetence and has
reasonable opportunity to act on it.
(2) Even with knowledge a bank may for ten days after the
date of death pay or certify checks drawn on or prior to that
date unless ordered to stop payment by a person claiming an
interest in the account.
Section 36-4-406. (1) When a bank sends to its customer a
statement of account accompanied by items paid in good faith
in support of the debit entries or holds the statement and items
pursuant to a request or instructions of its customer or
otherwise in a reasonable manner makes the statement and
items available to the customer, the customer must exercise
reasonable care and promptness to examine the statement and
items to discover his unauthorized signature or any alteration
on an item and must notify the bank promptly after discovery
thereof.
(2) If the bank establishes that the customer failed with
respect to an item to comply with the duties imposed on the
customer by subsection (1) the customer is precluded from
asserting against the bank
(a) his unauthorized signature or any alteration on the
item if the bank also establishes that it suffered a loss by
reason of such failure; and
(b) an unauthorized signature or alteration by the same
wrongdoer on any other item paid in good faith by the bank
after the first item and statement was available to the customer
for a reasonable period not exceeding fourteen calendar days
and before the bank receives notification from the customer of
any such unauthorized signature or alteration.
(3) The preclusion under subsection (2) does not apply if the
customer establishes lack of ordinary care on the part of the
bank in paying the item(s).
(4) Without regard to care or lack of care of either the
customer or the bank a customer who does not within one year
from the time the statement and items are made available to the
customer (subsection (1)) discover and report his unauthorized
signature or any alteration on the face or back of the item or
does not within three years from that time discover and report
any unauthorized indorsement is precluded from asserting
against the bank such unauthorized signature or indorsement or
such alteration.
(5) If under this section a payor bank has a valid defense
against a claim of a customer upon or resulting from payment
of an item and waives or fails upon request to assert the defense
the bank may not assert against any collecting bank or other
prior party presenting or transferring the item a claim based
upon the unauthorized signature or alteration giving rise to the
customer's claim.
Section 36-4-407. If a payor bank has paid an item over the
stop payment order of the drawer or maker or otherwise under
circumstances giving a basis for objection by the drawer or
maker, to prevent unjust enrichment and only to the extent
necessary to prevent loss to the bank by reason of its payment
of the item, the payor bank shall be subrogated to the rights
(a) of any holder in due course on the item against the
drawer or maker; and
(b) of the payee or any other holder of the item against
the drawer or maker either on the item or under the transaction
out of which the item arose; and
(c) of the drawer or maker against the payee or any other
holder of the item with respect to the transaction out of which
the item arose.
Section 36-4-501. A bank which takes a documentary draft
for collection must present or send the draft and accompanying
documents for presentment and upon learning that the draft has
not been paid or accepted in due course must seasonably notify
its customer of such fact even though it may have discounted or
bought the draft or extended credit available for withdrawal as
of right.
Section 36-4-502. When a draft or the relevant instructions
require presentment "on arrival," "when
goods arrive" or the like, the collecting bank need not
present until in its judgment a reasonable time for arrival of the
goods has expired. Refusal to pay or accept because the goods
have not arrived is not dishonor; the bank must notify its
transferor of such refusal but need not present the draft again
until it is instructed to do so or learns of the arrival of the
goods.
Section 36-4-503. Unless otherwise instructed and except
as provided in Chapter 5 a bank presenting a documentary draft
(a) must deliver the documents to the drawee on acceptance
of the draft if it is payable more than three days after
presentment; otherwise, only on payment; and
(b) upon dishonor, either in the case of presentment for
acceptance or presentment for payment, may seek and follow
instructions from any referee in case of need designated in the
draft or if the presenting bank does not choose to utilize his
services it must use diligence and good faith to ascertain the
reason for dishonor, must notify its transferor of the dishonor
and of the results of its effort to ascertain the reasons therefor
and must request instructions.
But the presenting bank is under no obligation with respect
to goods represented by the documents except to follow any
reasonable instructions seasonably received; it has a right to
reimbursement for any expense incurred in following
instructions and to prepayment of or indemnity for such
expenses.
Section 36-4-504. (1) A presenting bank which, following
the dishonor of a documentary draft, has seasonably requested
instructions but does not receive them within a reasonable time
may store, sell, or otherwise deal with the goods in any
reasonable manner.
(2) For its reasonable expenses incurred by action under
subsection (1) the presenting bank has a lien upon the goods or
their proceeds, which may be foreclosed in the same manner as
an unpaid seller's lien."
Section 36-4-101. SHORT TITLE.
This chapter may be cited as Uniform Commercial Code -
Bank Deposits and Collections.
OFFICIAL COMMENT
1. The great number of checks handled by banks and the
country-wide nature of the bank collection process require
uniformity in the law of bank collections. There is needed a
uniform statement of the principal rules of the bank collection
process with ample provision for flexibility to meet the needs
of the large volume handled and the changing needs and
conditions that are bound to come with the years. This Article
meets that need.
2. In 1950 at the time Article 4 was drafted, 6.7 billion
checks were written annually. By the time of the 1990 revision
of Article 4 annual volume was estimated by the American
Bankers Association to be about 50 billion checks. The
banking system could not have coped with this increase in
check volume had it not developed in the late 1950s and early
1960s an automated system for check collection based on
encoding checks with machine-readable information by
Magnetic Ink Character Recognition (MICR). An important
goal of the 1990 revision of Article 4 is to promote the
efficiency of the check collection process by making the
provisions of Article 4 more compatible with the needs of an
automated system and, by doing so, increase the speed and
lower the cost of check collection for those who write and
receive checks. An additional goal of the 1990 revision of
Article 4 is to remove any statutory barriers in the Article to the
ultimate adoption of programs allowing the presentment of
checks to payor banks by electronic transmission of information
captured from the MICR line on the checks. The potential of
these programs for saving the time and expense of transporting
the huge volume of checks from depositary to payor banks is
evident.
3. Article 4 defines rights between parties with respect to
bank deposits and collections. It is not a regulatory statute. It
does not regulate the terms of the bank-customer agreement,
nor does it prescribe what constraints different jurisdictions
may wish to impose on that relationship in the interest of
consumer protection. The revisions in Article 4 are intended to
create a legal framework that accommodates automation and
truncation for the benefit of all bank customers. This may raise
consumer problems which enacting jurisdictions may wish to
address in individual legislation. For example, with respect to
Section 4-401(c), jurisdictions may wish to examine their unfair
and deceptive practices laws to determine whether they are
adequate to protect drawers who postdate checks from
unscrupulous practices that may arise on the part of persons
who induce drawers to issue postdated checks in the erroneous
belief that the checks will not be immediately payable. Another
example arises from the fact that under various truncation plans
customers will no longer receive their cancelled checks and will
no longer have the cancelled check to prove payment.
Individual legislation might provide that a copy of a bank
statement along with a copy of the check is prima facie
evidence of payment.
Section 36-4-102. APPLICABILITY.
(a) To the extent that items within this chapter also are
within Chapters 3 and 8, they are subject to those chapters. If
there is conflict, this chapter governs Chapter 3, but Chapter 8
governs this chapter.
(b) The liability of a bank for action or nonaction with
respect to an item handled by it for purposes of presentment,
payment, or collection is governed by the law of the place
where the bank is located. In the case of action or nonaction by
or at a branch or separate office of a bank, its liability is
governed by the law of the place where the branch or separate
office is located.
OFFICIAL COMMENT
1. The rules of Article 3 governing negotiable instruments,
their transfer, and the contracts of the parties thereto apply to
the items collected through banking channels wherever no
specific provision is found in this Article. In the case of
conflict, this Article governs. See Section 3-102(b).
Bonds and like instruments constituting investment
securities under Article 8 may also be handled by banks for
collection purposes. Various sections of Article 8 prescribe
rules of transfer some of which (see Sections 8-304 and 8-306)
may conflict with provisions of this Article (Sections 4-205,
4-207, and 4-208). In the case of conflict, Article 8 governs.
Section 4-210 deals specifically with overlapping problems
and possible conflicts between this Article and Article 9.
However, similar reconciling provisions are not necessary in
the case of Articles 5 and 7. Sections 4-301 and 4-302 are
consistent with Section 5-112. In the case of Article 7
documents of title frequently accompany items but they are not
themselves items. See Section 4-104(a)(9).
In Clearfield Trust Co. v. United States, 318 U.S.
363 (1943), the Court held that if the United States is a party to
an instrument, its rights and duties are governed by federal
common law in the absence of a specific federal statute or
regulation. In United States v. Kimbell Foods, Inc.,
440 U.S. 715 (1979), the Court stated a three-pronged test to
ascertain whether the federal common-law rule should follow
the state rule. In most instances courts under the
Kimbell test have shown a willingness to adopt UCC
rules in formulating federal common law on the subject. In
Kimbell the Court adopted the priorities rules of
Article 9.
In addition, applicable federal law may supersede provisions
of this Article. One federal law that does so is the Expedited
Funds Availability Act, 12 U.S.C. Section 4001 et seq., and its
implementing Regulation CC, 12 CFR Pt. 229. In some
instances this law is alluded to in the statute, e.g., Section
4-215(e) and (f). In other instances, although not referred to in
this Article, the provisions of the EFAA and Regulation CC
control with respect to checks. For example, except between
the depositary bank and its customer, all settlements are final
and not provisional (Regulation CC, Section 229.36(d)), and
the midnight deadline may be extended (Regulation CC,
Section 229.30(c)). The Comments to this Article suggest in
most instances the relevant Regulation CC provisions.
2. Subsection (b) is designed to state a workable rule for the
solution of otherwise vexatious problems of the conflicts of
laws:
a. The routine and mechanical nature of bank collections
makes it imperative that one law govern the activities of one
office of a bank. The requirement found in some cases that to
hold an indorser notice must be given in accordance with the
law of the place of indorsement, since that method of notice
became an implied term of the indorser's contract, is more
theoretical than practical.
b. Adoption of what is in essence a tort theory of the
conflict of laws is consistent with the general theory of this
Article that the basic duty of a collecting bank is one of good
faith and the exercise of ordinary care. Justification lies in the
fact that, in using an ambulatory instrument, the drawer, payee,
and indorsers must know that action will be taken with respect
to it in other jurisdictions. This is especially pertinent with
respect to the law of the place of payment.
c. The phrase "action or non-action with respect to
any item handled by it for purposes of presentment, payment,
or collection" is intended to make the conflicts rule of
subsection (b) apply from the inception of the collection
process of an item through all phases of deposit, forwarding,
presentment, payment and remittance or credit of proceeds.
Specifically the subsection applies to the initial act of a
depositary bank in receiving an item and to the incidents of
such receipt. The conflicts rule of Weissman v. Banque de
Bruxelles, 254 N.Y. 488, 173 N.E. 835 (1930), is rejected.
The subsection applies to questions of possible vicarious
liability of a bank for action or non-action of sub-agents (see
Section 4-202(c)), and tests these questions by the law of the
state of the location of the bank which uses the sub-agent. The
conflicts rule of St. Nicholas Bank of New York v. State
Nat. Bank, 128 N.Y. 26, 27 N.E. 849, 13 L.R.A. 241
(1891), is rejected. The subsection applies to action or
non-action of a payor bank in connection with handling an item
(see Sections 4-215(a), 4-301, 4-302, 4-303) as well as action
or non-action of a collecting bank (Sections 4-201 through
4-216); to action or non-action of a bank which suspends
payment or is affected by another bank suspending payment
(Section 4-216); to action or non-action of a bank with respect
to an item under the rule of Part 4 of Article 4.
d. In a case in which subsection (b) makes this Article
applicable, Section 4-103(a) leaves open the possibility of an
agreement with respect to applicable law. This freedom of
agreement follows the general policy of Section 1-105.
Section 36-4-103. VARIATION BY AGREEMENT;
MEASURE OF DAMAGES; ACTION CONSTITUTING
ORDINARY CARE.
(a) The effect of the provisions of this chapter may be
varied by agreement, but the parties to the agreement cannot
disclaim a bank's responsibility for its lack of good faith or
failure to exercise ordinary care or limit the measure of
damages for the lack or failure. However, the parties may
determine by agreement the standards by which the bank's
responsibility is to be measured if those standards are not
manifestly unreasonable.
(b) Federal Reserve regulations and operating circulars,
clearing-house rules, and the like have the effect of agreements
under subsection (a), whether or not specifically assented to by
all parties interested in items handled.
(c) Action or nonaction approved by this chapter or
pursuant to Federal Reserve regulations or operating circulars
is the exercise of ordinary care and, in the absence of special
instructions, action or nonaction consistent with clearing-house
rules and the like or with a general banking usage not
disapproved by this chapter, is prima facie the exercise of
ordinary care.
(d) The specification or approval of certain procedures by
this chapter is not disapproval of other procedures that may be
reasonable under the circumstances.
(e) The measure of damages for failure to exercise
ordinary care in handling an item is the amount of the item
reduced by an amount that could not have been realized by the
exercise of ordinary care. If there also is bad faith it includes
any other damages the party suffered as a proximate
consequence.
OFFICIAL COMMENT
1. Section 1-102 states the general principles and rules for
variation of the effect of this Act by agreement and the
limitations to this power. Section 4-103 states the specific rules
for variation of Article 4 by agreement and also certain
standards of ordinary care. In view of the technical complexity
of the field of bank collections, the enormous number of items
handled by banks, the certainty that there will be variations
from the normal in each day's work in each bank, the certainty
of changing conditions and the possibility of developing
improved methods of collection to speed the process, it would
be unwise to freeze present methods of operation by mandatory
statutory rules. This section, therefore, permits within wide
limits variation of the effect of provisions of the Article by
agreement.
2. Subsection (a) confers blanket power to vary all
provisions of the Article by agreements of the ordinary kind.
The agreements may not disclaim a bank's responsibility for its
own lack of good faith or failure to exercise ordinary care and
may not limit the measure of damages for the lack or failure,
but this subsection like Section 1-102(3) approves the practice
of parties determining by agreement the standards by which the
responsibility is to be measured. In the absence of a showing
that the standards manifestly are unreasonable, the agreement
controls. Owners of items and other interested parties are not
affected by agreements under this subsection unless they are
parties to the agreement or are bound by adoption, ratification,
estoppel or the like.
As here used "agreement" has the meaning
given to it by Section 1-201(3). The agreement may be direct,
as between the owner and the depositary bank; or indirect, as in
the case in which the owner authorizes a particular type of
procedure and any bank in the collection chain acts pursuant to
such authorization. It may be with respect to a single item; or
to all items handled for a particular customer, e.g., a general
agreement between the depositary bank and the customer at the
time a deposit account is opened. Legends on deposit tickets,
collection letters and acknowledgments of items, coupled with
action by the affected party constituting acceptance, adoption,
ratification, estoppel or the like, are agreements if they meet the
tests of the definition of "agreement." See Section
1-201(3). First Nat. Bank of Denver v. Federal Reserve
Bank, 6 F.2d 339 (8th Cir. 1925) (deposit slip);
Jefferson County Bldg. Ass'n v. Southern Bank &
Trust Co., 225 Ala. 25, 142 So. 66 (1932) (signature card
and deposit slip); Semingson v. Stock Yards Nat.
Bank, 162 Minn. 424, 203 N.W. 412 (1925) (passbook);
Farmers State Bank v. Union Nat. Bank, 42 N.D. 449,
454, 173 N.W. 789, 790 (1919) (acknowledgment of receipt of
item).
3. Subsection (a) (subject to its limitations with respect to
good faith and ordinary care) goes far to meet the requirements
of flexibility. However, it does not by itself confer fully
effective flexibility. Since it is recognized that banks handle a
great number of items every business day and that the parties
interested in each item include the owner of the item, the
drawer (if it is a check), all nonbank indorsers, the payor bank
and from one to five or more collecting banks, it is obvious that
it is impossible, practically, to obtain direct agreements from all
of these parties on all items. In total, the interested parties
constitute virtually every adult person and business
organization in the United States. On the other hand they may
become bound to agreements on the principle that collecting
banks acting as agents have authority to make binding
agreements with respect to items being handled. This
conclusion was assumed but was not flatly decided in
Federal Reserve Bank of Richmond v. Malloy, 264
U.S. 160, at 167, 44 S.Ct. 296, at 298, 68 L.Ed. 617, 31 A.L.R.
1261 (1924).
To meet this problem subsection (b) provides that official or
quasi-official rules of collection, that is Federal Reserve
regulations and operating circulars, clearing-house rules, and
the like, have the effect of agreements under subsection (a),
whether or not specifically assented to by all parties interested
in items handled. Consequently, such official or quasi-official
rules may, standing by themselves but subject to the good faith
and ordinary care limitations, vary the effect of the provisions
of Article 4.
Federal Reserve regulations. Various sections of
the Federal Reserve Act (12 U.S.C. Section 221 et seq.)
authorize the Board of Governors of the Federal Reserve
System to direct the Federal Reserve banks to exercise bank
collection functions. For example, Section 16 (12 U.S.C.
Section 248(o)) authorizes the Board to require each Federal
Reserve bank to exercise the functions of a clearing-house for
its members and Section 13 (12 U.S.C. Section 342) authorizes
each Federal Reserve bank to receive deposits from nonmember
banks solely for the purposes of exchange or of collection.
Under this statutory authorization the Board has issued
Regulation J (Subpart A -- Collection of Checks and Other
Items). Under the supremacy clause of the Constitution, federal
regulations prevail over state statutes. Moreover, the Expedited
Funds Availability Act, 12 U.S.C. Section 4007(b) provides
that the Act and Regulation CC, 12 CFR 229, supersede
"any provision of the law of any State, including the
Uniform Commercial Code as in effect in such State, which is
inconsistent with this chapter or such regulations." See
Comment 1 to Section 4-102.
Federal Reserve operating circulars. The
regulations of the Federal Reserve Board authorize the Federal
Reserve banks to promulgate operating circulars covering
operating details. Regulation J, for example, provides that
"Each Reserve Bank shall receive and handle items in
accordance with this subpart, and shall issue operating circulars
governing the details of its handling of items and other matters
deemed appropriate by the Reserve Bank." This Article
recognizes that "operating circulars" issued
pursuant to the regulations and concerned with operating details
as appropriate may, within their proper sphere, vary the effect
of the Article.
Clearing-House Rules. Local clearing-houses have
long issued rules governing the details of clearing; hours of
clearing, media of remittance, time for return of mis-sent items
and the like. The case law has recognized these rules, within
their proper sphere, as binding on affected parties and as
appropriate sources for the courts to look to in filling out details
of bank collection law. Subsection (b) in recognizing
clearing-house rules as a means of preserving flexibility
continues the sensible approach indicated in the cases.
Included in the term "clearing-houses" are county
and regional clearing-houses as well as those within a single
city or town. There is, of course, no intention of authorizing a
local clearing-house or a group of clearing-houses to rewrite the
basic law generally. The term "clearing-house
rules" should be understood in the light of functions the
clearing-houses have exercised in the past.
And the like. This phrase is to be construed in the
light of the foregoing. "Federal Reserve regulations and
operating circulars" cover rules and regulations issued by
public or quasi-public agencies under statutory authority.
"Clearing-house rules" cover rules issued by a
group of banks which have associated themselves to perform
through a clearing-house some of their collection, payment and
clearing functions. Other agencies or associations of this kind
may be established in the future whose rules and regulations
could be appropriately looked on as constituting means of
avoiding absolute statutory rigidity. The phrase "and the
like" leaves open possibilities for future development.
An agreement between a number of banks or even all the banks
in an area simply because they are banks, would not of itself, by
virtue of the phrase "and the like," meet the
purposes and objectives of subsection (b).
4. Under this Article banks come under the general
obligations of the use of good faith and the exercise of ordinary
care. "Good faith" is defined in Section
3-103(a)(4). The term "ordinary care" is defined in
Section 3-103(a)(7). These definitions are made to apply to
Article 4 by Section 4-104(c). Section 4-202 states respects in
which collecting banks must use ordinary care. Subsection (c)
of Section 4-103 provides that action or nonaction approved by
the Article or pursuant to Federal Reserve regulations or
operating circulars constitutes the exercise of ordinary care.
Federal Reserve regulations and operating circulars constitute
an affirmative standard of ordinary care equally with the
provisions of Article 4 itself.
Subsection (c) further provides that, absent special
instructions, action or nonaction consistent with clearing-house
rules and the like or with a general banking usage not
disapproved by the Article, prima facie constitutes the exercise
of ordinary care. Clearing-house rules and the phrase
"and the like" have the significance set forth above
in these Comments. The term "general banking
usage" is not defined but should be taken to mean a
general usage common to banks in the area concerned. See
Section 1-205(2). In a case in which the adjective
"general" is used, the intention is to require a usage
broader than a mere practice between two or three banks but it
is not intended to require anything as broad as a country-wide
usage. A usage followed generally throughout a state, a
substantial portion of a state, a metropolitan area or the like
would certainly be sufficient. Consistently with the principle
of Section 1-205(3), action or nonaction consistent with
clearing-house rules or the like or with banking usages prima
facie constitutes the exercise of ordinary care. However, the
phrase "in the absence of special instructions"
affords owners of items an opportunity to prescribe other
standards and although there may be no direct supervision or
control of clearing-houses or banking usages by official
supervisory authorities, the confirmation of ordinary care by
compliance with these standards is prima facie only, thus
conferring on the courts the ultimate power to determine
ordinary care in any case in which it should appear desirable to
do so. The prima facie rule does, however, impose on the party
contesting the standards to establish that they are unreasonable,
arbitrary or unfair as used by the particular bank.
5. Subsection (d), in line with the flexible approach required
for the bank collection process is designed to make clear that a
novel procedure adopted by a bank is not to be considered
unreasonable merely because that procedure is not specifically
contemplated by this Article or by agreement, or because it has
not yet been generally accepted as a bank usage. Changing
conditions constantly call for new procedures and someone has
to use the new procedure first. If this procedure is found to be
reasonable under the circumstances, provided, of course, that it
is not inconsistent with any provision of the Article or other law
or agreement, the bank which has followed the new procedure
should not be found to have failed in the exercise of ordinary
care.
6. Subsection (e) sets forth a rule for determining the
measure of damages for failure to exercise ordinary care which,
under subsection (a), cannot be limited by agreement. In the
absence of bad faith the maximum recovery is the amount of
the item concerned. The term "bad faith" is not
defined; the connotation is the absence of good faith (Section
3-103). When it is established that some part or all of the item
could not have been collected even by the use of ordinary care
the recovery is reduced by the amount that would have been in
any event uncollectible. This limitation on recovery follows
the case law. Finally, if bad faith is established the rule opens
to allow the recovery of other damages, whose
"proximateness" is to be tested by the ordinary
rules applied in comparable cases. Of course, it continues to be
as necessary under subsection (e) as it has been under ordinary
common law principles that, before the damage rule of the
subsection becomes operative, liability of the bank and some
loss to the customer or owner must be established.
Section 36-4-104. DEFINITIONS AND INDEX OF
DEFINITIONS.
(a) As used in this chapter, unless the context otherwise
requires:
(1) `Account' means any deposit or credit account with
a bank, including a demand, time, savings, passbook, share
draft, or like account, other than an account evidenced by a
certificate of deposit;
(2) `Afternoon' means the period of a day between
noon and midnight;
(3) `Banking day' means the part of a day on which a
bank is open to the public for carrying on substantially all of its
banking functions;
(4) `Clearing-house' means an association of banks or
other payors regularly clearing items;
(5) `Customer' means a person having an account with
a bank or for whom a bank has agreed to collect items,
including a bank that maintains an account at another bank;
(6) `Documentary draft' means a draft to be presented
for acceptance or payment if specified documents, certificated
securities (Section 36-8-102) or instructions for uncertificated
securities (Section 36-8-308), or other certificates, statements,
or the like are to be received by the drawee or other payor
before acceptance or payment of the draft;
(7) `Draft' means a draft as defined in Section 36-3-104
or an item, other than an instrument, that is an order.
(8) `Drawee' means a person ordered in a draft to make
payment.
(9) `Item' means an instrument or a promise or order to
pay money handled by a bank for collection or payment. The
term does not include a payment order governed by Chapter 4A
or a credit or debit card slip;
(10) `Midnight deadline' with respect to a bank is
midnight on its next banking day following the banking day on
which it receives the relevant item or notice or from which the
time for taking action commences to run, whichever is later;
(11) `Settle' means to pay in cash, by clearing-house
settlement, in a charge or credit or by remittance, or otherwise
as agreed. A settlement may be either provisional or final.
(12) `Suspends payments' with respect to a bank means
that it has been closed by order of the supervisory authorities,
that a public officer has been appointed to take it over, or that
it ceases or refuses to make payments in the ordinary course of
business.
(b) Other definitions applying to this chapter and the
sections in which they appear are:
`Agreement for electronic
presentment' Section 36-4-110
`Bank' Section 36-4-105
`Collecting bank' Section 36-4-105
`Depositary bank' Section 36-4-105
`Intermediary bank' Section 36-4-105
`Payor bank' Section 36-4-105
`Presenting bank' Section 36-4-105
`Presentment notice' Section 36-4-110
(c) The following definitions in other chapters apply to
this chapter:
`Acceptance' Section 36-3-409
`Alteration' Section 36-3-407
`Cashier's check' Section 36-3-104
`Certificate of deposit' Section 36-3-104
`Certified check' Section 36-3-409
`Check' Section 36-3-104
`Good faith' Section 36-3-103
`Holder in due course' Section 36-3-302
`Instrument' Section 36-3-104
`Notice of dishonor' Section 36-3-503
`Order' Section 36-3-103
`Ordinary care' Section 36-3-103
`Person entitled to enforce' Section 36-3-301
`Presentment' Section 36-3-501
`Promise' Section 36-3-103
`Prove' Section 36-3-103
`Teller's check' Section 36-3-104
`Unauthorized signature' Section 36-3-403
(d) In addition, Chapter 1 contains general definitions and
principles of construction and interpretation applicable
throughout this chapter.
OFFICIAL COMMENT
1. Paragraph (a)(1): "Account" is defined to
include both asset accounts in which a customer has deposited
money and accounts from which a customer may draw on a line
of credit. The limiting factor is that the account must be in a
bank.
2. Paragraph (a)(3): "Banking day." Under
this definition that part of a business day when a bank is open
only for limited functions, e.g., to receive deposits and cash
checks, but with loan, bookkeeping and other departments
closed, is not part of a banking day.
3. Paragraph (a)(4): "Clearing-house."
Occasionally express companies, governmental agencies and
other nonbanks deal directly with a clearing-house; hence the
definition does not limit the term to an association of banks.
4. Paragraph (a)(5): "Customer." It is to be
noted that this term includes a bank carrying an account with
another bank as well as the more typical nonbank customer or
depositor.
5. Paragraph (a)(6): "Documentary draft"
applies even though the documents do not accompany the draft
but are to be received by the drawee or other payor before
acceptance or payment of the draft.
6. Paragraph (a)(7): "Draft" is defined in
Section 3-104 as a form of instrument. Since Article 4 applies
to items that may not fall within the definition of instrument,
the term is defined here to include an item that is a written
order to pay money, even though the item may not qualify as an
instrument. The term "order" is defined in Section
3-103.
7. Paragraph (a)(8): "Drawee" is defined in
Section 3-103 in terms of an Article 3 draft which is a form of
instrument. Here "drawee" is defined in terms of
an Article 4 draft which includes items that may not be
instruments.
8. Paragraph (a)(9): "Item" is defined
broadly to include an instrument, as defined in Section 3-104,
as well as promises or orders that may not be within the
definition of "instrument." The terms
"promise" and "order" are defined in
Section 3-103. A promise is a written undertaking to pay
money. An order is a written instruction to pay money. But
see Section 4-110(c). Since bonds and other investment
securities under Article 8 may be within the term
"instrument" or "promise," they are
items and when handled by banks for collection are subject to
this Article. See Comment 1 to Section 4-102. The functional
limitation on the meaning of this term is the willingness of the
banking system to handle the instrument, undertaking or
instruction for collection or payment.
9. Paragraph (a)(10): "Midnight deadline."
The use of this phrase is an example of the more mechanical
approach used in this Article. Midnight is selected as a
termination point or time limit to obtain greater uniformity and
definiteness than would be possible from other possible
terminating points, such as the close of the banking day or
business day.
10. Paragraph (a)(11): The term "settle" has
substantial importance throughout Article 4. In the American
Bankers Association Bank Collection Code, in deferred posting
statutes, in Federal Reserve regulations and operating circulars,
in clearing-house rules, in agreements between banks and
customers and in legends on deposit tickets and collection
letters, there is repeated reference to "conditional"
or "provisional" credits or payments. Tied in with
this concept of credits or payments being in some way
tentative, has been a related but somewhat different problem as
to when an item is "paid" or "finally
paid" either to determine the relative priority of the item
as against attachments, stop-payment orders and the like or in
insolvency situations. There has been extensive litigation in the
various states on these problems. To a substantial extent the
confusion, the litigation and even the resulting court decisions
fail to take into account that in the collection process some
debits or credits are provisional or tentative and others are final
and that very many debits or credits are provisional or tentative
for awhile but later become final. Similarly, some cases fail to
recognize that within a single bank, particularly a payor bank,
each item goes through a series of processes and that in a payor
bank most of these processes are preliminary to the basic act of
payment or "final payment."
The term "settle" is used as a convenient term to
characterize a broad variety of conditional, provisional,
tentative and also final payments of items. Such a
comprehensive term is needed because it is frequently difficult
or unnecessary to determine whether a particular action is
tentative or final or when a particular credit shifts from the
tentative class to the final class. Therefore, its use throughout
the Article indicates that in that particular context it is
unnecessary or unwise to determine whether the debit or the
credit or the payment is tentative or final. However, if qualified
by the adjective "provisional" its tentative nature is
intended, and if qualified by the adjective "final" its
permanent nature is intended.
Examples of the various types of settlement contemplated by
the term include payments in cash; the efficient but somewhat
complicated process of payment through the adjustment and
offsetting of balances through clearing-houses; debit or credit
entries in accounts between banks; the forwarding of various
types of remittance instruments, sometimes to cover a particular
item but more frequently to cover an entire group of items
received on a particular day.
11. Paragraph (a)(12): "Suspends payments."
This term is designed to afford an objective test to determine
when a bank is no longer operating as a part of the banking
system.
Section 36-4-105. `BANK'; `DEPOSITARY BANK';
`PAYOR BANK'; `INTERMEDIARY BANK';
`COLLECTING BANK'; `PRESENTING BANK'.
As used in this chapter:
(1) `Bank' means a person engaged in the business of
banking, including a savings bank, savings and loan
association, credit union, or trust company.
(2) `Depositary bank' means the first bank to take an item
even though it is also the payor bank, unless the item is
presented for immediate payment over the counter;
(3) `Payor bank' means a bank that is the drawee of a
draft;
(4) `Intermediary bank' means a bank to which an item is
transferred in course of collection except the depositary or
payor bank;
(5) `Collecting bank' means a bank handling an item for
collection except the payor bank;
(6) `Presenting bank' means a bank presenting an item
except a payor bank.
OFFICIAL COMMENT
1. The definitions in general exclude a bank to which an
item is issued, as this bank does not take by transfer except in
the particular case covered in which the item is issued to a
payee for collection, as in the case in which a corporation is
transferring balances from one account to another. Thus, the
definition of "depositary bank" does not include the
bank to which a check is made payable if a check is given in
payment of a mortgage. This bank has the status of a payee
under Article 3 on Negotiable Instruments and not that of a
collecting bank.
2. Paragraph (1): "Bank" is defined in Section
1-201(4) as meaning "any person engaged in the business
of banking." The definition in paragraph (1) makes clear
that "bank" includes savings banks, savings and
loan associations, credit unions and trust companies, in addition
to the commercial banks commonly denoted by use of the term
"bank."
3. Paragraph (2): A bank that takes an "on us"
item for collection, for application to a customer's loan, or first
handles the item for other reasons is a depositary bank even
though it is also the payor bank. However, if the holder
presents the item for immediate payment over the counter, the
payor bank is not a depositary bank.
4. Paragraph (3): The definition of "payor
bank" is clarified by use of the term
"drawee." That term is defined in Section 4-104 as
meaning "a person ordered in a draft to make
payment." An "order" is defined in Section
3-103 as meaning "a written instruction to pay money ... .
An authorization to pay is not an order unless the person
authorized to pay is also instructed to pay." The
definition of order is incorporated into Article 4 by Section
4-104(c). Thus a payor bank is one instructed to pay in the
item. A bank does not become a payor bank by being merely
authorized to pay or by being given an instruction to pay not
contained in the item.
5. Paragraph (4): The term "intermediary bank"
includes the last bank in the collection process if the drawee is
not a bank. Usually the last bank is also a presenting bank.
Section 36-4-106. PAYABLE THROUGH OR
PAYABLE AT BANK; COLLECTING BANK.
(a) If an item states that it is `payable through' a bank
identified in the item, (i) the item designates the bank as a
collecting bank and does not by itself authorize the bank to pay
the item, and (ii) the item may be presented for payment only
by or through the bank.
Alternative A
(b) If an item states that it is `payable at' a bank
identified in the item, the item is equivalent to a draft drawn on
the bank.
Alternative B
(b) If an item states that it is `payable at' a bank
identified in the item, (i) the item designates the bank as a
collecting bank and does not by itself authorize the bank to pay
the item, and (ii) the item may be presented for payment only
by or through the bank.
(c) If a draft names a nonbank drawee and it is unclear
whether a bank named in the draft is a co-drawee or a
collecting bank, the bank is a collecting bank.
OFFICIAL COMMENT
1. This section replaces former Sections 3-120 and 3-121.
Some items are made "payable through" a
particular bank. Subsection (a) states that such language makes
the bank a collecting bank and not a payor bank. An item
identifying a "payable through" bank can be
presented for payment to the drawee only by the "payable
through" bank. The item cannot be presented to the
drawee over the counter for immediate payment or by a
collecting bank other than the "payable through"
bank.
2. Subsection (b) retains the alternative approach of the
present law. Under Alternative A a note payable at a bank is
the equivalent of a draft drawn on the bank and the midnight
deadline provisions of Sections 4-301 and 4-302 apply. Under
Alternative B a "payable at" bank is in the same
position as a "payable through" bank under
subsection (a).
3. Subsection (c) rejects the view of some cases that a bank
named below the name of a drawee is itself a drawee. The
commercial understanding is that this bank is a collecting bank
and is not accountable under Section 4-302 for holding an item
beyond its deadline. The liability of the bank is governed by
Sections 4-202(a) and 4-103(e).
Section 36-4-107. SEPARATE OFFICE OF BANK.
A branch or separate office of a bank is a separate bank for
the purpose of computing the time within which and
determining the place at or to which action may be taken or
notice or orders must be given under this chapter and under
Chapter 3.
OFFICIAL COMMENT
1. A rule with respect to the status of a branch or separate
office of a bank as a part of any statute on bank collections is
highly desirable if not absolutely necessary. However,
practices in the operations of branches and separate offices vary
substantially in the different states and it has not been possible
to find any single rule that is logically correct, fair in all
situations and workable under all different types of practices.
The decision not to draft the section with greater specificity
leaves to the courts the resolution of the issues arising under
this section on the basis of the facts of each case.
2. In many states and for many purposes a branch or
separate office of the bank should be treated as a separate bank.
Many branches function as separate banks in the handling and
payment of items and require time for doing so similar to that
of a separate bank. This is particularly true if branch banking
is permitted throughout a state or in different towns and cities.
Similarly, if there is this separate functioning a particular
branch or separate office is the only proper place for various
types of action to be taken or orders or notices to be given.
Examples include the drawing of a check on a particular branch
by a customer whose account is carried at that branch; the
presentment of that same check at that branch; the issuance of
an order to the branch to stop payment on the check.
3. Section 1 of the American Bankers Association Bank
Collection Code provided simply: "A branch or office of
any such bank shall be deemed a bank." Although this
rule appears to be brief and simple, as applied to particular
sections of the ABA Code it produces illogical and, in some
cases, unreasonable results. For example, under Section 11 of
the ABA Code it seems anomalous for one branch of a bank to
have charged an item to the account of the drawer and another
branch to have the power to elect to treat the item as
dishonored. Similar logical problems would flow from
applying the same rule to Article 4. Warranties by one branch
to another branch under Sections 4-207 and 4-208 (each
considered a separate bank) do not make sense.
4. Assuming that it is not desirable to make each branch a
separate bank for all purposes, this section provides that a
branch or separate office is a separate bank for certain
purposes. In so doing the single legal entity of the bank as a
whole is preserved, thereby carrying with it the liability of the
institution as a whole on such obligations as it may be under.
On the other hand, in cases in which the Article provides a
number of time limits for different types of action by banks, if
a branch functions as a separate bank, it should have the time
limits available to a separate bank. Similarly if in its relations
to customers a branch functions as a separate bank, notices and
orders with respect to accounts of customers of the branch
should be given at the branch. For example, whether a branch
has notice sufficient to affect its status as a holder in due course
of an item taken by it should depend upon what notice that
branch has received with respect to the item. Similarly the
receipt of a stop-payment order at one branch should not be
notice to another branch so as to impair the right of the second
branch to be a holder in due course of the item, although in
circumstances in which ordinary care requires the
communication of a notice or order to the proper branch of a
bank, the notice or order would be effective at the proper
branch from the time it was or should have been received. See
Section 1-201(27).
5. The bracketed language ("maintaining its own
deposit ledger") in former Section 4-106 is deleted.
Today banks keep records on customer accounts by electronic
data storage. This has led most banks with branches to
centralize to some degree their record keeping. The place
where records are kept has little meaning if the information is
electronically stored and is instantly retrievable at all branches
of the bank. Hence, the inference to be drawn from the deletion
of the bracketed language is that where record keeping is done
is no longer an important factor in determining whether a
branch is a separate bank.
Section 36-4-108. TIME OF RECEIPT OF ITEMS.
(a) For the purpose of allowing time to process items,
prove balances, and make the necessary entries on its books to
determine its position for the day, a bank may fix an afternoon
hour of two o'clock p.m. or later as a cutoff hour for the
handling of money and items and the making of entries on its
books.
(b) An item or deposit of money received on any day after
a cutoff hour so fixed or after the close of the banking day may
be treated as being received at the opening of the next banking
day.
OFFICIAL COMMENT
1. Each of the huge volume of checks processed each day
must go through a series of accounting procedures that
consume time. Many banks have found it necessary to
establish a cutoff hour to allow time for these procedures to be
completed within the time limits imposed by Article 4.
Subsection (a) approves a cutoff hour of this type provided it is
not earlier than 2 P.M. Subsection (b) provides that if such a
cutoff hour is fixed, items received after the cutoff hour may be
treated as being received at the opening of the next banking
day. If the number of items received either through the mail or
over the counter tends to taper off radically as the afternoon
hours progress, a 2 P.M. cutoff hour does not involve a large
portion of the items received but at the same time permits a
bank using such a cutoff hour to leave its doors open later in the
afternoon without forcing into the evening the completion of its
settling and proving process.
2. The provision in subsection (b) that items or deposits
received after the close of the banking day may be treated as
received at the opening of the next banking day is important in
cases in which a bank closes at twelve or one o'clock, e.g., on
a Saturday, but continues to receive some items by mail or over
the counter if, for example, it opens Saturday evening for the
limited purpose of receiving deposits and cashing checks.
Section 36-4-109. DELAYS.
(a) Unless otherwise instructed, a collecting bank in a
good faith effort to secure payment of a specific item drawn on
a payor other than a bank, and with or without the approval of
any person involved, may waive, modify, or extend time limits
imposed or permitted by this chapter for a period not exceeding
two additional banking days without discharge of drawers or
indorsers or liability to its transferor or a prior party.
(b) Delay by a collecting bank or payor bank beyond time
limits prescribed or permitted by this chapter or by instructions
is excused if (i) the delay is caused by interruption of
communication or computer facilities, suspension of payments
by another bank, war, emergency conditions, failure of
equipment, or other circumstances beyond the control of the
bank, and (ii) the bank exercises such diligence as the
circumstances require.
OFFICIAL COMMENT
1. Sections 4-202(b), 4-214, 4-301, and 4-302 prescribe
various time limits for the handling of items. These are the
limits of time within which a bank, in fulfillment of its
obligation to exercise ordinary care, must handle items
entrusted to it for collection or payment. Under Section 4-103
they may be varied by agreement or by Federal Reserve
regulations or operating circular, clearing-house rules, or the
like. Subsection (a) permits a very limited extension of these
time limits. It authorizes a collecting bank to take additional
time in attempting to collect drafts drawn on nonbank payors
with or without the approval of any interested party. The right
of a collecting bank to waive time limits under subsection (a)
does not apply to checks. The two-day extension can only be
granted in a good faith effort to secure payment and only with
respect to specific items. It cannot be exercised if the customer
instructs otherwise. Thus limited the escape provision should
afford a limited degree of flexibility in special cases but should
not interfere with the overall requirement and objective of
speedy collections.
2. An extension granted under subsection (a) is without
discharge of drawers or indorsers. It therefore extends the
times for presentment or payment as specified in Article 3.
3. Subsection (b) is another escape clause from time limits.
This clause operates not only with respect to time limits
imposed by the Article itself but also time limits imposed by
special instructions, by agreement or by Federal regulations or
operating circulars, clearing-house rules or the like. The latter
time limits are "permitted" by the Code. For
example, a payor bank that fails to make timely return of a
dishonored item may be accountable for the amount of the item.
Subsection (b) excuses a bank from this liability when its
failure to meet its midnight deadline resulted from, for
example, a computer breakdown that was beyond the control of
the bank, so long as the bank exercised the degree of diligence
that the circumstances required. In Port City State Bank v.
American National Bank, 486 F.2d 196 (10th Cir. 1973),
the court held that a bank exercised sufficient diligence to be
excused under this subsection. If delay is sought to be excused
under this subsection, the bank has the burden of proof on the
issue of whether it exercised "such diligence as the
circumstances require." The subsection is consistent with
Regulation CC, Section 229.38(e).
Section 36-4-110. ELECTRONIC
PRESENTMENT.
(a) `Agreement for electronic presentment' means an
agreement, clearing-house rule, or Federal Reserve regulation
or operating circular providing that presentment of an item may
be made by transmission of an image of an item or information
describing the item (presentment notice) rather than delivery of
the item itself. The agreement may provide for procedures
governing retention, presentment, payment, dishonor, and other
matters concerning items subject to the agreement.
(b) Presentment of an item pursuant to an agreement
for presentment is made when the presentment notice is
received.
(c) If presentment is made by presentment notice, a
reference to `item' or `check' in this chapter means the
presentment notice unless the context otherwise indicates.
OFFICIAL COMMENT
1. "An agreement for electronic presentment"
refers to an agreement under which presentment may be made
to a payor bank by a presentment notice rather than by
presentment of the item. Under imaging technology now under
development, the presentment notice might be an image of the
item. The electronic presentment agreement may provide that
the item may be retained by a depositary bank, other collecting
bank, or even a customer of the depositary bank, or it may
provide that the item will follow the presentment notice. The
identifying characteristic of an electronic presentment
agreement is that presentment occurs when the presentment
notice is received. "An agreement for electronic
presentment" does not refer to the common case of
retention of items by payor banks because the item itself is
presented to the payor bank in these cases. Payor bank check
retention is a matter of agreement between payor banks and
their customers. Provisions on payor bank check retention are
found in Section 4-406(b).
2. The assumptions under which the electronic presentment
amendments are based are as follows: No bank will participate
in an electronic presentment program without an agreement.
These agreements may be either bilateral (Section 4-103(a)),
under which two banks that frequently do business with each
other may agree to depositary bank check retention, or
multilateral (Section 4-103(b)), in which large segments of the
banking industry may participate in such a program. In the
latter case, federal or other uniform regulatory standards would
likely supply the substance of the electronic presentment
agreement, the application of which could be triggered by the
use of some form of identifier on the item. Regulation CC,
Section 229.36(c) authorizes truncation agreements but forbids
them from extending return times or otherwise varying
requirements of the part of Regulation CC governing check
collection without the agreement of all parties interested in the
check. For instance, an extension of return time could damage
a depositary bank which must make funds available to its
customers under mandatory availability schedules. The
Expedited Funds Availability Act, 12 U.S.C. Section
4008(b)(2), directs the Federal Reserve Board to consider
requiring that banks provide for check truncation.
3. The parties affected by an agreement for electronic
presentment, with the exception of the customer, can be
expected to protect themselves. For example, the payor bank
can probably be expected to limit its risk of loss from drawer
forgery by limiting the dollar amount of eligible items (Federal
Reserve program), by reconcilement agreements (ABA
Safekeeping program), by insurance (credit union share draft
program), or by other means. Because agreements will exist,
only minimal amendments are needed to make clear that the
UCC does not prohibit electronic presentment.
Section 36-4-111. STATUTE OF LIMITATIONS.
An action to enforce an obligation, duty, or right arising
under this chapter must be commenced within three years after
the cause of action accrues.
OFFICIAL COMMENT
This section conforms to the period of limitations set by
Section 3-118(g) for actions for breach of warranty and to
enforce other obligations, duties or rights arising under Article
3. Bracketing "cause of action" recognizes that
some states use a different term, such as "claim for
relief."
Section 36-4-201. STATUS OF COLLECTING BANK
AS AGENT AND PROVISIONAL STATUS OF CREDITS;
APPLICABILITY OF CHAPTER; ITEM INDORSED `PAY
ANY BANK'.
(a) Unless a contrary intent clearly appears and before the
time that a settlement given by a collecting bank for an item is
or becomes final, the bank, with respect to the item, is an agent
or sub-agent of the owner of the item and any settlement given
for the item is provisional. This provision applies regardless of
the form of indorsement or lack of indorsement and even
though credit given for the item is subject to immediate with-
drawal as of right or is in fact withdrawn; but the continuance
of ownership of an item by its owner and any rights of the
owner to proceeds of the item are subject to rights of a
collecting bank, such as those resulting from outstanding
advances on the item and rights of recoupment or setoff. If an
item is handled by banks for purposes of presentment, payment,
collection, or return, the relevant provisions of this chapter
apply even though action of the parties clearly establishes that
a particular bank has purchased the item and is the owner of it.
(b) After an item has been indorsed with the words `pay
any bank' or the like, only a bank may acquire the rights of a
holder until the item has been:
(1) returned to the customer initiating collection; or
(2) specially indorsed by a bank to a person who is not
a bank.
OFFICIAL COMMENT
1. This section states certain basic rules of the bank
collection process. One basic rule, appearing in the last
sentence of subsection (a), is that, to the extent applicable, the
provisions of the Article govern without regard to whether a
bank handling an item owns the item or is an agent for
collection. Historically, much time has been spent and effort
expended in determining or attempting to determine whether a
bank was a purchaser of an item or merely an agent for
collection. See discussion of this subject and cases cited in 11
A.L.R. 1043, 16 A.L.R. 1084, 42 A.L.R. 492, 68 A.L.R. 725,
99 A.L.R. 486. See also Section 4 of the American Bankers
Association Bank Collection Code. The general approach of
Article 4, similar to that of other articles, is to provide, within
reasonable limits, rules or answers to major problems known to
exist in the bank collection process without regard to questions
of status and ownership but to keep general principles such as
status and ownership available to cover residual areas not
covered by specific rules. In line with this approach, the last
sentence of subsection (a) says in effect that Article 4 applies
to practically every item moving through banks for the purpose
of presentment, payment or collection.
2. Within this general rule of broad coverage, the first two
sentences of subsection (a) state a rule of agency status.
"Unless a contrary intent clearly appears" the status
of a collecting bank is that of an agent or sub-agent for the
owner of the item. Although as indicated in Comment 1 it is
much less important under Article 4 to determine status than
has been the case heretofore, status may have importance in
some residual areas not covered by specific rules. Further,
since status has been considered so important in the past, to
omit all reference to it might cause confusion. The status of
agency "applies regardless of the form of indorsement or
lack of indorsement and even though credit given for the item
is subject to immediate withdrawal as of right or is in fact
withdrawn." Thus questions heretofore litigated as to
whether ordinary indorsements "for deposit,"
"for collection" or in blank have the effect of
creating an agency status or a purchase, no longer have
significance in varying the prima facie rule of agency.
Similarly, the nature of the credit given for an item or whether
it is subject to immediate withdrawal as of right or is in fact
withdrawn, does not alter the agency status. See A.L.R.
references supra in Comment 1.
A contrary intent can change agency status but this must be
clear. An example of a clear contrary intent would be if
collateral papers established or the item bore a legend stating
that the item was sold absolutely to the depositary bank.
3. The prima facie agency status of collecting banks is
consistent with prevailing law and practice today. Section 2 of
the American Bankers Association Bank Collection Code so
provided. Legends on deposit tickets, collection letters and
acknowledgments of items and Federal Reserve operating
circulars consistently so provide. The status is consistent with
rights of charge-back (Section 4-214 and Section 11 of the
ABA Code) and risk of loss in the event of insolvency (Section
4-216 and Section 13 of the ABA Code). The right of
charge-back with respect to checks is limited by Regulation
CC, Section 226.36(d).
4. Affirmative statement of a prima facie agency status for
collecting banks requires certain limitations and qualifications.
Under current practices substantially all bank collections
sooner or later merge into bank credits, at least if collection is
effected. Usually, this takes place within a few days of the
initiation of collection. An intermediary bank receives final
collection and evidences the result of its collection by a
"credit" on its books to the depositary bank. The
depositary bank evidences the results of its collection by a
"credit" in the account of its customer. As used in
these instances the term "credit" clearly indicates
a debtor-creditor relationship. At some stage in the bank
collection process the agency status of a collecting bank
changes to that of debtor, a debtor of its customer. Usually at
about the same time it also becomes a creditor for the amount
of the item, a creditor of some intermediary, payor or other
bank. Thus the collection is completed, all agency aspects are
terminated and the identity of the item has become completely
merged in bank accounts, that of the customer with the
depositary bank and that of one bank with another.
Although Section 4-215(a) provides that an item is finally
paid when the payor bank takes or fails to take certain action
with respect to the item, the final payment of the item may or
may not result in the simultaneous final settlement for the item
in the case of all prior parties. If a series of provisional debits
and credits for the item have been entered in accounts between
banks, the final payment of the item by the payor bank may
result in the automatic firming up of all these provisional debits
and credits under Section 4-215(c), and the consequent receipt
of final settlement for the item by each collecting bank and the
customer of the depositary bank simultaneously with such
action of the payor bank. However, if the payor bank or some
intermediary bank accounts for the item with a remittance draft,
the next prior bank usually does not receive final settlement for
the item until the remittance draft finally clears. See Section
4-213(c). The first sentence of subsection (a) provides that the
agency status of a collecting bank (whether intermediary or
depositary) continues until the settlement given by it for the
item is or becomes final. In the case of the series of provisional
credits covered by Section 4-215(c), this could be
simultaneously with the final payment of the item by the payor
bank. In cases in which remittance drafts are used or in straight
noncash collections, this would not be until the times specified
in Sections 4-213(c) and 4-215(d). With respect to checks
Regulation CC Sections 229.31(c), 229.32(b), and 229.36(d)
provide that all settlements between banks are final in both the
forward collection and return of checks.
Under Section 4-213(a) settlements for items may be made
by any means agreed to by the parties. Since it is impossible to
contemplate all the kinds of settlements that will be utilized, no
attempt is made in Article 4 to provide when settlement is final
in all cases. The guiding principle is that settlements should be
final when the presenting person has received usable funds.
Section 4-213(c) and (d) and Section 4-215(c) provide when
final settlement occurs with respect to certain kinds of
settlement, but these provisions are not intended to be
exclusive.
A number of practical results flow from the rule continuing
the agency status of a collecting bank until its settlement for the
item is or becomes final, some of which are specifically set
forth in this Article. One is that risk of loss continues in the
owner of the item rather than the agent bank. See Section
4-214. Offsetting rights favorable to the owner are that pending
such final settlement, the owner has the preference rights of
Section 4-216 and the direct rights of Section 4-302 against the
payor bank. It also follows from this rule that the dollar
limitations of Federal Deposit Insurance are measured by the
claim of the owner of the item rather than that of the collecting
bank. With respect to checks, rights of the parties in insolvency
are determined by Regulation CC Section 229.39 and the
liability of a bank handling a check to a subsequent bank that
does not receive payment because of suspension of payments
by another bank is stated in Regulation CC Section 229.35(b).
5. In those cases in which some period of time elapses
between the final payment of the item by the payor bank and
the time that the settlement of the collecting bank is or becomes
final, e.g., if the payor bank or an intermediary bank accounts
for the item with a remittance draft or in straight noncash
collections, the continuance of the agency status of the
collecting bank necessarily carries with it the continuance of
the owner's status as principal. The second sentence of
subsection (a) provides that whatever rights the owner has to
proceeds of the item are subject to the rights of collecting banks
for outstanding advances on the item and other valid rights, if
any. The rule provides a sound rule to govern cases of
attempted attachment of proceeds of a noncash item in the
hands of the payor bank as property of the absent owner. If a
collecting bank has made an advance on an item which is still
outstanding, its right to obtain reimbursement for this advance
should be superior to the rights of the owner to the proceeds or
to the rights of a creditor of the owner. An intentional crediting
of proceeds of an item to the account of a prior bank known to
be insolvent, for the purpose of acquiring a right of setoff,
would not produce a valid setoff. See 8 Zollman, Banks and
Banking (1936) Sec. 5443.
6. This section and Article 4 as a whole represent an
intentional abandonment of the approach to bank collection
problems appearing in Section 4 of the American Bankers
Association Bank Collection Code. Because the tremendous
volume of items handled makes impossible the examination by
all banks of all indorsements on all items and thus in fact this
examination is not made, except perhaps by depositary banks,
it is unrealistic to base the rights and duties of all banks in the
collection chain on variations in the form of indorsements. It
is anomalous to provide throughout the ABA Code that the
prima facie status of collecting banks is that of agent or
sub-agent but in Section 4 to provide that subsequent holders
(sub-agents) shall have the right to rely on the presumption that
the bank of deposit (the primary agent) is the owner of the item.
It is unrealistic, particularly in this background, to base rights
and duties on status of agent or owner. Thus Section 4-201
makes the pertinent provisions of Article 4 applicable to
substantially all items handled by banks for presentment,
payment or collection, recognizes the prima facie status of most
banks as agents, and then seeks to state appropriate limits and
some attributes to the general rules so expressed.
7. Subsection (b) protects the ownership rights with respect
to an item indorsed "pay any bank or banker" or in
similar terms of a customer initiating collection or of any bank
acquiring a security interest under Section 4-210, in the event
the item is subsequently acquired under improper
circumstances by a person who is not a bank and transferred by
that person to another person, whether or not a bank. Upon
return to the customer initiating collection of an item so
indorsed, the indorsement may be cancelled (Section 3-207).
A bank holding an item so indorsed may transfer the item out
of banking channels by special indorsement; however, under
Section 4-103(e), the bank would be liable to the owner of the
item for any loss resulting therefrom if the transfer had been
made in bad faith or with lack of ordinary care. If briefer and
more simple forms of bank indorsements are developed under
Section 4-206 (e.g., the use of bank transit numbers in lieu of
present lengthy forms of bank indorsements), a depositary bank
having the transit number "X100" could make
subsection (b) operative by indorsements such as "Pay
any bank--X100." Regulation CC Section 229.35(c)
states the effect of an indorsement on a check by a bank.
Section 36-4-202. RESPONSIBILITY FOR
COLLECTION OR RETURN; WHEN ACTION TIMELY.
(a) A collecting bank must exercise ordinary care in:
(1) presenting an item or sending it for presentment;
(2) sending notice of dishonor or nonpayment or
returning an item other than a documentary draft to the bank's
transferor after learning that the item has not been paid or
accepted, as the case may be;
(3) settling for an item when the bank receives final
settlement; and
(4) notifying its transferor of any loss or delay in
transit within a reasonable time after discovery thereof.
(b) A collecting bank exercises ordinary care under
subsection (a) by taking proper action before its midnight
deadline following receipt of an item, notice, or settlement.
Taking proper action within a reasonably longer time may
constitute the exercise of ordinary care, but the bank has the
burden of establishing timeliness.
(c) Subject to subsection (a)(1), a bank is not liable for the
insolvency, neglect, misconduct, mistake, or default of another
bank or person or for loss or destruction of an item in the
possession of others or in transit.
OFFICIAL COMMENT
1. Subsection (a) states the basic responsibilities of a
collecting bank. Of course, under Section 1-203 a collecting
bank is subject to the standard requirement of good faith. By
subsection (a) it must also use ordinary care in the exercise of
its basic collection tasks. By Section 4-103(a) neither
requirement may be disclaimed.
2. If the bank makes presentment itself, subsection (a)(1)
requires ordinary care with respect both to the time and manner
of presentment. (Sections 3-501 and 4-212.) If it forwards the
item to be presented the subsection requires ordinary care with
respect to routing (Section 4-204), and also in the selection of
intermediary banks or other agents.
3. Subsection (a) describes types of basic action with
respect to which a collecting bank must use ordinary care.
Subsection (b) deals with the time for taking action. It first
prescribes the general standard for timely action, namely, for
items received on Monday, proper action (such as forwarding
or presenting) on Monday or Tuesday is timely. Although
under current "production line" operations banks
customarily move items along on regular schedules
substantially briefer than two days, the subsection states an
outside time within which a bank may know it has taken timely
action. To provide flexibility from this standard norm, the
subsection further states that action within a reasonably longer
time may be timely but the bank has the burden of proof. In the
case of time items, action after the midnight deadline, but
sufficiently in advance of maturity for proper presentation, is a
clear example of a "reasonably longer time" that is
timely. The standard of requiring action not later than Tuesday
in the case of Monday items is also subject to possibilities of
variation under the general provisions of Section 4-103, or
under the special provisions regarding time of receipt of items
(Section 4-108), and regarding delays (Section 4-109). This
subsection (b) deals only with collecting banks. The time limits
applicable to payor banks appear in Sections 4-301 and 4-302.
4. At common law the so-called New York collection rule
subjected the initial collecting bank to liability for the actions
of subsequent banks in the collection chain; the so-called
Massachusetts rule was that each bank, subject to the duty of
selecting proper intermediaries, was liable only for its own
negligence. Subsection (c) adopts the Massachusetts rule. But
since this is stated to be subject to subsection (a)(1) a collecting
bank remains responsible for using ordinary care in selecting
properly qualified intermediary banks and agents and in giving
proper instructions to them. Regulation CC Section 229.36(d)
states the liability of a bank during the forward collection of
checks.
Section 36-4-203. EFFECT OF INSTRUCTIONS.
Subject to Chapter 3 concerning conversion of instruments
(Section 36-3-420) and restrictive indorsements (Section
36-3-206), only a collecting bank's transferor can give
instructions that affect the bank or constitute notice to it, and a
collecting bank is not liable to prior parties for any action taken
pursuant to the instructions or in accordance with any
agreement with its transferor.
OFFICIAL COMMENT
This section adopts a "chain of command"
theory which renders it unnecessary for an intermediary or
collecting bank to determine whether its transferor is
"authorized" to give the instructions. Equally the
bank is not put on notice of any "revocation of
authority" or "lack of authority" by notice
received from any other person. The desirability of speed in
the collection process and the fact that, by reason of advances
made, the transferor may have the paramount interest in the
item requires the rule.
The section is made subject to the provisions of Article 3
concerning conversion of instruments (Section 3-420) and
restrictive indorsements (Section 3-206). Of course
instructions from or an agreement with its transferor does not
relieve a collecting bank of its general obligation to exercise
good faith and ordinary care. See Section 4-103(a). If in any
particular case a bank has exercised good faith and ordinary
care and is relieved of responsibility by reason of instructions
of or an agreement with its transferor, the owner of the item
may still have a remedy for loss against the transferor (another
bank) if such transferor has given wrongful instructions.
The rules of the section are applied only to collecting banks.
Payor banks always have the problem of making proper
payment of an item; whether such payment is proper should be
based upon all of the rules of Articles 3 and 4 and all of the
facts of any particular case, and should not be dependent
exclusively upon instructions from or an agreement with a
person presenting the item.
Section 36-4-204. METHODS OF SENDING AND
PRESENTING; SENDING DIRECTLY TO PAYOR BANK.
(a) A collecting bank shall send items by a reasonably
prompt method, taking into consideration relevant instructions,
the nature of the item, the number of those items on hand, the
cost of collection involved, and the method generally used by
it or others to present those items.
(b) A collecting bank may send:
(1) an item directly to the payor bank;
(2) an item to a nonbank payor if authorized by its
transferor; and
(3) an item other than documentary drafts to a
nonbank payor, if authorized by Federal Reserve regulation or
operating circular, clearing-house rule, or the like.
(c) Presentment may be made by a presenting bank at a
place where the payor bank or other payor has requested that
presentment be made.
OFFICIAL COMMENT
1. Subsection (a) prescribes the general standards applicable
to proper sending or forwarding of items. Because of the many
types of methods available and the desirability of preserving
flexibility any attempt to prescribe limited or precise methods
is avoided.
2. Subsection (b)(1) codifies the practice of direct mail,
express, messenger or like presentment to payor banks. The
practice is now country-wide and is justified by the need for
speed, the general responsibility of banks, Federal Deposit
Insurance protection and other reasons.
3. Full approval of the practice of direct sending is limited
to cases in which a bank is a payor. Since nonbank drawees or
payors may be of unknown responsibility, substantial risks may
be attached to placing in their hands the instruments calling for
payments from them. This is obviously so in the case of
documentary drafts. However, in some cities practices have
long existed under clearing-house procedures to forward certain
types of items to certain nonbank payors. Examples include
insurance loss drafts drawn by field agents on home offices.
For the purpose of leaving the door open to legitimate practices
of this kind, subsection (b)(3) affirmatively approves direct
sending of any item other than documentary drafts to any
nonbank payor, if authorized by Federal Reserve regulation or
operating circular, clearing-house rule or the like.
On the other hand subsection (b)(2) approves sending any
item directly to a nonbank payor if authorized by a collecting
bank's transferor. This permits special instructions or
agreements out of the norm and is consistent with the
"chain of command" theory of Section 4-203.
However, if a transferor other than the owner of the item, e.g.,
a prior collecting bank, authorizes a direct sending to a nonbank
payor, such transferor assumes responsibility for the propriety
or impropriety of such authorization.
4. Section 3-501(b) provides where presentment may be
made. This provision is expressly subject to Article 4. Section
4-204(c) specifically approves presentment by a presenting
bank at any place requested by the payor bank or other payor.
The time when a check is received by a payor bank for
presentment is governed by Regulation CC Section 229.36(b).
Section 36-4-205. DEPOSITARY BANK HOLDER
OF UNINDORSED ITEM.
If a customer delivers an item to a depositary bank for
collection:
(1) the depositary bank becomes a holder of the item at the
time it receives the item for collection if the customer at the
time of delivery was a holder of the item, whether or not the
customer indorses the item, and, if the bank satisfies the other
requirements of Section 36-3-302, it is a holder in due course;
and
(2) the depositary bank warrants to collecting banks, the
payor bank or other payor, and the drawer that the amount of
the item was paid to the customer or deposited to the customer's
account.
OFFICIAL COMMENT
Section 3-201(b) provides that negotiation of an instrument
payable to order requires indorsement by the holder. The rule
of former Section 4-205(1) was that the depositary bank may
supply a missing indorsement of its customer unless the item
contains the words "payee's indorsement required"
or the like. The cases have differed on the status of the
depositary bank as a holder if it fails to supply its customer's
indorsement. Marine Midland Bank, N.A. v. Price, Miller,
Evans & Flowers, 446 N.Y.S.2d 797 (N.Y.Apo.
Div.4th Dept. 1981), rev'd, 455 N.Y.S.2d 565 (N.Y.
1982). It is common practice for depositary banks to receive
unindorsed checks under so-called "lock-box"
agreements from customers who receive a high volume of
checks. No function would be served by requiring a depositary
bank to run these items through a machine that would supply
the customer's indorsement except to afford the drawer and the
subsequent banks evidence that the proceeds of the item
reached the customer's account. Paragraph (1) provides that the
depositary bank becomes a holder when it takes the item for
deposit if the depositor is a holder. Whether it supplies the
customer's indorsement is immaterial. Paragraph (2) satisfies
the need for a receipt of funds by the depositary bank by
imposing on that bank a warranty that it paid the customer or
deposited the item to the customer's account. This warranty
runs not only to collecting banks and to the payor bank or
nonbank drawee but also to the drawer, affording protection to
these parties that the depositary bank received the item and
applied it to the benefit of the holder.
Section 36-4-206. TRANSFER BETWEEN BANKS.
Any agreed method that identifies the transferor bank is
sufficient for the item's further transfer to another bank.
OFFICIAL COMMENT
This section is designed to permit the simplest possible form
of transfer from one bank to another, once an item gets in the
bank collection chain, provided only identity of the transferor
bank is preserved. This is important for tracing purposes and
if recourse is necessary. However, since the responsibilities of
the various banks appear in the Article it becomes unnecessary
to have liability or responsibility depend on more formal
indorsements. Simplicity in the form of transfer is conducive
to speed. If the transfer is between banks, this section takes the
place of the more formal requirements of Section 3-201.
Section 36-4-207. TRANSFER WARRANTIES.
(a) A customer or collecting bank that transfers an item
and receives a settlement or other consideration warrants to the
transferee and to any subsequent collecting bank that:
(1) the warrantor is a person entitled to enforce the
item;
(2) all signatures on the item are authentic and
authorized;
(3) the item has not been altered;
(4) the item is not subject to a defense or claim in
recoupment (Section 36-3-305(a)) of any party that can be
asserted against the warrantor; and
(5) the warrantor has no knowledge of any
insolvency proceeding commenced with respect to the maker
or acceptor or, in the case of an unaccepted draft, the
drawer.
(b) If an item is dishonored, a customer or collecting
bank transferring the item and receiving settlement or other
consideration is obliged to pay the amount due on the item (i)
according to the terms of the item at the time it was transferred,
or (ii) if the transfer was of an incomplete item, according to its
terms when completed as stated in Sections 36-3-115 and
36-3-407. The obligation of a transferor is owed to the
transferee and to any subsequent collecting bank that takes the
item in good faith. A transferor cannot disclaim its obligation
under this subsection by an indorsement stating that it is made
`without recourse' or otherwise disclaiming liability.
(c) A person to whom the warranties under subsection
(a) are made and who took the item in good faith may recover
from the warrantor as damages for breach of warranty an
amount equal to the loss suffered as a result of the breach, but
not more than the amount of the item plus expenses and loss of
interest incurred as a result of the breach.
(d) The warranties stated in subsection (a) cannot be
disclaimed with respect to checks. Unless notice of a claim for
breach of warranty is given to the warrantor within thirty days
after the claimant has reason to know of the breach and the
identity of the warrantor, the warrantor is discharged to the
extent of any loss caused by the delay in giving notice of the
claim.
(e) A cause of action for breach of warranty under this
section accrues when the claimant has reason to know of the
breach.
OFFICIAL COMMENT
Except for subsection (b), this section conforms to Section
3-416 and extends its coverage to items. The substance of this
section is discussed in the Comment to Section 3-416.
Subsection (b) provides that customers or collecting banks that
transfer items, whether by indorsement or not, undertake to pay
the item if the item is dishonored. This obligation cannot be
disclaimed by a "without recourse" indorsement or
otherwise. With respect to checks, Regulation CC Section
229.34 states the warranties made by paying and returning
banks.
Section 36-4-208. PRESENTMENT
WARRANTIES.
(a) If an unaccepted draft is presented to the drawee for
payment or acceptance and the drawee pays or accepts the
draft, (i) the person obtaining payment or acceptance, at the
time of presentment, and (ii) a previous transferor of the draft,
at the time of transfer, warrant to the drawee that pays or
accepts the draft in good faith that:
(1) the warrantor is, or was, at the time the
warrantor transferred the draft, a person entitled to enforce the
draft or authorized to obtain payment or acceptance of the draft
on behalf of a person entitled to enforce the draft;
(2) the draft has not been altered; and
(3) the warrantor has no knowledge that the
signature of the purported drawer of the draft is
unauthorized.
(b) A drawee making payment may recover from a
warrantor damages for breach of warranty equal to the amount
paid by the drawee less the amount the drawee received or is
entitled to receive from the drawer because of the payment. In
addition, the drawee is entitled to compensation for expenses
and loss of interest resulting from the breach. The right of the
drawee to recover damages under this subsection is not affected
by any failure of the drawee to exercise ordinary care in making
payment. If the drawee accepts the draft (i) breach of warranty
is a defense to the obligation of the acceptor, and (ii) if the
acceptor makes payment with respect to the draft, the acceptor
is entitled to recover from a warrantor for breach of warranty
the amounts stated in this subsection.
(c) If a drawee asserts a claim for breach of warranty
under subsection (a) based on an unauthorized indorsement of
the draft or an alteration of the draft, the warrantor may defend
by proving that the indorsement is effective under Section
36-3-404 or 36-3-405 or the drawer is precluded under Section
36-3-406 or 36-4-406 from asserting against the drawee the
unauthorized indorsement or alteration.
(d) If (i) a dishonored draft is presented for payment to
the drawer or an indorser or (ii) any other item is presented for
payment to a party obliged to pay the item, and the item is paid,
the person obtaining payment and a prior transferor of the item
warrant to the person making payment in good faith that the
warrantor is, or was, at the time the warrantor transferred the
item, a person entitled to enforce the item or authorized to
obtain payment on behalf of a person entitled to enforce the
item. The person making payment may recover from any
warrantor for breach of warranty an amount equal to the
amount paid plus expenses and loss of interest resulting from
the breach.
(e) The warranties stated in subsections (a) and (d)
cannot be disclaimed with respect to checks. Unless notice of
a claim for breach of warranty is given to the warrantor within
thirty days after the claimant has reason to know of the breach
and the identity of the warrantor, the warrantor is discharged to
the extent of any loss caused by the delay in giving notice of
the claim.
(f) A cause of action for breach of warranty under this
section accrues when the claimant has reason to know of the
breach.
OFFICIAL COMMENT
This section conforms to Section 3-417 and extends its
coverage to items. The substance of this section is discussed in
the Comment to Section 3-417. "Draft" is defined
in Section 4-104 as including an item that is an order to pay so
as to make clear that the term "draft" in Article 4
may include items that are not instruments within Section
3-104.
Section 36-4-209. ENCODING AND RETENTION
WARRANTIES.
(a) A person who encodes information on or with
respect to an item after issue warrants to any subsequent
collecting bank and to the payor bank or other payor that the
information is correctly encoded. If the customer of a
depositary bank encodes, that bank also makes the
warranty.
(b) A person who undertakes to retain an item pursuant
to an agreement for electronic presentment warrants to any
subsequent collecting bank and to the payor bank or other
payor that retention and presentment of the item comply with
the agreement. If a customer of a depositary bank undertakes
to retain an item, that bank also makes this warranty.
(c) A person to whom warranties are made under this
section and who took the item in good faith may recover from
the warrantor as damages for breach of warranty an amount
equal to the loss suffered as a result of the breach, plus
expenses and loss of interest incurred as a result of the
breach.
OFFICIAL COMMENT
1. Encoding and retention warranties are included in Article
4 because they are unique to the bank collection process. These
warranties are breached only by the person doing the encoding
or retaining the item and not by subsequent banks handling the
item. Encoding and check retention may be done by customers
who are payees of a large volume of checks; hence, this section
imposes warranties on customers as well as banks. If a
customer encodes or retains, the depositary bank is also liable
for any breach of this warranty.
2. A misencoding of the amount on the MICR line is not an
alteration under Section 3-407(a) which defines alteration as
changing the contract of the parties. If a drawer wrote a check
for $2,500 and the depositary bank encoded $25,000 on the
MICR line, the payor bank could debit the drawer's account for
only $2,500. This subsection would allow the payor bank to
hold the depositary bank liable for the amount paid out over
$2,500 without first pursuing the person who received payment.
Intervening collecting banks would not be liable to the payor
bank for the depositary bank's error. If a drawer wrote a check
for $25,000 and the depositary bank encoded $2,500, the payor
bank becomes liable for the full amount of the check. The
payor bank's rights against the depositary bank depend on
whether the payor bank has suffered a loss. Since the payor
bank can debit the drawer's account for $25,000, the payor bank
has a loss only to the extent that the drawer's account is less
than the full amount of the check. There is no requirement that
the payor bank pursue collection against the drawer beyond the
amount in the drawer's account as a condition to the payor
bank's action against the depositary bank for breach of
warranty. See Georgia Railroad Bank & Trust Co. v.
First National Bank & Trust, 229 S.E.2d 482 (Ga.
App. 1976), aff'd, 235 S.E.2d 1 (Ga. 1977), and First
National Bank of Boston v. Fidelity Bank, National
Association, 724 F.Supp. 1168 (E.D. Pa. 1989).
3. A person retaining items under an electronic presentment
agreement (Section 4-110) warrants that it has complied with
the terms of the agreement regarding its possession of the item
and its sending a proper presentment notice. If the keeper is a
customer, its depositary bank also makes this warranty.
Section 36-4-210. SECURITY INTEREST OF
COLLECTING BANK IN ITEMS, ACCOMPANYING
DOCUMENTS AND PROCEEDS.
(a) A collecting bank has a security interest in an item and
any accompanying documents or the proceeds of either:
(1) in case of an item deposited in an account, to the
extent to which credit given for the item has been withdrawn or
applied;
(2) in case of an item for which it has given credit
available for withdrawal as of right, to the extent of the credit
given, whether or not the credit is drawn upon or there is a right
of charge-back; or
(3) if it makes an advance on or against the item.
(b) If credit given for several items received at one time
or pursuant to a single agreement is withdrawn or applied in
part, the security interest remains upon all the items, any
accompanying documents or the proceeds of either. For the
purpose of this section, credits first given are first withdrawn.
(c) Receipt by a collecting bank of a final settlement for
an item is a realization on its security interest in the item,
accompanying documents, and proceeds. So long as the bank
does not receive final settlement for the item or give up
possession of the item or accompanying documents for
purposes other than collection, the security interest continues
to that extent and is subject to Chapter 9, but:
(1) no security agreement is necessary to make the
security interest enforceable (Section 36-9-203(1)(a));
(2) no filing is required to perfect the security interest;
and
(3) the security interest has priority over conflicting
perfected security interests in the item, accompanying
documents, or proceeds.
OFFICIAL COMMENT
1. Subsection (a) states a rational rule for the interest of a
bank in an item. The customer of the depositary bank is
normally the owner of the item and the several collecting banks
are agents of the customer (Section 4-201). A collecting agent
may properly make advances on the security of paper held for
collection, and acquires at common law a possessory lien for
these advances. Subsection (a) applies an analogous principle
to a bank in the collection chain which extends credit on items
in the course of collection. The bank has a security interest to
the extent stated in this section. To the extent of its security
interest it is a holder for value (Sections 3-303, 4-211) and a
holder in due course if it satisfies the other requirements for
that status (Section 3-302). Subsection (a) does not derogate
from the banker's general common law lien or right of setoff
against indebtedness owing in deposit accounts. See Section
1-103. Rather subsection (a) specifically implements and
extends the principle as a part of the bank collection process.
2. Subsection (b) spreads the security interest of the bank
over all items in a single deposit or received under a single
agreement and a single giving of credit. It also adopts the
"first-in, first-out" rule.
3. Collection statistics establish that the vast majority of
items handled for collection are in fact collected. The first
sentence of subsection (c) reflects the fact that in the normal
case the bank's security interest is self-liquidating. The
remainder of the subsection correlates the security interest with
the provisions of Article 9, particularly for use in the cases of
noncollection in which the security interest may be important.
Section 36-4-211. WHEN BANK GIVES VALUE
FOR PURPOSES OF HOLDER IN DUE COURSE.
For purposes of determining its status as a holder in due
course, a bank has given value to the extent it has a security
interest in an item, if the bank otherwise complies with the
requirements of Section 36-3-302 on what constitutes a holder
in due course.
OFFICIAL COMMENT
The section completes the thought of the previous section
and makes clear that a security interest in an item is
"value" for the purpose of determining the holder's
status as a holder in due course. The provision is in accord
with the prior law (N.I.L. Section 27) and with Article 3
(Section 3-303). The section does not prescribe a security
interest under Section 4-210 as a test of "value"
generally because the meaning of "value" under
other Articles is adequately defined in Section 1-201.
Section 36-4-212. PRESENTMENT BY NOTICE OF
ITEM NOT PAYABLE BY, THROUGH, OR AT BANK;
LIABILITY OF DRAWER OR INDORSER.
(a) Unless otherwise instructed, a collecting bank may
present an item not payable by, through, or at a bank by
sending to the party to accept or pay a written notice that the
bank holds the item for acceptance or payment. The notice
must be sent in time to be received on or before the day when
presentment is due and the bank must meet any requirement of
the party to accept or pay under Section 36-3-501 by the close
of the bank's next banking day after it knows of the
requirement.
(b) If presentment is made by notice and payment,
acceptance, or request for compliance with a requirement under
Section 36-3-501 is not received by the close of business on the
day after maturity or, in the case of demand items, by the close
of business on the third banking day after notice was sent, the
presenting bank may treat the item as dishonored and charge
any drawer or indorser by sending it notice of the facts.
OFFICIAL COMMENT
1. This section codifies a practice extensively followed in
presentation of trade acceptances and documentary and other
drafts drawn on nonbank payors. It imposes a duty on the
payor to respond to the notice of the item if the item is not to be
considered dishonored. Notice of such a dishonor charges
drawers and indorsers. Presentment under this section is good
presentment under Article 3. See Section 3-501.
2. A drawee not receiving notice is not, of course, liable to
the drawer for wrongful dishonor.
3. A bank so presenting an instrument must be sufficiently
close to the drawee to be able to exhibit the instrument on the
day it is requested to do so or the next business day at the latest.
Section 36-4-213. MEDIUM AND TIME OF
SETTLEMENT BY BANK.
(a) With respect to settlement by a bank, the medium and
time of settlement may be prescribed by Federal Reserve
regulations or circulars, clearing-house rules, and the like, or
agreement. In the absence of such prescription:
(1) the medium of settlement is cash or credit to an
account in a Federal Reserve bank of or specified by the person
to receive settlement; and
(2) the time of settlement, is with respect to tender of
settlement by:
(i) cash, a cashier's check, or teller's check, when
the cash or check is sent or delivered;
(ii) credit in an account in a Federal Reserve Bank,
when the credit is made;
(iii) a credit or debit to an account in a bank, when
the credit or debit is made or, in the case of tender of settlement
by authority to charge an account, when the authority is sent or
delivered; or
(iv) a funds transfer, when payment is made pursuant
to Section 36-4-406(a) to the person receiving settlement.
(b) If the tender of settlement is not by a medium
authorized by subsection (a) or the time of settlement is not
fixed by subsection (a), no settlement occurs until the tender of
settlement is accepted by the person receiving settlement.
(c) If settlement for an item is made by cashier's check or
teller's check and the person receiving settlement, before its
midnight deadline:
(1) presents or forwards the check for collection,
settlement is final when the check is finally paid; or
(2) fails to present or forward the check for collection,
settlement is final at the midnight deadline of the person
receiving settlement.
(d) If settlement for an item is made by giving authority
to charge the account of the bank giving settlement in the bank
receiving settlement, settlement is final when the charge is
made by the bank receiving settlement if there are funds
available in the account for the amount of the item.
OFFICIAL COMMENT
1. Subsection (a) sets forth the medium of settlement that
the person receiving settlement must accept. In nearly all cases
the medium of settlement will be determined by agreement or
by Federal Reserve regulations and circulars, clearing-house
rules, and the like. In the absence of regulations, rules or
agreement, the person receiving settlement may demand cash
or credit in a Federal Reserve bank. If the person receiving
settlement does not have an account in a Federal Reserve bank,
it may specify the account of another bank in a Federal Reserve
bank. In the unusual case in which there is no agreement on the
medium of settlement and the bank making settlement tenders
settlement other than cash or Federal Reserve bank credit, no
settlement has occurred under subsection (b) unless the person
receiving settlement accepts the settlement tendered. For
example, if a payor bank, without agreement, tenders a teller's
check, the bank receiving the settlement may reject the check
and return it to the payor bank or it may accept the check as
settlement.
2. In several provisions of Article 4 the time that a
settlement occurs is relevant. Subsection (a) sets out a general
rule that the time of settlement, like the means of settlement,
may be prescribed by agreement. In the absence of agreement,
the time of settlement for tender of the common agreed media
of settlement is that set out in subsection (a)(2). The time of
settlement by cash, cashier's or teller's check or authority to
charge an account is the time the cash, check or authority is
sent, unless presentment is over the counter in which case
settlement occurs upon delivery to the presenter. If there is no
agreement on the time of settlement and the tender of
settlement is not made by one of the media set out in subsection
(a), under subsection (b) the time of settlement is the time the
settlement is accepted by the person receiving settlement.
3. Subsections (c) and (d) are special provisions for
settlement by remittance drafts and authority to charge an
account in the bank receiving settlement. The relationship
between final settlement and final payment under Section 4-215
is addressed in subsection (b) of Section 4-215. With respect
to settlement by cashier's checks or teller's checks, other than
in response to over-the-counter presentment, the bank receiving
settlement can keep the risk that the check will not be paid on
the bank tendering the check in settlement by acting to initiate
collection of the check within the midnight deadline of the bank
receiving settlement. If the bank fails to initiate settlement
before its midnight deadline, final settlement occurs at the
midnight deadline, and the bank receiving settlement assumes
the risk that the check will not be paid. If there is no agreement
that permits the bank tendering settlement to tender a cashier's
or teller's check, subsection (b) allows the bank receiving the
check to reject it, and, if it does, no settlement occurs.
However, if the bank accepts the check, settlement occurs and
the time of final settlement is governed by subsection (c).
With respect to settlement by tender of authority to charge
the account of the bank making settlement in the bank receiving
settlement, subsection (d) provides that final settlement does
not take place until the account charged has available funds to
cover the amount of the item. If there is no agreement that
permits the bank tendering settlement to tender an authority to
charge an account as settlement, subsection (b) allows the bank
receiving the tender to reject it. However, if the bank accepts
the authority, settlement occurs and the time of final settlement
is governed by subsection (d).
Section 36-4-214. RIGHT OF CHARGE-BACK OR
REFUND; LIABILITY OF COLLECTING BANK; RETURN
OF ITEM.
(a) If a collecting bank has made provisional settlement
with its customer for an item and fails by reason of dishonor,
suspension of payments by a bank, or otherwise to receive
settlement for the item which is or becomes final, the bank may
revoke the settlement given by it, charge back the amount of
any credit given for the item to its customer's account, or obtain
refund from its customer, whether or not it is able to return the
item, if by its midnight deadline or within a longer reasonable
time after it learns the facts it returns the item or sends
notification of the facts. If the return or notice is delayed
beyond the bank's midnight deadline or a longer reasonable
time after it learns the facts, the bank may revoke the
settlement, charge back the credit, or obtain refund from its
customer, but it is liable for any loss resulting from the delay.
These rights to revoke, charge back, and obtain refund
terminate if and when a settlement for the item received by the
bank is or becomes final.
(b) A collecting bank returns an item when it is sent or
delivered to the bank's customer or transferor or pursuant to its
instructions.
(c) A depositary bank that is also the payor may charge
back the amount of an item to its customer's account or obtain
refund in accordance with the section governing return of an
item received by a payor bank for credit on its books (Section
36-4-301).
(d) The right to charge back is not affected by:
(1) previous use of a credit given for the item; or
(2) failure by any bank to exercise ordinary care with
respect to the item, but a bank so failing remains liable.
(e) A failure to charge back or claim refund does not
affect other rights of the bank against the customer or any other
party.
(f) If credit is given in dollars as the equivalent of the
value of an item payable in foreign money, the dollar amount
of any charge-back or refund must be calculated on the basis
of the bank-offered spot rate for the foreign money prevailing
on the day when the person entitled to the charge-back or
refund learns that it will not receive payment in ordinary
course.
OFFICIAL COMMENT
1. Under current bank practice, in a major portion of cases
banks make provisional settlement for items when they are first
received and then await subsequent determination of whether
the item will be finally paid. This is the principal characteristic
of what are referred to in banking parlance as "cash
items." Statistically, this practice of settling
provisionally first and then awaiting final payment is justified
because the vast majority of such cash items are finally paid,
with the result that in this great preponderance of cases it
becomes unnecessary for the banks making the provisional
settlements to make any further entries. In due course the
provisional settlements become final simply with the lapse of
time. However, in those cases in which the item being
collected is not finally paid or if for various reasons the bank
making the provisional settlement does not itself receive final
payment, provision is made in subsection (a) for the reversal of
the provisional settlements, charge-back of provisional credits
and the right to obtain refund.
2. Various causes of a bank's not receiving final payment,
with the resulting right of charge-back or refund, are stated or
suggested in subsection (a). These include dishonor of the
original item; dishonor of a remittance instrument given for it;
reversal of a provisional credit for the item; suspension of
payments by another bank. The causes stated are illustrative;
the right of charge-back or refund is stated to exist whether the
failure to receive final payment in ordinary course arises
through one of them "or otherwise."
3. The right of charge-back or refund exists if a collecting
bank has made a provisional settlement for an item with its
customer but terminates if and when a settlement received by
the bank for the item is or becomes final. If the bank fails to
receive such a final settlement the right of charge-back or
refund must be exercised promptly after the bank learns the
facts. The right exists (if so promptly exercised) whether or not
the bank is able to return the item. The second sentence of
subsection (a) adopts the view of Appliance Buyers Credit
Corp. v. Prospect National Bank, 708 F.2d 290 (7th Cir.
1983), that if the midnight deadline for returning an item or
giving notice is not met, a collecting bank loses its rights only
to the extent of damages for any loss resulting from the delay.
4. Subsection (b) states when an item is returned by a
collecting bank. Regulation CC, Section 229.31 preempts this
subsection with respect to checks by allowing direct return to
the depositary bank. Because a returned check may follow a
different path than in forward collection, settlement given for
the check is final and not provisional except as between the
depositary bank and its customer. Regulation CC Section
229.36(d). See also Regulations CC Sections 229.31(c) and
229.32(b). Thus owing to the federal preemption, this
subsection applies only to noncheck items.
5. The rule of subsection (d) relating to charge-back (as
distinguished from claim for refund) applies irrespective of the
cause of the nonpayment, and of the person ultimately liable for
nonpayment. Thus charge-back is permitted even if
nonpayment results from the depositary bank's own negligence.
Any other rule would result in litigation based upon a claim for
wrongful dishonor of other checks of the customer, with
potential damages far in excess of the amount of the item. Any
other rule would require a bank to determine difficult questions
of fact. The customer's protection is found in the general
obligation of good faith (Sections 1-203 and 4-103). If bad
faith is established the customer's recovery "includes
other damages, if any, suffered by the party as a proximate
consequence" (Section 4-103(e); see also Section 4-402).
6. It is clear that the charge-back does not relieve the bank
from any liability for failure to exercise ordinary care in
handling the item. The measure of damages for such failure is
stated in Section 4-103(e).
7. Subsection (f) states a rule fixing the time for determining
the rate of exchange if there is a charge-back or refund of a
credit given in dollars for an item payable in a foreign currency.
Compare Section 3-107. Fixing such a rule is desirable to
avoid disputes. If in any case the parties wish to fix a different
time for determining the rate of exchange, they may do so by
agreement.
Section 36-4-215. FINAL PAYMENT OF ITEM BY
PAYOR BANK; WHEN PROVISIONAL DEBITS AND
CREDITS BECOME FINAL; WHEN CERTAIN CREDITS
BECOME AVAILABLE FOR WITHDRAWAL.
(a) An item is finally paid by a payor bank when the bank
has first done any of the following:
(1) paid the item in cash;
(2) settled for the item without having a right to revoke
the settlement under statute, clearing-house rule, or agreement;
or
(3) made a provisional settlement for the item and
failed to revoke the settlement in the time and manner permitted
by statute, clearing-house rule, or agreement.
(b) If provisional settlement for an item does not become
final, the item is not finally paid.
(c) If provisional settlement for an item between the
presenting and payor banks is made through a clearing-house
or by debits or credits in an account between them, then to the
extent that provisional debits or credits for the item are entered
in accounts between the presenting and payor banks or between
the presenting and successive prior collecting banks seriatim,
they become final upon final payment of the items by the payor
bank.
(d) If a collecting bank receives a settlement for an item
which is or becomes final, the bank is accountable to its
customer for the amount of the item and any provisional credit
given for the item in an account with its customer becomes
final.
(e) Subject to (i) applicable law stating a time for
availability of funds and (ii) any right of the bank to apply the
credit to an obligation of the customer, credit given by a bank
for an item in a customer's account becomes available for
withdrawal as of right:
(1) if the bank has received a provisional settlement for
the item, when the settlement becomes final and the bank has
had a reasonable time to receive return of the item and the item
has not been received within that time;
(2) if the bank is both the depositary bank and the
payor bank, and the item is finally paid, at the opening of the
bank's second banking day following receipt of the item.
(f) Subject to applicable law stating a time for availability
of funds and any right of a bank to apply a deposit to an
obligation of the depositor, a deposit of money becomes
available for withdrawal as of right at the opening of the bank's
next banking day after receipt of the deposit.
OFFICIAL COMMENT
1. By the definition and use of the term
"settle" (Section 4-104(a)(11)) this Article
recognizes that various debits or credits, remittances,
settlements or payments given for an item may be either
provisional or final, that settlements sometimes are provisional
and sometimes are final and sometimes are provisional for
awhile but later become final. Subsection (a) defines when
settlement for an item constitutes final payment.
Final payment of an item is important for a number of
reasons. It is one of several factors determining the relative
priorities between items and notices, stop-payment orders, legal
process and setoffs (Section 4-303). It is the "end of the
line" in the collection process and the "turn
around" point commencing the return flow of proceeds.
It is the point at which many provisional settlements become
final. See Section 4-215(c). Final payment of an item by the
payor bank fixes preferential rights under Section 4-216.
2. If an item being collected moves through several
states, e.g., is deposited for collection in California, moves
through two or three California banks to the Federal Reserve
Bank of San Francisco, to the Federal Reserve Bank of Boston,
to a payor bank in Maine, the collection process involves the
eastward journey of the item from California to Maine and the
westward journey of the proceeds from Maine to California.
Subsection (a) recognizes that final payment does not take
place, in this hypothetical case, on the journey of the item
eastward. It also adopts the view that neither does final
payment occur on the journey westward because what in fact is
journeying westward are proceeds of the item.
3. Traditionally and under various decisions payment in
cash of an item by a payor bank has been considered final
payment. Subsection (a)(1) recognizes and provides that
payment of an item in cash by a payor bank is final payment.
4. Section 4-104(a)(11) defines "settle" as
meaning "to pay in cash, by clearing-house settlement, in
a charge or credit or by remittance, or otherwise as agreed. A
settlement may be either provisional or final."
Subsection (a)(2) of Section 4-215 provides that an item is
finally paid by a payor bank when the bank has "settled
for the item without having a right to revoke the settlement
under statute, clearing-house rule or agreement." Former
subsection (1)(b) is modified by subsection (a)(2) to make clear
that a payor bank cannot make settlement provisional by
unilaterally reserving a right to revoke the settlement. The right
must come from a statute (e.g., Section 4-301), clearing-house
rule or other agreement. Subsection (a)(2) provides in effect
that if the payor bank finally settles for an item this constitutes
final payment of the item. The subsection operates if nothing
has occurred and no situation exists making the settlement
provisional. If under statute, clearing-house rule or agreement,
a right of revocation of the settlement exists, the settlement is
provisional. Conversely, if there is an absence of a right to
revoke under statute, clearing-house rule or agreement, the
settlement is final and such final settlement constitutes final
payment of the item.
A primary example of a statutory right on the part of the
payor bank to revoke a settlement is the right to revoke
conferred by Section 4-301. The underlying theory and reason
for deferred posting statutes (Section 4-301) is to require a
settlement on the date of receipt of an item but to keep that
settlement provisional with the right to revoke prior to the
midnight deadline. In any case in which Section 4-301 is
applicable, any settlement by the payor bank is provisional
solely by virtue of the statute, subsection (a)(2) of Section
4-215 does not operate, and such provisional settlement does
not constitute final payment of the item. With respect to
checks, Regulation CC Section 229.36(d) provides that
settlement between banks for the forward collection of checks
is final. The relationship of this provision to Article 4 is
discussed in the Commentary to that section.
A second important example of a right to revoke a
settlement is that arising under clearing-house rules. It is very
common for clearing-house rules to provide that items
exchanged and settled for in a clearing (e.g., before 10:00 a.m.
on Monday) may be returned and the settlements revoked up to
but not later than 2:00 p.m. on the same day (Monday) or under
deferred posting at some hour on the next business day (e.g.,
2:00 p.m. Tuesday). Under this type of rule the Monday
morning settlement is provisional and being provisional does
not constitute a final payment of the item.
An example of an agreement allowing the payor bank to
revoke a settlement is a case in which the payor bank is also the
depositary bank and has signed a receipt or duplicate deposit
ticket or has made an entry in a passbook acknowledging
receipt, for credit to the account of A, of a check drawn on it by
B. If the receipt, deposit ticket, passbook or other agreement
with A is to the effect that any credit so entered is provisional
and may be revoked pending the time required by the payor
bank to process the item to determine if it is in good form and
there are funds to cover it, the agreement keeps the receipt or
credit provisional and avoids its being either final settlement or
final payment.
The most important application of subsection (a)(2) is that
in which presentment of an item has been made over the
counter for immediate payment. In this case Section 4-301(a)
does not apply to make the settlement provisional, and final
payment has occurred unless a rule or agreement provides
otherwise.
5. Former Section 4-213(1)(c) provided that final
payment occurred when the payor bank completed the
"process of posting." The term was defined in
former Section 4-109. In the present Article, Section 4-109 has
been deleted and the process-of-posting test has been
abandoned in Section 4-215(a) for determining when final
payment is made. Difficulties in determining when the events
described in former Section 4-109 take place make the
process-of-posting test unsuitable for a system of automated
check collection or electronic presentment.
6. The last sentence of former Section 4-213(1) is deleted
as an unnecessary source of confusion. Initially the view that
payor bank may be accountable for, that is, liable for the
amount of, an item that it has already paid seems incongruous.
This is particularly true in the light of the language formerly
found in Section 4-302 stating that the payor bank can defend
against liability for accountability by showing that it has
already settled for the item. But, at least with respect to former
Section 4-213(1)(c), such a provision was needed because
under the process-of-posting test a payor bank may have paid
an item without settling for it. Now that Article 4 has
abandoned the process-of-posting test, the sentence is no longer
needed. If the payor bank has neither paid the item nor
returned it within its midnight deadline, the payor bank is
accountable under Section 4-302.
7. Subsection (a)(3) covers the situation in which the
payor bank makes a provisional settlement for an item, and this
settlement becomes final at a later time by reason of the failure
of the payor bank to revoke it in the time and manner permitted
by statute, clearing-house rule or agreement. An example of
this type of situation is the clearing-house settlement referred
to in Comment 4. In the illustration there given if the time limit
for the return of items received in the Monday morning clearing
is 2:00 p.m. on Tuesday and the provisional settlement has not
been revoked at that time in a manner permitted by the
clearing-house rules, the provisional settlement made on
Monday morning becomes final at 2:00 p.m. on Tuesday.
Subsection (a)(3) provides specifically that in this situation the
item is finally paid at 2:00 p.m. Tuesday. If on the other hand
a payor bank receives an item in the mail on Monday and
makes some provisional settlement for the item on Monday, it
has until midnight on Tuesday to return the item or give notice
and revoke any settlement under Section 4-301. In this
situation subsection (a)(3) of Section 4-215 provides that if the
provisional settlement made on Monday is not revoked before
midnight on Tuesday as permitted by Section 4-301, the item
is finally paid at midnight on Tuesday. With respect to checks,
Regulation CC Section 229.30 (c) allows an extension of the
midnight deadline under certain circumstances. If a bank does
not expeditiously return a check liability may accrue under
Regulation CC Section 229.38. For the relationship of that
liability to responsibility under this Article, see Regulation CC
Sections 229.30 and 229.38.
8. Subsection (b) relates final settlement to final payment
under Section 4-215. For example, if a payor bank makes
provisional settlement for an item by sending a cashier's or
teller's check and that settlement fails to become final under
Section 4-213(c), subsection (b) provides that final payment has
not occurred. If the item is not paid, the drawer remains liable,
and under Section 4-302(a) the payor bank is accountable
unless it has returned the item before its midnight deadline. In
this regard, subsection (b) is an exception to subsection (a)(3).
Even if the payor bank has not returned an item by its midnight
deadline there is still no final payment if provisional settlement
had been made and settlement failed to become final.
However, if presentment of the item was over the counter for
immediate payment, final payment has occurred under Section
4-215(a)(2). Subsection (b) does not apply because the
settlement was not provisional. Section 4-301(a). In this case
the presenting person, often the payee of the item, has the right
to demand cash or the cash equivalent of federal reserve credit.
If the presenting person accepts another medium of settlement
such as a cashier's or teller's check, the presenting person takes
the risk that the payor bank may fail to pay a cashier's check
because of insolvency or that the drawee of a teller's check may
dishonor it.
9. Subsection (c) states the country-wide usage that when
the item is finally paid by the payor bank under subsection (a)
this final payment automatically without further action
"firms up" other provisional settlements made for
it. However, the subsection makes clear that this
"firming up" occurs only if the settlement between
the presenting and payor banks was made either through a
clearing-house or by debits and credits in accounts between
them. It does not take place if the payor bank remits for the
item by sending some form of remittance instrument. Further,
the "firming up" continues only to the extent that
provisional debits and credits are entered seriatim in accounts
between banks which are successive to the presenting bank.
The automatic "firming up" is broken at any time
that any collecting bank remits for the item by sending a
remittance draft, because final payment to the remittee then
usually depends upon final payment of the remittance draft.
10. Subsection (d) states the general rule that if a
collecting bank receives settlement for an item which is or
becomes final, the bank is accountable to its customer for the
amount of the item. One means of accounting is to remit to its
customer the amount it has received on the item. If previously
it gave to its customer a provisional credit for the item in an
account its receipt of final settlement for the item "firms
up" this provisional credit and makes it final. When this
credit given by it so becomes final, in the usual case its agency
status terminates and it becomes a debtor to its customer for the
amount of the item. See Section 4-201(a). If the accounting is
by a remittance instrument or authorization to charge further
time will usually be required to complete its accounting
(Section 4-213).
11. Subsection (e) states when certain credits given by a
bank to its customer become available for withdrawal as of
right. Subsection (e)(1) deals with the situation in which a
bank has given a credit (usually provisional) for an item to its
customer and in turn has received a provisional settlement for
the item from an intermediary or payor bank to which it has
forwarded the item. In this situation before the provisional
credit entered by the collecting bank in the account of its
customer becomes available for withdrawal as of right, it is not
only necessary that the provisional settlement received by the
bank for the item becomes final but also that the collecting
bank has a reasonable time to receive return of the item and the
item has not been received within that time. How much time is
"reasonable" for these purposes will of course
depend on the distance the item has to travel and the number of
banks through which it must pass (having in mind not only
travel time by regular lines of transmission but also the
successive midnight deadlines of the several banks) and other
pertinent facts. Also, if the provisional settlement received is
some form of a remittance instrument or authorization to
charge, the "reasonable" time depends on the
identity and location of the payor of the remittance instrument,
the means for clearing such instrument, and other pertinent
facts. With respect to checks Regulation CC Sections
229.10-229.13 or similar applicable state law (Section 229.20)
control. This is also time for the situation described in
Comment 12.
12. Subsection (e)(2) deals with the situation of a bank
that is both a depositary bank and a payor bank. The subsection
recognizes that if A and B are both customers of a
depositary-payor bank and A deposits B's check on the
depositary-payor in A's account on Monday, time must be
allowed to permit the check under the deferred posting rules of
Section 4-301 to reach the bookkeeper for B's account at some
time on Tuesday, and, if there are insufficient funds in B's
account, to reverse or charge back the provisional credit in A's
account. Consequently this provisional credit in A's account
does not become available for withdrawal as of right until the
opening of business on Wednesday. If it is determined on
Tuesday that there are insufficient funds in B's account to pay
the check, the credit to A's account can be reversed on Tuesday.
On the other hand if the item is in fact paid on Tuesday, the rule
of subsection (e)(2) is desirable to avoid uncertainty and
possible disputes between the bank and its customer as to
exactly what hour within the day the credit is available.
Section 36-4-216. INSOLVENCY AND
PREFERENCE.
(a) If an item is in or comes into the possession of a payor
or collecting bank that suspends payment and the item has not
been finally paid, the item must be returned by the receiver,
trustee, or agent in charge of the closed bank to the presenting
bank or the closed bank's customer.
(b) If a payor bank finally pays an item and suspends
payments without making a settlement for the item with its
customer or the presenting bank which settlement is or becomes
final, the owner of the item has a preferred claim against the
payor bank.
(c) If a payor bank gives or a collecting bank gives or
receives a provisional settlement for an item and thereafter
suspends payments, the suspension does not prevent or interfere
with the settlement's becoming final if the finality occurs
automatically upon the lapse of certain time or the happening
of certain events.
(d) If a collecting bank receives from subsequent parties
settlement for an item, which settlement is or becomes final and
the bank suspends payments without making a settlement for
the item with its customer which settlement is or becomes final,
the owner of the item has a preferred claim against the
collecting bank.
OFFICIAL COMMENT
1. The underlying purpose of the provisions of this section
is not to confer upon banks, holders of items or anyone else
preferential positions in the event of bank failures over general
depositors or any other creditors of the failed banks. The
purpose is to fix as definitely as possible the cut-off point of
time for the completion or cessation of the collection process in
the case of items that happen to be in the process at the time a
particular bank suspends payments. It must be remembered
that in bank collections as a whole and in the handling of items
by an individual bank, items go through a whole series of
processes. It must also be remembered that at any particular
point of time a particular bank (at least one of any size) is
functioning as a depositary bank for some items, as an
intermediary bank for others, as a presenting bank for still
others and as a payor bank for still others, and that when it
suspends payments it will have close to its normal load of items
working through its various processes. For the convenience of
receivers, owners of items, banks, and in fact substantially
everyone concerned, it is recognized that at the particular
moment of time that a bank suspends payment, a certain portion
of the items being handled by it have progressed far enough in
the bank collection process that it is preferable to permit them
to continue the remaining distance, rather than to send them
back and reverse the many entries that have been made or the
steps that have been taken with respect to them. Therefore,
having this background and these purposes in mind, the section
states what items must be turned backward at the moment
suspension intervenes and what items have progressed far
enough that the collection process with respect to them
continues, with the resulting necessary statement of rights of
various parties flowing from this prescription of the cut-off
time.
2. The rules stated are similar to those stated in the
American Bankers Association Bank Collection Code, but with
the abandonment of any theory of trust. On the other hand,
some law previous to this Act may be relevant. See Note,
Uniform Commercial Code: Stopping Payment of an Item
Deposited with an Insolvent Depositary Bank, 40 Okla. L. Rev.
689 (1987). Although for practical purposes Federal Deposit
Insurance affects materially the result of bank failures on
holders of items and banks, no attempt is made to vary the rules
of the section by reason of such insurance.
3. It is recognized that in view of Jennings v. United
States Fidelity & Guaranty Co., 294 U.S. 216, 55
S.Ct. 394, 79 L.Ed. 869, 99 A.L.R. 1248 (1935), amendment of
the National Bank Act would be necessary to have this section
apply to national banks. But there is no reason why it should
not apply to others. See Section 1-108.
Section 36-4-301. DEFERRED POSTING;
RECOVERY OF PAYMENT BY RETURN OF ITEMS; TIME
OF DISHONOR; RETURN OF ITEMS BY PAYOR BANK.
(a) If a payor bank settles for a demand item other than a
documentary draft presented otherwise than for immediate
payment over the counter before midnight of the banking day
of receipt, the payor bank may revoke the settlement and
recover the settlement if, before it has made final payment and
before its midnight deadline, it
(1) returns the item; or
(2) sends written notice of dishonor or nonpayment if
the item is unavailable for return.
(b) If a demand item is received by a payor bank for credit
on its books, it may return the item or send notice of dishonor
and may revoke any credit given or recover the amount thereof
withdrawn by its customer, if it acts within the time limit and
in the manner specified in subsection (a).
(c) Unless previous notice of dishonor has been sent, an
item is dishonored at the time when for purposes of dishonor it
is returned or notice sent in accordance with this section.
(d) An item is returned:
(1) as to an item presented through a clearing-house,
when it is delivered to the presenting or last collecting bank or
to the clearing-house or is sent or delivered in accordance with
clearing-house rules; or
(2) in all other cases, when it is sent or delivered to the
bank's customer or transferor or pursuant to instructions.
OFFICIAL COMMENT
1. The term "deferred posting" appears in the
caption of Section 4-301. This refers to the practice permitted
by statute in most of the states before the UCC under which a
payor bank receives items on one day but does not post the
items to the customer's account until the next day. Items
dishonored were then returned after the posting on the day after
receipt. Under Section 4-301 the concept of "deferred
posting" merely allows a payor bank that has settled for
an item on the day of receipt to return a dishonored item on the
next day before its midnight deadline, without regard to when
the item was actually posted. With respect to checks
Regulation CC Section 229.30(c) extends the midnight deadline
under the UCC under certain circumstances. See the
Commentary to Regulation CC Section 229.38(d) on the
relationship between the UCC and Regulation CC on
settlement.
2. The function of this section is to provide the
circumstances under which a payor bank that has made timely
settlement for an item may return the item and revoke the
settlement so that it may recover any settlement made. These
circumstances are: (1) the item must be a demand item other
than a documentary draft; (2) the item must be presented
otherwise than for immediate payment over the counter; and (3)
the payor bank must return the item (or give notice if the item
is unavailable for return) before its midnight deadline and
before it has paid the item. With respect to checks, see
Regulation CC Section 229.31(f) on notice in lieu of return and
Regulation CC Section 229.33 as to the different requirement
of notice of nonpayment. An instance of when an item may be
unavailable for return arises under a collecting bank check
retention plan under which presentment is made by a
presentment notice and the item is retained by the collecting
bank. Subsection 4-215(a)(2) provides that final payment
occurs if the payor bank has settled for an item without a right
to revoke the settlement under statute, clearing-house rule or
agreement. In any case in which Section 4-301(a) is applicable,
the payor bank has a right to revoke the settlement by statute;
therefore, Section 4-215(a)(2) is inoperable, and the settlement
is provisional. Hence, if the settlement is not over the counter
and the payor bank settles in a manner that does not constitute
final payment, the payor bank can revoke the settlement by
returning the item before its midnight deadline.
3. The relationship of Section 4-301(a) to final settlement
and final payment under Section 4-215 is illustrated by the
following case. Depositary Bank sends by mail an item to
Payor Bank with instructions to settle by remitting a teller's
check drawn on a bank in the city where Depositary Bank is
located. Payor Bank sends the teller's check on the day the item
was presented. Having made timely settlement, under the
deferred posting provisions of Section 4-301(a), Payor Bank
may revoke that settlement by returning the item before its
midnight deadline. If it fails to return the item before its
midnight deadline, it has finally paid the item if the bank on
which the teller's check was drawn honors the check. But if the
teller's check is dishonored there has been no final settlement
under Section 4-213(c) and no final payment under Section
4-215(b). Since the Payor Bank has neither paid the item nor
made timely return, it is accountable for the item under Section
4-302(a).
4. The time limits for action imposed by subsection (a) are
adopted by subsection (b) for cases in which the payor bank is
also the depositary bank, but in this case the requirement of a
settlement on the day of receipt is omitted.
5. Subsection (c) fixes a base point from which to measure
the time within which notice of dishonor must be given. See
Section 3-503.
6. Subsection (d) leaves banks free to agree upon the
manner of returning items but establishes a precise time when
an item is "returned." For definition of
"sent" as used in paragraphs (1) and (2) see Section
1-201(38). Obviously the subsection assumes that the item has
not been "finally paid" under Section 4-215(a). If
it has been, this provision has no operation.
7. The fact that an item has been paid under proposed
Section 4-215 does not preclude the payor bank from asserting
rights of restitution or revocation under Section 3-418.
National Savings and Trust Co. v. Park Corp., 722
F.2d 1303 (6th Cir. 1983), cert. denied, 466 U.S. 939 (1984), is
the correct interpretation of the present law on this issue.
Section 36-4-302. PAYOR BANK'S
RESPONSIBILITY FOR LATE RETURN OF ITEM.
(a) If an item is presented to and received by a payor
bank, the bank is accountable for the amount of:
(1) a demand item, other than a documentary draft,
whether properly payable or not, if the bank, in any case in
which it is not also the depositary bank, retains the item beyond
midnight of the banking day of receipt without settling for it or,
whether or not it is also the depositary bank, does not pay or
return the item or send notice of dishonor until after its
midnight deadline; or
(2) any other properly payable item unless, within the
time allowed for acceptance or payment of that item, the bank
either accepts or pays the item or returns it and accompanying
documents.
(b) The liability of a payor bank to pay an item pursuant
to subsection (a) is subject to defenses based on breach of a
presentment warranty (Section 36-4-208) or proof that the
person seeking enforcement of the liability presented or
transferred the item for the purpose of defrauding the payor
bank.
OFFICIAL COMMENT
1. Subsection (a)(1) continues the former law distinguishing
between cases in which the payor bank is not also the
depositary bank and those in which the payor bank is also the
depositary bank ("on us" items). For "on
us" items the payor bank is accountable if it retains the
item beyond its midnight deadline without settling for it. If the
payor bank is not the depositary bank it is accountable if it
retains the item beyond midnight of the banking day of receipt
without settling for it. It may avoid accountability either by
settling for the item on the day of receipt and returning the item
before its midnight deadline under Section 4-301 or by
returning the item on the day of receipt. This rule is consistent
with the deferred posting practice authorized by Section 4-301
which allows the payor bank to make provisional settlement for
an item on the day of receipt and to revoke that settlement by
returning the item on the next day. With respect to checks,
Regulation CC Section 229.36(d) provides that settlements
between banks for forward collection of checks are final when
made. See the Commentary on that provision for its effect on
the UCC.
2. If the settlement given by the payor bank does not
become final, there has been no payment under Section
4-215(b), and the payor bank giving the failed settlement is
accountable under subsection (a)(1) of Section 4-302. For
instance, the payor bank makes provisional settlement by
sending a teller's check that is dishonored. In such a case
settlement is not final under Section 4-213(c) and no payment
occurs under Section 4-215(b). Payor bank is accountable on
the item. The general principle is that unless settlement
provides the presenting bank with usable funds, settlement has
failed and the payor bank is accountable for the amount of the
item.
3. Subsection (b) is an elaboration of the deleted
introductory language of former Section 4-302: "In the
absence of a valid defense such as breach of a presentment
warranty (subsection (1) of Section 4-207), settlement effected
or the like ... ." A payor bank can defend an action
against it based on accountability by showing that the item
contained a forged indorsement or a fraudulent alteration.
Subsection (b) drops the ambiguous "or the like"
language and provides that the payor bank may also raise the
defense of fraud. Decisions that hold an accountable bank's
liability to be "absolute" are rejected. A payor
bank that makes a late return of an item should not be liable to
a defrauder operating a check kiting scheme. In Bank of
Leumi Trust Co. v. Bally's Park Place Inc., 528 F.Supp.
349 (S.D.N.Y. 1981), and American National Bank v.
Foodbasket, 497 P.2d 546 (Wyo. 1972), banks that were
accountable under Section 4-302 for missing their midnight
deadline were successful in defending against parties who
initiated collection knowing that the check would not be paid.
The "settlement effected" language is deleted as
unnecessary. If a payor bank is accountable for an item it is
liable to pay it. If it has made final payment for an item, it is no
longer accountable for the item.
Section 36-4-303. WHEN ITEMS SUBJECT TO
NOTICE, STOP-PAYMENT ORDER, LEGAL PROCESS,
OR SETOFF; ORDER IN WHICH ITEMS MAY BE
CHARGED OR CERTIFIED.
(a) Any knowledge, notice, or stop-payment order
received by, legal process served upon, or setoff exercised by
a payor bank comes too late to terminate, suspend, or modify
the bank's right or duty to pay an item or to charge its
customer's account for the item if the knowledge, notice,
stop-payment order, or legal process is received or served and
a reasonable time for the bank to act thereon expires or the
setoff is exercised after the earliest of the following:
(1) the bank accepts or certifies the item;
(2) the bank pays the item in cash;
(3) the bank settles for the item without having a right
to revoke the settlement under statute, clearing-house rule, or
agreement;
(4) the bank becomes accountable for the amount of
the item under Section 36-4-302 dealing with the payor bank's
responsibility for late return of items; or
(5) with respect to checks, a cutoff hour no earlier than
one hour after the opening of the next banking day after the
banking day on which the bank received the check and no later
than the close of that next banking day or, if no cutoff hour is
fixed, the close of the next banking day after the banking day
on which the bank received the check.
(b) Subject to subsection (a), items may be accepted,
paid, certified, or charged to the indicated account of its
customer in any order.
OFFICIAL COMMENT
1. While a payor bank is processing an item presented for
payment, it may receive knowledge or a legal notice affecting
the item, such as knowledge or a notice that the drawer has
filed a petition in bankruptcy or made an assignment for the
benefit of creditors; may receive an order of the drawer
stopping payment on the item; may have served on it an
attachment of the account of the drawer; or the bank itself may
exercise a right of setoff against the drawer's account. Each of
these events affects the account of the drawer and may
eliminate or freeze all or part of whatever balance is available
to pay the item. Subsection (a) states the rule for determining
the relative priorities between these various legal events and the
item.
2. The rule is that if any one of several things has been done
to the item or if it has reached any one of several stages in its
processing at the time the knowledge, notice, stop-payment
order or legal process is received or served and a reasonable
time for the bank to act thereon expires or the setoff is
exercised, the knowledge, notice, stop-payment order, legal
process or setoff comes too late, the item has priority and a
charge to the customer's account may be made and is effective.
With respect to the effect of the customer's bankruptcy, the
bank's rights are governed by Bankruptcy Code Section 542(c)
which codifies the result of Bank of Marin v. England,
385 U.S. 99 (1966). Section 4-405 applies to the death or
incompetence of the customer.
3. Once a payor bank has accepted or certified an item or
has paid the item in cash, the event has occurred that
determines priorities between the item and the various legal
events usually described as the "four legals."
Paragraphs (1) and (2) of subsection (a) so provide. If a payor
bank settles for an item presented over the counter for
immediate payment by a cashier's check or teller's check which
the presenting person agrees to accept, paragraph (3) of
subsection (a) would control and the event determining priority
has occurred. Because presentment was over the counter,
Section 4-301(a) does not apply to give the payor bank the
statutory right to revoke the settlement. Thus the requirements
of paragraph (3) have been met unless a clearing-house rule or
agreement of the parties provides otherwise.
4. In the usual case settlement for checks is by entries in
bank accounts. Since the process-of-posting test has been
abandoned as inappropriate for automated check collection, the
determining event for priorities is a given hour on the day after
the item is received. (Paragraph (5) of subsection (a).) The
hour may be fixed by the bank no earlier than one hour after the
opening on the next banking day after the bank received the
check and no later than the close of that banking day. If an
item is received after the payor bank's regular Section 4-108
cutoff hour, it is treated as received the next banking day. If a
bank receives an item after its regular cutoff hour on Monday
and an attachment is levied at noon on Tuesday, the attachment
is prior to the item if the bank had not before that hour taken
the action described in paragraphs (1), (2), and (3) of
subsection (a). The Commentary to Regulation CC Section
229.36(d) explains that even though settlement by a paying
bank for a check is final for Regulation CC purposes, the
paying bank's right to return the check before its midnight
deadline under the UCC is not affected.
5. Another event conferring priority for an item and a
charge to the customer's account based upon the item is stated
by the language "become accountable for the amount of
the item under Section 4-302 dealing with the payor bank's
responsibility for late return of items." Expiration of the
deadline under Section 4-302 with resulting accountability by
the payor bank for the amount of the item, establishes priority
of the item over notices, stop-payment orders, legal process or
setoff.
6. In the case of knowledge, notice, stop-payment orders
and legal process the effective time for determining whether
they were received too late to affect the payment of an item and
a charge to the customer's account by reason of such payment,
is receipt plus a reasonable time for the bank to act on any of
these communications. Usually a relatively short time is
required to communicate to the accounting department advice
of one of these events but certainly some time is necessary.
Compare Sections 1-201(27) and 4-403. In the case of setoff
the effective time is when the setoff is actually made.
7. As between one item and another no priority rule is
stated. This is justified because of the impossibility of stating
a rule that would be fair in all cases, having in mind the almost
infinite number of combinations of large and small checks in
relation to the available balance on hand in the drawer's
account; the possible methods of receipt; and other variables.
Further, the drawer has drawn all the checks, the drawer should
have funds available to meet all of them and has no basis for
urging one should be paid before another; and the holders have
no direct right against the payor bank in any event, unless of
course, the bank has accepted, certified or finally paid a
particular item, or has become liable for it under Section 4-302.
Under subsection (b) the bank has the right to pay items for
which it is itself liable ahead of those for which it is not.
Section 36-4-401. WHEN BANK MAY CHARGE
CUSTOMER'S ACCOUNT.
(a) A bank may charge against the account of a customer
an item that is properly payable from that account even though
the charge creates an overdraft. An item is properly payable if
it is authorized by the customer and is in accordance with any
agreement between the customer and bank.
(b) A customer is not liable for the amount of an overdraft
if the customer neither signed the item nor benefited from the
proceeds of the item.
(c) A bank may charge against the account of a customer
a check that is otherwise properly payable from the account,
even though payment was made before the date of the check,
unless the customer has given notice to the bank of the
postdating describing the check with reasonable certainty. The
notice is effective for the period stated in Section 36-4-403(b)
for stop-payment orders, and must be received at such time and
in such manner as to afford the bank a reasonable opportunity
to act on it before the bank takes any action with respect to the
check described in Section 36-4-303. If a bank charges against
the account of a customer a check before the date stated in the
notice of postdating, the bank is liable for damages for the loss
resulting from its act. The loss may include damages for
dishonor of subsequent items under Section 36-4-402.
(d) A bank that in good faith makes payment to a holder
may charge the indicated account of its customer according to:
(1) the original terms of the altered item; or
(2) the terms of the completed item, even though the
bank knows the item has been completed unless the bank has
notice that the completion was improper.
OFFICIAL COMMENT
1. An item is properly payable from a customer's account if
the customer has authorized the payment and the payment does
not violate any agreement that may exist between the bank and
its customer. For an example of a payment held to violate an
agreement with a customer, see Torrance National Bank v.
Enesco Federal Credit Union, 285 P.2d 737 (Cal.App.
1955). An item drawn for more than the amount of a
customer's account may be properly payable. Thus under
subsection (a) a bank may charge the customer's account for an
item even though payment results in an overdraft. An item
containing a forged drawer's signature or forged indorsement is
not properly payable. Concern has arisen whether a bank may
require a customer to execute a stop-payment order when the
customer notifies the bank of the loss of an unindorsed or
specially indorsed check. Since such a check cannot be
properly payable from the customer's account, it is
inappropriate for a bank to require stop-payment order in such
a case.
2. Subsection (b) adopts the view of case authority holding
that if there is more than one customer who can draw on an
account, the nonsigning customer is not liable for an overdraft
unless that person benefits from the proceeds of the item.
3. Subsection (c) is added because the automated check
collection system cannot accommodate postdated checks. A
check is usually paid upon presentment without respect to the
date of the check. Under the former law, if a payor bank paid
a postdated check before its stated date, it could not charge the
customer's account because the check was not "properly
payable." Hence, the bank might have been liable for
wrongfully dishonoring subsequent checks of the drawer that
would have been paid had the postdated check not been
prematurely paid. Under subsection (c) a customer wishing to
postdate a check must notify the payor bank of its postdating in
time to allow the bank to act on the customer's notice before the
bank has to commit itself to pay the check. If the bank fails to
act on the customer's timely notice, it may be liable for
damages for the resulting loss which may include damages for
dishonor of subsequent items. This Act does not regulate fees
that banks charge their customers for a notice of postdating or
other services covered by the Act, but under principles of law
such as unconscionability or good faith and fair dealing, courts
have reviewed fees and the bank's exercise of a discretion to set
fees. Perdue v. Crocker National Bank, 38 Cal.3d 913
(1985) (unconscionability); Best v. United Bank of
Oregon, 739 P.2d 554, 562-566 (1987) (good faith and fair
dealing). In addition, Section 1-203 provides that every
contract or duty within this Act imposes an obligation of good
faith in its performance or enforcement.
4. Section 3-407(c) states that a payor bank or drawee which
pays a fraudulently altered instrument in good faith and without
notice of the alteration may enforce rights with respect to the
instrument according to its original terms or, in the case of an
incomplete instrument altered by unauthorized completion,
according to its terms as completed. Section 4-401(d) follows
the rule stated in Section 3-407(c) by applying it to an altered
item and allows the bank to enforce rights with respect to the
altered item by charging the customer's account.
Section 36-4-402. BANK'S LIABILITY TO
CUSTOMER FOR WRONGFUL DISHONOR; TIME OF
DETERMINING INSUFFICIENCY OF ACCOUNT.
(a) Except as otherwise provided in this chapter, a payor
bank wrongfully dishonors an item if it dishonors an item that
is properly payable, but a bank may dishonor an item that
would create an overdraft unless it has agreed to pay the
overdraft.
(b) A payor bank is liable to its customer for damages
proximately caused by the wrongful dishonor of an item.
Liability is limited to actual damages proved and may include
damages for an arrest or prosecution of the customer or other
consequential damages. Whether any consequential damages
are proximately caused by the wrongful dishonor is a question
of fact to be determined in each case.
(c) A payor bank's determination of the customer's
account balance on which a decision to dishonor for
insufficiency of available funds is based may be made at any
time between the time the item is received by the payor bank
and the time that the payor bank returns the item or gives notice
in lieu of return, and no more than one determination need be
made. If, at the election of the payor bank, a subsequent
balance determination is made for the purpose of reevaluating
the bank's decision to dishonor the item, the account balance at
that time is determinative of whether a dishonor for
insufficiency of available funds is wrongful.
OFFICIAL COMMENT
1. Subsection (a) states positively what has been assumed
under the original Article: that if a bank fails to honor a
properly payable item it may be liable to its customer for
wrongful dishonor. Under subsection (b) the payor bank's
wrongful dishonor of an item gives rise to a statutory cause of
action. Damages may include consequential damages.
Confusion has resulted from the attempts of courts to reconcile
the first and second sentences of former Section 4-402. The
second sentence implied that the bank was liable for some form
of damages other than those proximately caused by the
dishonor if the dishonor was other than by mistake. But
nothing in the section described what these noncompensatory
damages might be. Some courts have held that in
distinguishing between mistaken dishonors and nonmistaken
dishonors, the so-called "trader" rule has been
retained that allowed a "merchant or trader" to
recover substantial damages for wrongful dishonor without
proof of damages actually suffered. Comment 3 to former
Section 4-402 indicated that this was not the intent of the
drafters. White & Summers, Uniform Commercial Code,
Section 18-4 (1988), states: "The negative implication is
that when wrongful dishonors occur not 'through mistake' but
willfully, the court may impose damages greater than 'actual
damages' ... . Certainly the reference to 'mistake' in the second
sentence of 4-402 invites a court to adopt the relevant pre-Code
distinction." Subsection (b) by deleting the reference to
mistake in the second sentence precludes any inference that
Section 4-402 retains the "trader" rule. Whether a
bank is liable for noncompensatory damages, such as punitive
damages, must be decided by Section 1-103 and Section 1-106
("by other rule of law").
2. Wrongful dishonor is different from "failure to
exercise ordinary care in handling an item," and the
measure of damages is that stated in this section, not that stated
in Section 4-103(e). By the same token, if a dishonor comes
within this section, the measure of damages of this section
applies and not another measure of damages. If the wrongful
refusal of the beneficiary's bank to make funds available from
a funds transfer causes the beneficiary's check to be dishonored,
no specific guidance is given as to whether recovery is under
this section or Article 4A. In each case this issue must be
viewed in its factual context, and it was thought unwise to seek
to establish certainty at the cost of fairness.
3. The second and third sentences of the subsection (b)
reject decisions holding that as a matter of law the dishonor of
a check is not the "proximate cause" of the arrest
and prosecution of the customer and leave to determination in
each case as a question of fact whether the dishonor is or may
be the "proximate cause."
4. Banks commonly determine whether there are sufficient
funds in an account to pay an item after the close of banking
hours on the day of presentment when they post debit and credit
items to the account. The determination is made on the basis of
credits available for withdrawal as of right or made available
for withdrawal by the bank as an accommodation to its
customer. When it is determined that payment of the item
would overdraw the account, the item may be returned at any
time before the bank's midnight deadline the following day.
Before the item is returned new credits that are withdrawable
as of right may have been added to the account. Subsection (c)
eliminates uncertainty under Article 4 as to whether the failure
to make a second determination before the item is returned on
the day following presentment is a wrongful dishonor if new
credits were added to the account on that day that would have
covered the amount of the check.
5. Section 4-402 has been construed to preclude an action
for wrongful dishonor by a plaintiff other than the bank's
customer. Loucks v. Albuquerque National Bank, 418
P.2d 191 (N.Mex. 1966). Some courts have allowed a plaintiff
other than the customer to sue when the customer is a business
entity that is one and the same with the individual or
individuals operating it. Murdaugh Volkswagen, Inc. v.
First National Bank, 801 F.2d 719 (4th Cir. 1986) and
Karsh v. American City Bank, 113 Cal.App.3d 419,
169 Cal.Rptr. 851 (1980). However, where the wrongful
dishonor impugns the reputation of an operator of the business,
the issue is not merely, as the court in Koger v. East First
National Bank, 443 So.2d 141 (Fla.App. 1983), put it, one
of a literal versus a liberal interpretation of Section 4-402.
Rather the issue is whether the statutory cause of action in
Section 4-402 displaces, in accordance with Section 1-103, any
cause of action that existed at common law in a person who is
not the customer whose reputation was damaged. See
Marcum v. Security Trust and Savings Co., 221 Ala.
419, 129 So.74 (1930). While Section 4-402 should not be
interpreted to displace the latter cause of action, the section
itself gives no cause of action to other than a
"customer," however that definition is construed,
and thus confers no cause of action on the holder of a
dishonored item. First American National Bank v.
Commerce Union Bank, 692 S.W.2d 642 (Tenn.App.
1985).
Section 36-4-403. CUSTOMER'S RIGHT TO STOP
PAYMENT; BURDEN OF PROOF OF LOSS.
(a) A customer or any person authorized to draw on the
account if there is more than one person may stop payment of
any item drawn on the customer's account or close the account
by an order to the bank describing the item or account with
reasonable certainty received at a time and in a manner that
affords the bank a reasonable opportunity to act on it before
any action by the bank with respect to the item described in
Section 36-4-303. If the signature of more than one person is
required to draw on an account, any of these persons may stop
payment or close the account.
(b) A stop-payment order is effective for six months, but
it lapses after fourteen calendar days if the original order was
oral and was not confirmed in writing within that period. A
stop-payment order may be renewed for additional six-month
periods by a writing given to the bank within a period during
which the stop-payment order is effective.
(c) The burden of establishing the fact and amount of loss
resulting from the payment of an item contrary to a
stop-payment order or order to close an account is on the
customer. The loss from payment of an item contrary to a
stop-payment order may include damages for dishonor of
subsequent items under Section 36-4-402.
OFFICIAL COMMENT
1. The position taken by this section is that stopping
payment or closing an account is a service which depositors
expect and are entitled to receive from banks notwithstanding
its difficulty, inconvenience and expense. The inevitable
occasional losses through failure to stop or close should be
borne by the banks as a cost of the business of banking.
2. Subsection (a) follows the decisions holding that a payee
or indorsee has no right to stop payment. This is consistent
with the provision governing payment or satisfaction. See
Section 3-602. The sole exception to this rule is found in
Section 4-405 on payment after notice of death, by which any
person claiming an interest in the account can stop payment.
3. Payment is commonly stopped only on checks; but the
right to stop payment is not limited to checks, and extends to
any item payable by any bank. If the maker of a note payable
at a bank is in a position analogous to that of a drawer (Section
4-106) the maker may stop payment of the note. By analogy
the rule extends to drawees other than banks.
4. A cashier's check or teller's check purchased by a
customer whose account is debited in payment for the check is
not a check drawn on the customer's account within the
meaning of subsection (a); hence, a customer purchasing a
cashier's check or teller's check has no right to stop payment of
such a check under subsection (a). If a bank issuing a cashier's
check or teller's check refuses to pay the check as an
accommodation to its customer or for other reasons, its liability
on the check is governed by Section 3-411. There is no right to
stop payment after certification of a check or other acceptance
of a draft, and this is true no matter who procures the
certification. See Sections 3-411 and 4-303. The acceptance
is the drawee's own engagement to pay, and it is not required to
impair its credit by refusing payment for the convenience of the
drawer.
5. Subsection (a) makes clear that if there is more than one
person authorized to draw on a customer's account any one of
them can stop payment of any check drawn on the account or
can order the account closed. Moreover, if there is a customer,
such as a corporation, that requires its checks to bear the
signatures of more than one person, any of these persons may
stop payment on a check. In describing the item, the customer,
in the absence of a contrary agreement, must meet the standard
of what information allows the bank under the technology then
existing to identify the item with reasonable certainty.
6. Under subsection (b), a stop-payment order is effective
after the order, whether written or oral, is received by the bank
and the bank has a reasonable opportunity to act on it. If the
order is written it remains in effect for six months from that
time. If the order is oral it lapses after 14 days unless there is
written confirmation. If there is written confirmation within the
14-day period, the six-month period dates from the giving of
the oral order. A stop-payment order may be renewed any
number of times by written notice given during a six-month
period while a stop order is in effect. A new stop-payment
order may be given after a six-month period expires, but such
a notice takes effect from the date given. When a stop-payment
order expires it is as though the order had never been given, and
the payor bank may pay the item in good faith under Section
4-404 even though a stop-payment order had once been given.
7. A payment in violation of an effective direction to stop
payment is an improper payment, even though it is made by
mistake or inadvertence. Any agreement to the contrary is
invalid under Section 4-103(a) if in paying the item over the
stop-payment order the bank has failed to exercise ordinary
care. An agreement to the contrary which is imposed upon a
customer as part of a standard form contract would have to be
evaluated in the light of the general obligation of good faith.
Sections 1-203 and 4-104(c). The drawee is, however, entitled
to subrogation to prevent unjust enrichment (Section 4-407);
retains common law defenses, e.g., that by conduct in
recognizing the payment the customer has ratified the bank's
action in paying over a stop-payment order (Section 1-103);
and retains common law rights, e.g., to recover money paid
under a mistake under Section 3-418. It has sometimes been
said that payment cannot be stopped against a holder in due
course, but the statement is inaccurate. The payment can be
stopped but the drawer remains liable on the instrument to the
holder in due course (Sections 3-305, 3-414) and the drawee, if
it pays, becomes subrogated to the rights of the holder in due
course against the drawer. Section 4-407. The relationship
between Sections 4-403 and 4-407 is discussed in the
Comments to Section 4-407. Any defenses available against a
holder in due course remain available to the drawer, but other
defenses are cut off to the same extent as if the holder were
bringing the action.
Section 36-4-404. BANK NOT OBLIGED TO PAY
CHECK MORE THAN SIX MONTHS OLD.
A bank is under no obligation to a customer having a
checking account to pay a check, other than a certified check,
which is presented more than six months after its date, but it
may charge its customer's account for a payment made
thereafter in good faith.
OFFICIAL COMMENT
This section incorporates a type of statute that had been
adopted in 26 jurisdictions before the Code. The time limit is
set at six months because banking and commercial practice
regards a check outstanding for longer than that period as stale,
and a bank will normally not pay such a check without
consulting the depositor. It is therefore not required to do so,
but is given the option to pay because it may be in a position to
know, as in the case of dividend checks, that the drawer wants
payment made.
Certified checks are excluded from the section because they
are the primary obligation of the certifying bank (Sections
3-409 and 3-413). The obligation runs directly to the holder of
the check. The customer's account was presumably charged
when the check was certified.
Section 36-4-405. DEATH OR INCOMPETENCE OF
CUSTOMER.
(a) A payor or collecting bank's authority to accept, pay,
or collect an item or to account for proceeds of its collection, if
otherwise effective, is not rendered ineffective by incompetence
of a customer of either bank existing at the time the item is
issued or its collection is undertaken if the bank does not know
of an adjudication of incompetence. Neither death nor
incompetence of a customer revokes the authority to accept,
pay, collect, or account until the bank knows of the fact of
death or of an adjudication of incompetence and has reasonable
opportunity to act on it.
(b) Even with knowledge, a bank may for 10 days after
the date of death pay or certify checks drawn on or before that
date unless ordered to stop payment by a person claiming an
interest in the account.
OFFICIAL COMMENT
1. Subsection (a) follows existing decisions holding that a
drawee (payor) bank is not liable for the payment of a check
before it has notice of the death or incompetence of the drawer.
The justice and necessity of the rule are obvious. A check is an
order to pay which the bank must obey under penalty of
possible liability for dishonor. Further, with the tremendous
volume of items handled any rule that required banks to verify
the continued life and competency of drawers would be
completely unworkable.
One or both of these same reasons apply to other phases of
the bank collection and payment process and the rule is made
wide enough to apply to these other phases. It applies to all
kinds of "items"; to "customers" who
own items as well as "customers" who draw or
make them; to the function of collecting items as well as the
function of accepting or paying them; to the carrying out of
instructions to account for proceeds even though these may
involve transfers to third parties; to depositary and intermediary
banks as well as payor banks; and to incompetency existing at
the time of the issuance of an item or the commencement of the
collection or payment process as well as to incompetency
occurring thereafter. Further, the requirement of actual
knowledge makes inapplicable the rule of some cases that an
adjudication of incompetency is constructive notice to all the
world because obviously it is as impossible for banks to keep
posted on such adjudications (in the absence of actual
knowledge) as it is to keep posted as to death of immediate or
remote customers.
2. Subsection (b) provides a limited period after death
during which a bank may continue to pay checks (as
distinguished from other items) even though it has notice. The
purpose of the provision, as of the existing statutes, is to permit
holders of checks drawn and issued shortly before death to cash
them without the necessity of filing a claim in probate. The
justification is that these checks normally are given in
immediate payment of an obligation, that there is almost never
any reason why they should not be paid, and that filing in
probate is a useless formality, burdensome to the holder, the
executor, the court and the bank.
This section does not prevent an executor or administrator
from recovering the payment from the holder of the check. It
is not intended to affect the validity of any gift causa mortis or
other transfer in contemplation of death, but merely to relieve
the bank of liability for the payment.
3. Any surviving relative, creditor or other person who
claims an interest in the account may give a direction to the
bank not to pay checks, or not to pay a particular check. Such
notice has the same effect as a direction to stop payment. The
bank has no responsibility to determine the validity of the claim
or even whether it is "colorable." But obviously
anyone who has an interest in the estate, including the person
named as executor in a will, even if the will has not yet been
admitted to probate, is entitled to claim an interest in the
account.
Section 36-4-406. CUSTOMER'S DUTY TO
DISCOVER AND REPORT UNAUTHORIZED SIGNATURE
OR ALTERATION.
(a) A bank that sends or makes available to a customer a
statement of account showing payment of items for the account
shall either return or make available to the customer the items
paid or provide information in the statement of account
sufficient to allow the customer reasonably to identify the items
paid. The statement of account provides sufficient information
if the item is described by item number, amount, and date of
payment.
(b) If the items are not returned to the customer, the
person retaining the items shall either retain the items or, if the
items are destroyed, maintain the capacity to furnish legible
copies of the items until the expiration of seven years after
receipt of the items. A customer may request an item from the
bank that paid the item, and that bank must provide in a
reasonable time either the item or, if the item has been
destroyed or is not otherwise obtainable, a legible copy of the
item.
(c) If a bank sends or makes available a statement of
account or items pursuant to subsection (a), the customer must
exercise reasonable promptness in examining the statement or
the items to determine whether any payment was not authorized
because of an alteration of an item or because a purported
signature by or on behalf of the customer was not authorized.
If, based on the statement or items provided, the customer
should reasonably have discovered the unauthorized payment,
the customer must promptly notify the bank of the relevant
facts.
(d) If the bank proves that the customer failed, with
respect to an item, to comply with the duties imposed on the
customer by subsection (c), the customer is precluded from
asserting against the bank:
(1) the customer's unauthorized signature or any
alteration on the item, if the bank also proves that it suffered a
loss by reason of the failure; and
(2) the customer's unauthorized signature or alteration
by the same wrongdoer on any other item paid in good faith by
the bank if the payment was made before the bank received
notice from the customer of the unauthorized signature or
alteration and after the customer had been afforded a reasonable
period of time, not exceeding thirty days, in which to examine
the item or statement of account and notify the bank.
(e) If subsection (d) applies and the customer proves that
the bank failed to exercise ordinary care in paying the item and
that the failure substantially contributed to loss, the loss is
allocated between the customer precluded and the bank
asserting the preclusion according to the extent to which the
failure of the customer to comply with subsection (c) and the
failure of the bank to exercise ordinary care contributed to the
loss. If the customer proves that the bank did not pay the item
in good faith, the preclusion under subsection (d) does not
apply.
(f) Without regard to care or lack of care of either the
customer or the bank, a customer who does not within one year
after the statement or items are made available to the customer
(subsection (a)) discover and report the customer's
unauthorized signature on or any alteration on the item is
precluded from asserting against the bank the unauthorized
signature or alteration. If there is a preclusion under this
subsection, the payor bank may not recover for breach of
warranty under Section 36-4-208 with respect to the
unauthorized signature or alteration to which the preclusion
applies.
OFFICIAL COMMENT
1. In order to impose on its customer the duty stated in
subsection (c) to examine a statement or the returned items and
report unauthorized signatures of the customer or alterations,
the bank must comply with subsection (a) in sending or making
available to the customer a statement of account. Whether the
bank returns to the customer the items paid is a matter for
bank-customer agreement. If the agreement is that the bank
does not return the items paid, a general standard is stated that
the customer must be given information "sufficient to
allow the customer reasonably to identify the items paid."
If the bank supplies its customer with an image of an item, it
complies with this standard. But a safe harbor rule is provided.
If the item is described by item number, amount, and date of
payment, the bank does comply. This information was chosen
because it can be obtained by the bank's computer from the
check's MICR line without examination of the items involved.
The other two items of information that the customer would
normally want to know -- the name of the payee and the date of
the item -- cannot currently be obtained from the MICR line.
The safe harbor rule is important in determining the feasibility
of payor or collecting bank check retention plans. A customer
who keeps a record of items written will have sufficient
information to identify the item on the basis of item number,
amount and date of payment. But customers who don't keep
records may not. The policy decision is that accommodating
these customers is not as desirable as accommodating others
who keep more careful records at less cost to the check
collection system and, thus, to all customers of the system. It
is expected that technological advances may make it possible
for banks to give customers more information in the future in
a manner that is fully compatible with automation or truncation
systems. At that time the Permanent Editorial Board may wish
to make recommendations for an amendment revising the safe
harbor requirements in the light of those advances.
2. Subsection (b) applies if the items are not returned to the
customer. Check retention plans may include a simple payor
bank check retention plan or the kind of check retention plan
that would be authorized by a truncation agreement in which a
collecting bank or the payee may retain the items. Even after
agreeing to a check retention plan, a customer may need to see
one or more checks for litigation or other purposes. The
customer's request for the check may always be made to the
payor bank. Under subsection (b) retaining banks may destroy
items but must maintain the capacity to furnish legible copies
for seven years. A legible copy may include an image of an
item. This Act does not define the length of the reasonable
period of time for a bank to provide the check or copy of the
check. What is reasonable depends on the capacity of the bank
and the needs of the customer. This Act does not specify
sanctions for failure to retain or furnish the items or legible
copies; this is left to other laws regulating banks. See
Comment 3 to Section 4-101. Moreover, this Act does not
regulate fees that banks charge their customers for furnishing
items or copies or other services covered by the Act, but under
principles of law such as unconscionability or good faith and
fair dealing, courts have reviewed fees and the bank's exercise
of a discretion to set fees. Perdue v. Crocker National
Bank, 38 Cal.3d 913 (1985) (unconscionability); Best
v. United Bank of Oregon, 739 P.2d 554, 562-566 (1987)
(good faith and fair dealing). In addition, Section 1-203
provides that every contract or duty within this Act imposes an
obligation of good faith in its performance or enforcement.
3. Subsection (c) imposes on the customer the duty to
examine for and report unauthorized payments. Subsection
(d)(2) changes former subsection (2)(b) by adopting a 30-day
period in place of a 14-day period. Although the 14-day period
may have been sufficient when the original version of Article
4 was drafted in the 1950s, given the much greater volume of
checks at the time of the revision, a longer period was viewed
as more appropriate. The rule of subsection (d)(2) follows
pre-Code case law that payment of an additional item or items
bearing an unauthorized signature or alteration by the same
wrongdoer is a loss suffered by the bank traceable to the
customer's failure to exercise reasonable care in examining the
statement and notifying the bank of objections to it. One of the
most serious consequences of failure of the customer to comply
with the requirements of subsection (c) is the opportunity
presented to the wrongdoer to repeat the misdeeds. Conversely,
one of the best ways to keep down losses in this type of
situation is for the customer to promptly examine the statement
and notify the bank of an unauthorized signature or alteration
so that the bank will be alerted to stop paying further items.
Hence, the rule of subsection (d)(2) is prescribed, and to avoid
dispute a specific time limit, 30 days, is designated for cases to
which the subsection applies. These considerations are not
present if there are no losses resulting from the payment of
additional items. In these circumstances, a reasonable period
for the customer to comply with its duties under subsection (c)
would depend on the circumstances (Section 1-204(2)) and the
subsection (d)(2) time limit should not be imported by analogy
into subsection (c).
4. Subsection (e) replaces former subsection (3) and poses
a modified comparative negligence test for determining
liability. See the discussion on this point in the Comments to
Sections 3-404, 3-405, and 3-406. The term "good
faith" is defined in Section 3-103(a)(4) as including
"observance of reasonable commercial standards of fair
dealing." The connotation of this standard is fairness and
not absence of negligence.
The term "ordinary care" used in subsection (e)
is defined in Section 3-103(a)(7), made applicable to Article 4
by Section 4-104(c), to provide that sight examination by a
payor bank is not required if its procedure is reasonable and is
commonly followed by other comparable banks in the area.
The case law is divided on this issue. The definition of
"ordinary care" in Section 3-103 rejects those
authorities that hold, in effect, that failure to use sight
examination is negligence as a matter of law. The effect of the
definition of "ordinary care" on Section 4-406 is
only to provide that in the small percentage of cases in which
a customer's failure to examine its statement or returned items
has led to loss under subsection (d) a bank should not have to
share that loss solely because it has adopted an automated
collection or payment procedure in order to deal with the great
volume of items at a lower cost to all customers.
5. Several changes are made in former Section 4-406(5).
First, former subsection (5) is deleted and its substance is made
applicable only to the one-year notice preclusion in former
subsection (4) (subsection (f)). Thus if a drawer has not
notified the payor bank of an unauthorized check or material
alteration within the one-year period, the payor bank may not
choose to recredit the drawer's account and pass the loss to the
collecting banks on the theory of breach of warranty. Second,
the reference in former subsection (4) to unauthorized
indorsements is deleted. Section 4-406 imposes no duties on
the drawer to look for unauthorized indorsements. Section
4-111 sets out a statute of limitations allowing a customer a
three-year period to seek a credit to an account improperly
charged by payment of an item bearing an unauthorized
indorsement. Third, subsection (c) is added to Section 4-208 to
assure that if a depositary bank is sued for breach of a
presentment warranty, it can defend by showing that the drawer
is precluded by Section 3-406 or Section 4-406(c) and (d).
Section 36-4-407. PAYOR BANK'S RIGHT TO
SUBROGATION ON IMPROPER PAYMENT.
If a payor bank has paid an item over the order of the
drawer or maker to stop payment, or after an account has been
closed, or otherwise under circumstances giving a basis for
objection by the drawer or maker, to prevent unjust enrichment
and only to the extent necessary to prevent loss to the bank by
reason of its payment of the item, the payor bank is subrogated
to the rights of:
(1) any holder in due course on the item against the
drawer or maker;
(2) the payee or any other holder of the item against the
drawer or maker either on the item or under the transaction out
of which the item arose; and
(3) the drawer or maker against the payee or any other
holder of the item with respect to the transaction out of which
the item arose.
OFFICIAL COMMENT
1. Section 4-403 states that a stop-payment order or an order
to close an account is binding on a bank. If a bank pays an item
over such an order it is prima facie liable, but under subsection
(c) of Section 4-403 the burden of establishing the fact and
amount of loss from such payment is on the customer. A
defense frequently interposed by a bank in an action against it
for wrongful payment over a stop-payment order is that the
drawer or maker suffered no loss because it would have been
liable to a holder in due course in any event. On this argument
some cases have held that payment cannot be stopped against
a holder in due course. Payment can be stopped, but if it is, the
drawer or maker is liable and the sound rule is that the bank is
subrogated to the rights of the holder in due course. The
preamble and paragraph (1) of this section state this rule.
2. Paragraph (2) also subrogates the bank to the rights of the
payee or other holder against the drawer or maker either on the
item or under the transaction out of which it arose. It may well
be that the payee is not a holder in due course but still has good
rights against the drawer. These may be on the check but also
may not be as, for example, where the drawer buys goods from
the payee and the goods are partially defective so that the payee
is not entitled to the full price, but the goods are still worth a
portion of the contract price. If the drawer retains the goods it
is obligated to pay a part of the agreed price. If the bank has
paid the check it should be subrogated to this claim of the
payee against the drawer.
3. Paragraph (3) subrogates the bank to the rights of the
drawer or maker against the payee or other holder with respect
to the transaction out of which the item arose. If, for example,
the payee was a fraudulent salesman inducing the drawer to
issue a check for defective securities, and the bank pays the
check over a stop-payment order but reimburses the drawer for
such payment, the bank should have a basis for getting the
money back from the fraudulent salesman.
4. The limitations of the preamble prevent the bank itself
from getting any double recovery or benefits out of its
subrogation rights conferred by the section.
5. The spelling out of the affirmative rights of the bank in
this section does not destroy other existing rights (Section
1-103). Among others these may include the defense of a payor
bank that by conduct in recognizing the payment a customer
has ratified the bank's action in paying in disregard of a
stop-payment order or right to recover money paid under a
mistake.
Section 36-4-501. HANDLING OF DOCUMENTARY
DRAFTS; DUTY TO SEND FOR PRESENTMENT AND TO
NOTIFY CUSTOMER OF DISHONOR.
A bank that takes a documentary draft for collection shall
present or send the draft and accompanying documents for
presentment and, upon learning that the draft has not been paid
or accepted in due course, shall seasonably notify its customer
of the fact even though it may have discounted or bought the
draft or extended credit available for withdrawal as of
right.
OFFICIAL COMMENT
This section states the duty of a bank handling a
documentary draft for a customer. "Documentary
draft" is defined in Section 4-104. The duty stated exists
even if the bank has bought the draft. This is because to the
customer the draft normally represents an underlying
commercial transaction, and if that is not going through as
planned the customer should know it promptly.
Section 36-4-502. PRESENTMENT OF `ON
ARRIVAL' DRAFTS.
If a draft or the relevant instructions require presentment `on
arrival', `when goods arrive' or the like, the collecting bank
need not present until in its judgment a reasonable time for
arrival of the goods has expired. Refusal to pay or accept
because the goods have not arrived is not dishonor; the bank
must notify its transferor of the refusal but need not present the
draft again until it is instructed to do so or learns of the arrival
of the goods.
OFFICIAL COMMENT
The section is designed to establish a definite rule for
"on arrival" drafts. The term includes not only
drafts drawn payable "on arrival" but also drafts
forwarded with instructions to present "on arrival."
The term refers to the arrival of the relevant goods. Unless a
bank has actual knowledge of the arrival of the goods, as for
example, when it is the "notify" party on the bill of
lading, the section only requires the exercise of such judgment
in estimating time as a bank may be expected to have.
Commonly the buyer-drawee will want the goods and will
therefore call for the documents and take up the draft when they
do arrive.
Section 36-4-503. RESPONSIBILITY OF
PRESENTING BANK FOR DOCUMENTS AND GOODS;
REPORT OF REASONS FOR DISHONOR; REFEREE IN
CASE OF NEED.
Unless otherwise instructed and except as provided in
Chapter 5, a bank presenting a documentary draft:
(1) must deliver the documents to the drawee on
acceptance of the draft if it is payable more than three days
after presentment; otherwise, only on payment; and
(2) upon dishonor, either in the case of presentment for
acceptance or presentment for payment, may seek and follow
instructions from any referee in case of need designated in the
draft or, if the presenting bank does not choose to utilize the
referee's services, it must use diligence and good faith to
ascertain the reason for dishonor, must notify its transferor of
the dishonor and of the results of its effort to ascertain the
reasons therefor, and must request instructions.
However the presenting bank is under no obligation with
respect to goods represented by the documents except to follow
any reasonable instructions seasonably received; it has a right
to reimbursement for any expense incurred in following
instructions and to prepayment of or indemnity for those
expenses.
OFFICIAL COMMENT
1. This section states the rules governing, in the absence of
instructions, the duty of the presenting bank in case either of
honor or of dishonor of a documentary draft. The section
should be read in connection with Section 2-514 on when
documents are deliverable on acceptance, when on payment.
2. If the draft is drawn under a letter of credit, Article 5
controls. See Sections 5-109 through 5-114.
Section 36-4-504. PRIVILEGE OF PRESENTING
BANK TO DEAL WITH GOODS; SECURITY INTEREST
FOR EXPENSES.
(a) A presenting bank that, following the dishonor of a
documentary draft, has seasonably requested instructions but
does not receive them within a reasonable time may store, sell,
or otherwise deal with the goods in any reasonable manner.
(b) For its reasonable expenses incurred by action under
subsection (a), the presenting bank has a lien upon the goods or
their proceeds, which may be foreclosed in the same manner as
an unpaid seller's lien."
OFFICIAL COMMENT
The section gives the presenting bank, after dishonor, a
privilege to deal with the goods in any commercially reasonable
manner pending instructions from its transferor and, if still
unable to communicate with its principal after a reasonable
time, a right to realize its expenditures as if foreclosing on an
unpaid seller's lien (Section 2-706). The provision includes
situations in which storage of goods or other action becomes
commercially necessary pending receipt of any requested
instructions, even if the requested instructions are later
received.
The "reasonable manner" referred to means one
reasonable in the light of business factors and the judgment of
a business man.
SECTION 3. Item (20), as last amended by Act 161 of 1991,
and items (24) and (43) of Section 36-1-201 of the 1976 Code
are amended to read:
"(20) `Holder', with respect to a negotiable
instrument, means a the person who
is in possession of a document of title or an instrument
or an investment security drawn, issued, or indorsed to him or
to his order or to bearer or in blank if the instrument is
payable to bearer or, in the case of an instrument payable to an
identified person, if the identified person is in possession.
`Holder', with respect to a document of title, means the person
in possession if the goods are deliverable to bearer or to the
order of the person in possession.
(24) `Money' means a medium of exchange authorized or
adopted by a domestic or foreign government as a part of its
currency and includes a monetary unit of account
established by an intergovernmental organization or by
agreement between two or more nations.
(43) `Unauthorized' signature or indorsement means
one made without actual, implied, or apparent
authority and includes a forgery."
OFFICIAL COMMENT
43. Under the former version of Section 1-201(43), it
was not clear whether a reference to an "unauthorized
signature" in Articles 3 and 4 applied to indorsements.
The words "or indorsement" are deleted so that
references to "unauthorized signature" in
Section 3-406 and elsewhere will unambiguously refer to any
signature.
SECTION 4. Section 36-1-207 of the 1976 Code is amended
to read:
"Section 36-1-207. PERFORMANCE OR
ACCEPTANCE UNDER RESERVATION OF RIGHTS.
(1) A party who, with explicit
reservation of rights, performs or promises
performance or assents to performance in a manner demanded
or offered by the other party does not thereby prejudice the
rights reserved. Such words as `without prejudice', `under
protest', or the like are sufficient.
(2) Subsection (1) does not apply to an accord and
satisfaction."
OFFICIAL COMMENT
1. This section provides machinery for the continuation of
performance along the lines contemplated by the contract
despite a pending dispute, by adopting the mercantile device of
going ahead with delivery, acceptance, or payment
"without prejudice," "under protest,"
"under reserve," "with reservation of all our
rights," and the like. All of these phrases completely
reserve all rights within the meaning of this section. The
section therefore contemplates that limited as well as general
reservations and acceptance by a party may be made
"subject to satisfaction of our purchaser,"
"subject to acceptance by our customers," or the
like.
2. This section does not add any new requirement of
language of reservation where not already required by law, but
merely provides a specific measure on which a party can rely
as that party makes or concurs in any interim adjustment in the
course of performance. It does not affect or impair the
provisions of this Act such as those under which the buyer's
remedies for defect survive acceptance without being expressly
claimed if notice of the defects is given within a reasonable
time. Nor does it disturb the policy of those cases which
restrict the effect of a waiver of a defect to reasonable limits
under the circumstances, even though no such reservation is
expressed.
The section is not addressed to the creation or loss of
remedies in the ordinary course of performance but rather to a
method of procedure where one party is claiming as of right
something which the other believes to be unwarranted.
3. Judicial authority was divided on the issue of whether
former Section 1-207 (present subsection (1)) applied to an
accord and satisfaction. Typically the cases involved attempts
to reach an accord and satisfaction by use of a check tendered
in full satisfaction of a claim. Subsection (2) of revised Section
1-207 resolves this conflict by stating that Section 1-207 does
not apply to an accord and satisfaction. Section 3-311 of
revised Article 3 governs if an accord and satisfaction is
attempted by tender of a negotiable instrument as stated in that
section. If Section 3-311 does not apply, the issue of whether
an accord and satisfaction has been effected is determined by
the law of contract. Whether or not Section 3-311 applies,
Section 1-207 has no application to an accord and satisfaction.
SECTION 5. Section 36-2-511 of the 1976 Code is amended
to read:
"Section 36-2-511. (1) Unless otherwise agreed
tender of payment is a condition to the seller's duty to tender
and complete any delivery.
(2) Tender of payment is sufficient when made by any
means or in any manner current in the ordinary course of
business unless the seller demands payment in legal tender and
gives any extension of time reasonably necessary to procure it.
(3) Subject to the provisions of this act on the effect of an
instrument on an obligation (Section
36-3-802310), payment by check is conditional
and is defeated as between the parties by dishonor of the check
on due presentment."
OFFICIAL COMMENT
If revised Article 3 is adopted, the reference in Section
2-511 to Section 3-802 should be changed to Section 3-310.
SECTION 6. This act takes effect upon approval by the
Governor.
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