H 4449 Session 109 (1991-1992)
H 4449 General Bill, By Wilkins, R.C. Fulmer, S.E. Gonzales, Harvin,
B.H. Harwell, Keegan, K.G. Kempe, Kirsh, S.G. Manly, Quinn, J. Rama, Riser,
R. Smith, Vaughn, C.Y. Waites, C.C. Wells and Young-Brickell
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.
02/25/92 House Introduced and read first time HJ-10
02/25/92 House Referred to Committee on Judiciary HJ-10
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 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
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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