S 252 Session 111 (1995-1996)
S 0252 General Bill, By Hayes and M.T. Rose
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 Chapter 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.
10/31/94 Senate Prefiled
10/31/94 Senate Referred to Committee on Judiciary
01/10/95 Senate Introduced and read first time SJ-86
01/10/95 Senate Referred to Committee on Judiciary SJ-86
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 CHAPTER 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. Chapter 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.
(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
4-105) 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 (b) 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.
Section 36-3-312. LOST, DESTROYED, OR STOLEN
CASHIER'S CHECK, TELLER'S CHECK, OR CERTIFIED
CHECK.
(a) As used in this section:
(1) "Check" means a cashier's check, teller's
check, or certified check.
(2) "Claimant" means a person who claims the
right to receive the amount of a cashier's check, teller's check, or
certified check that was lost, destroyed, or stolen.
(3) "Declaration of loss" means a written state-
ment, made under penalty of perjury, to the effect that:
(i) the declarer lost possession of a check;
(ii) the declarer is the drawer or payee of the check, in the
case of a certified check, or the remitter or payee of the check, in
the case of a cashier's check or teller's check;
(iii) the loss of possession was not the result of a transfer
by the declarer or a lawful seizure; and
(iv) the declarer cannot reasonably obtain possession of
the check because the check 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.
(4) "Obligated bank" means the issuer of a
cashier's check or teller's check or the acceptor of a certified check.
(b) A claimant may assert a claim to the amount of a check by
a communication to the obligated bank describing the check with
reasonable certainty and requesting payment of the amount of the
check, if:
(i) the claimant is the drawer or payee of a certified check
or the remitter or payee of a cashier's check or teller's check;
(ii) the communication contains or is accompanied by a
declaration of loss of the claimant with respect to the check;
(iii) the communication is received at a time and in a
manner affording the bank a reasonable time to act on it before the
check is paid; and
(iv) the claimant provides reasonable identification if
requested by the obligated bank.
Delivery of a declaration of loss is a warranty of the truth of the
statements made in the declaration.
If a claim is asserted in compliance with this subsection, the
following rules apply:
(1) The claim becomes enforceable at the time the claim is
asserted, or the ninetieth day following the date of the check, in the
case of a cashier's check or teller's check, or the ninetieth day
following the date of the acceptance, in the case of a certified
check, whichever is later.
(2) Until the claim becomes enforceable, it has no legal effect
and the obligated bank may pay the check or, in the case of a
teller's check, may permit the drawee to pay the check. Payment to
a person entitled to enforce the check discharges all liability of the
obligated bank with respect to the check.
(3) If the claim becomes enforceable before the check is
presented for payment, the obligated bank is not obliged to pay the
check.
(4) When the claim becomes enforceable, the obligated bank
becomes obliged to pay the amount of the check to the claimant if
payment of the check has not been made to a person entitled to
enforce the check. Subject to Section 36-4-302(a)(1), payment to
the claimant discharges all liability of the obligated bank with
respect to the check.
(c) If the obligated bank pays the amount of a check to a
claimant under subsection (b)(4) and the check is presented for
payment by a person having rights of a holder in due course, the
claimant is obliged to refund the payment to the obligated bank if
the check is paid, or pay the amount of the check to the person
having rights of a holder in due course if the check is dishonored.
(d) If a claimant has the right to assert a claim under subsection
(b) and is also a person entitled to enforce a cashier's check, teller's
check, or certified check which is lost, destroyed, or stolen, the
claimant may assert rights with respect to the check either under
this section or Section 36-3-309.
OFFICIAL COMMENT
1. This section applies to cases in which a cashier's check,
teller's check, or certified check is lost, destroyed, or stolen. In one
typical case a customer of a bank closes his or her account and
takes a cashier's check or teller's check of the bank as payment of
the amount of the account. The customer may be moving to a new
area and the check is to be used to open a bank account in that
area. In such a case the check will normally be payable to the
customer. In another typical case a cashier's check or teller's check
is bought from a bank for the purpose of paying some obligation of
the buyer of the check. In such a case the check may be made
payable to the customer and then negotiated to the creditor by
indorsement. But often, the payee of the check is the creditor. In
the latter case the customer is a remitter. The section covers loss of
the check by either the remitter or the payee. The section also
covers loss of a certified check by either the drawer or payee.
Under Section 3-309 a person seeking to enforce a lost,
destroyed, or stolen cashier's check or teller's check may be
required by the court to give adequate protection to the issuing bank
against loss that might occur by reason of the claim by another
person to enforce the check. This might require the posting of an
expensive bond for the amount of the check. Moreover, Section
3-309 applies only to a person entitled to enforce the check. It does
not apply to a remitter of a cashier's check or teller's check or to
the drawer of a certified check. Section 3-312 applies to both. The
purpose of Section 3-312 is to offer a person who loses such a
check a means of getting refund of the amount of the check within
a reasonable period of time without the expense of posting a bond
and with full protection of the obligated bank.
2. A claim to the amount of a lost, destroyed, or stolen
cashier's check, teller's check, or certified check may be made
under subsection (b) if the following requirements of that subsection
are met. First, a claim may be asserted only by the drawer or
payee of a certified check or the remitter or payee of a cashier's
check or teller's check. An indorsee of a check is not covered
because the indorsee is not an original party to the check or a
remitter. Limitation to an original party or remitter gives the
obligated bank the ability to determine, at the time it becomes
obligated on the check, the identity of the person or persons who
can assert a claim with respect to the check. The bank is not faced
with having to determine the rights of some person who was not a
party to the check at that time or with whom the bank had not
dealt. If a cashier's check is issued to the order of the person who
purchased it from the bank and that person indorses it over to a
third person who loses the check, the third person may assert rights
to enforce the check under Section 3-309 but has no rights under
Section 3-312.
Second, the claim must be asserted by a communication to the
obligated bank describing the check with reasonable certainty and
requesting payment of the amount of the check. "Obligated
bank" is defined in subsection (a)(4). Third, the
communication must be received in time to allow the obligated
bank to act on the claim before the check is paid, and the claimant
must provide reasonable identification if requested. Subsections
(b)(iii) and (iv). Fourth, the communication must contain or be
accompanied by a declaration of loss described in subsection (b).
This declaration is an affidavit or other writing made under penalty
of perjury alleging the loss, destruction, or theft of the check and
stating that the declarer is a person entitled to assert a claim, i.e. the
drawer or payee of a certified check or the remitter or payee of a
cashier's check or teller's check.
A claimant who delivers a declaration of loss makes a
warranty of the truth of the statements made in the declaration.
The warranty is made to the obligated bank and anybody who has a
right to enforce the check. If the declaration of loss falsely alleges
loss of a cashier's check that did not in fact occur, a holder of the
check who was unable to obtain payment because subsection (b)(3)
and (4) caused the obligated bank to dishonor the check would have
a cause of action against the declarer for breach of warranty.
The obligated bank may not impose additional requirements on
the claimant to assert a claim under subsection (b). For example,
the obligated bank may not require the posting of a bond or other
form of security. Section 3-312(b) states the procedure for
asserting claims covered by the section. Thus, procedures that may
be stated in other law for stating claims to property do not apply
and are displaced within the meaning of Section 1-103.
3. A claim asserted under subsection (b) does not have any
legal effect, however, until the date it becomes enforceable, which
cannot be earlier than 90 days after the date of a cashier's check or
teller's check or 90 days after the date of acceptance of a certified
check. Thus, if a lost check is presented for payment within the
90-day period, the bank may pay a person entitled to enforce the
check without regard to the claim and is discharged of all liability
with respect to the check. This ensures the continued utility of
cashier's checks, teller's checks, and certified checks as cash
equivalents. Virtually all such checks are presented for payment
within 90 days.
If the claim becomes enforceable and payment has not been
made to a person entitled to enforce the check, the bank becomes
obligated to pay the amount of the check to the claimant.
Subsection (b)(4). When the bank becomes obligated to pay the
amount of the check to the claimant, the bank is relieved of its
obligation to pay the check. Subsection (b)(3). Thus, any person
entitled to enforce the check, including even a holder in due course,
loses the right to enforce the check after a claim under subsection
(b) becomes enforceable.
If the obligated bank pays the claimant under subsection
(b)(4), the bank is discharged of all liability with respect to the
check. The only exception is the unlikely case in which the
obligated bank subsequently incurs liability under Section 4-302
(a)(1) with respect to the check. For example, Obligated Bank is
the issuer of a cashier's check and, after a claim becomes
enforceable, it pays the claimant under subsection (b)(4). Later the
check is presented to Obligated Bank for payment over the counter.
Under subsection (b)(3), Obligated Bank is not obliged to pay the
check and may dishonor the check by returning it to the person who
presented it for payment. But the normal rules of check collection
are not affected by Section 3-312. If Obligated Bank retains the
check beyond midnight of the day of presentment without settling
for it, it becomes accountable for the amount of the check under
Section 4-302 (a)(1) even though it had no obligation to pay the
check.
An obligated bank that pays the amount of a check to a
claimant under subsection (b)(4) is discharged of all liability on the
check so long as the assertion of the claim meets the requirements
of subsection (b) discussed in Comment 2. This is important in
cases of fraudulent declarations of loss. For example, if the
claimant falsely alleges a loss that in fact did not occur, the bank,
subject to Section 1-203, may rely on the declaration of loss. On
the other hand, a claim may be asserted only by a person described
in subsection (b)(i). Thus, the bank is discharged under subsection
(a)(4) only if it pays such a person. Although it is highly unlikely,
it is possible that more than one person could assert a claim under
subsection (b) to the amount of a check. Such a case could occur if
one of the claimants makes a false declaration of loss. The
obligated bank is not required to determine whether a claimant who
complies with subsection (b) is acting wrongfully. The bank may
utilize procedures outside this Article, such as interpleader, under
which the conflicting claims may be adjudicated.
Although it is unlikely that a lost check would be presented for
payment after the claimant was paid by the bank under subsection
(b)(4), it is possible for it to happen. Suppose the declaration of
loss by the claimant fraudulently alleged a loss that in fact did not
occur. If the claimant negotiated the check, presentment for
payment would occur shortly after negotiation in almost all cases.
Thus, a fraudulent declaration of loss is not likely to occur unless
the check is negotiated after the 90-day period has already expired
or shortly before expiration. In such a case the holder of the check,
who may not have noticed the date of the check, is not entitled to
payment from the obligated bank if the check is presented for
payment after the claim becomes enforceable. Subsection (b)(3).
The remedy of the holder who is denied payment in that case is an
action against the claimant under subsection (c) if the holder is a
holder in due course, or for breach of warranty under subsection
(b). The holder would also have common law remedies against the
claimant under the law of restitution or fraud.
4. The following cases illustrate the operation of Section
3-312:
Case #1. Obligated Bank (OB) certified a
check drawn by its customer, Drawer (D), payable to
Payee (P). Two days after the check was certified, D
lost the check and then asserted a claim pursuant to
subsection (b). The check had not been presented for
payment when D's claim became enforceable 90 days
after the check was certified. Under subsection (b)(4),
at the time D's claim became enforceable OB became
obliged to pay D the amount of the check. If the
check is later presented for payment, OB may refuse
to pay the check and has no obligation to anyone to
pay the check. Any obligation owed by D to P, for
which the check was intended as payment, is
unaffected because the check was never delivered to P.
Case #2. Obligated Bank (OB) issued a
teller's check to Remitter (R) payable to Payee (P). R
delivered the check to P in payment of an obligation.
P lost the check and then asserted a claim pursuant to
subsection (b). To carry out P's order, OB issued an
order pursuant to Section 4-403(a) to the drawee of
the teller's check to stop payment of the check
effective on the 90th day after the date of the teller's
check. The check was not presented for payment. On
the 90th day after the date of the teller's check P's
claim becomes enforceable and OB becomes obliged
to pay P the amount of the check. As in Case #1, OB
has no further liability with respect to the check to
anyone. When R delivered the check to P, R's
underlying obligation to P was discharged under
Section 3-310. Thus, R suffered no loss. Since P
received the amount of the check, P also suffered no
loss except with respect to the delay in receiving the
amount of the check.
Case #3. Obligated Bank (OB) issued a
cashier's check to its customer, Payee (P). Two days
after issue, the check was stolen from P who then
asserted a claim pursuant to subsection (b). Ten days
after issue, the check was deposited by X in an
account in Depositary Bank (DB). X had found the
check and forged the indorsement of P. DB promptly
presented the check to OB and obtained payment on
behalf of X. On the 90th day after the date of the
check P's claim becomes enforceable and P is entitled
to receive the amount of the check from OB.
Subsection (b)(4). Although the check was presented
for payment before P's claim became enforceable, OB
is not discharged. Because of the forged indorsement
X was not a holder and neither was DB. Thus, neither
is a person entitled to enforce the check (Section
3-301) and OB is not discharged under Section
3-602(a). Thus, under subsection (b)(4), because OB
did not pay a person entitled to enforce the check, OB
must pay P. OB's remedy is against DB for breach of
warranty under Section 4-208(a)(1). As an alternative
to the remedy under Section 3-312, P could recover
from DB for conversion under Section 3-420(a).
Case #4. Obligated Bank (OB) issued a
cashier's check to its customer, Payee (P). P made an
unrestricted blank indorsement of the check and
mailed the check to P's bank for deposit to P's
account. The check was never received by P's bank.
When P discovered the loss, P asserted a claim
pursuant to subsection (b). X found the check and
deposited it in X's account in Depositary Bank (DB)
after indorsing the check. DB presented the check for
payment before the end of the 90-day period after its
date. OB paid the check. Because of the unrestricted
blank indorsement by P, X became a holder of the
check. DB also became a holder. Since the check
was paid before P's claim became enforceable and
payment was made to a person entitled to enforce the
check, OB is discharged of all liability with respect to
the check. Subsection (b)(2). Thus, P is not entitled
to payment from OB. Subsection (b)(4) doesn't apply.
Case #5. Obligated Bank (OB) issued a
cashier's check to its customer, Payee (P). P made an
unrestricted blank indorsement of the check and
mailed the check to P's bank for deposit to P's
account. The check was never received by P's bank.
When P discovered the loss, P asserted a claim
pursuant to subsection (b). At the end of the 90-day
period after the date of the check, OB paid the amount
of the check to P under subsection (b)(4). X then
found the check and deposited it to X's account in
Depositary Bank (DB). DB presented the check to OB
for payment. OB is not obliged to pay the check.
Subsection (b)(4). If OB dishonors the check, DB's
remedy is to charge back X's account. Section
4-214(a). Although P, as an indorser, would normally
have liability to DB under Section 3-415(a) because
the check was dishonored, P is released from that
liability under Section 3-415(e) because collection of
the check was initiated more than 30 days after the
indorsement. DB has a remedy only against X. A
depositary bank that takes a cashier's check that
cannot be presented for payment before expiration of
the 90-day period after its date is on notice that the
check might not be paid because of the possibility of a
claim asserted under subsection (b) which would
excuse the issuer of the check from paying the check.
Thus, the depositary bank cannot safely release funds
with respect to the check until it has assurance that the
check has been paid. DB cannot be a holder in due
course of the check because it took the check when the
check was overdue. Section 3-304(a)(2). Thus, DB
has no action against P under subsection (c).
Case #6. Obligated Bank (OB)issued a
cashier's check payable to bearer and delivered it to its
customer, Remitter (R). R held the check for 90 days
and then wrongfully asserted a claim to the amount of
the check under subsection (b). The declaration of
loss fraudulently stated that the check was lost. R
received payment from OB under subsection (b)(4). R
then negotiated the check to X for value. X presented
the check to OB for payment. Although OB, under
subsection (b)(2), was not obliged to pay the check,
OB paid X by mistake. OB's teller did not notice that
the check was more than 90 days old and was not
aware that OB was not obliged to pay the check. If X
took the check in good faith, OB may not recover
from X. Section 3-418(c). OB's remedy is to recover
from R for fraud or for breach of warranty in making
a false declaration of loss. Subsection (b).
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), (d), and (e) 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)(1) 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 mean-
ing 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
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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