S 126 Session 112 (1997-1998)
S 0126 General Bill, By Hayes
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.
01/14/97 Senate Introduced and read first time SJ-133
01/14/97 Senate Referred to Committee on Banking and Insurance SJ-133
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 IOU or other written acknowledgment 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 ninety 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 statement, 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 meaning if the
information is electronically stored and is instantly retrievable at all
branches of the bank. Hence, the inference to be drawn from the
deletion of the bracketed language is that where record keeping is
done is no longer an important factor in determining whether a
branch is a separate bank.
Section 36-4-108. Time of receipt of items.
(a) For the purpose of allowing time to process items, prove
balances, and make the necessary entries on its books to determine its
position for the day, a bank may fix an afternoon hour of two o'clock
p.m. or later as a cutoff hour for the handling of money and items and
the making of entries on its books.
(b) An item or deposit of money received on any day after a
cutoff hour so fixed or after the close of the banking day may be
treated as being received at the opening of the next banking day.
OFFICIAL COMMENT
1. Each of the huge volume of checks processed each day must
go through a series of accounting procedures that consume time.
Many banks have found it necessary to establish a cutoff hour to
allow time for these procedures to be completed within the time
limits imposed by Article 4. Subsection (a) approves a cutoff hour
of this type provided it is not earlier than 2 P.M. Subsection (b)
provides that if such a cutoff hour is fixed, items received after the
cutoff hour may be treated as being received at the opening of the
next banking day. If the number of items received either through the
mail or over the counter tends to taper off radically as the afternoon
hours progress, a 2 P.M. cutoff hour does not involve a large portion
of the items received but at the same time permits a bank using such
a cutoff hour to leave its doors open later in the afternoon without
forcing into the evening the completion of its settling and proving
process.
2. The provision in subsection (b) that items or deposits received
after the close of the banking day may be treated as received at the
opening of the next banking day is important in cases in which a bank
closes at twelve or one o'clock, e.g., on a Saturday, but continues to
receive some items by mail or over the counter if, for example, it
opens Saturday evening for the limited purpose of receiving deposits
and cashing checks.
Section 36-4-109. Delays.
(a) Unless otherwise instructed, a collecting bank in a good faith
effort to secure payment of a specific item drawn on a payor other
than a bank, and with or without the approval of any person involved,
may waive, modify, or extend time limits imposed or permitted by
this chapter for a period not exceeding two additional banking days
without discharge of drawers or indorsers or liability to its transferor
or a prior party.
(b) Delay by a collecting bank or payor bank beyond time limits
prescribed or permitted by this chapter or by instructions is excused
if (i) the delay is caused by interruption of communication or
computer facilities, suspension of payments by another bank, war,
emergency conditions, failure of equipment, or other circumstances
beyond the control of the bank, and (ii) the bank exercises such
diligence as the circumstances require.
OFFICIAL COMMENT
1. Sections 4-202(b), 4-214, 4-301, and 4-302 prescribe various
time limits for the handling of items. These are the limits of time
within which a bank, in fulfillment of its obligation to exercise
ordinary care, must handle items entrusted to it for collection or
payment. Under Section 4-103 they may be varied by agreement or
by Federal Reserve regulations or operating circular, clearing-house
rules, or the like. Subsection (a) permits a very limited extension of
these time limits. It authorizes a collecting bank to take additional
time in attempting to collect drafts drawn on nonbank payors with or
without the approval of any interested party. The right of a collecting
bank to waive time limits under subsection (a) does not apply to
checks. The two-day extension can only be granted in a good faith
effort to secure payment and only with respect to specific items. It
cannot be exercised if the customer instructs otherwise. Thus limited
the escape provision should afford a limited degree of flexibility in
special cases but should not interfere with the overall requirement
and objective of speedy collections.
2. An extension granted under subsection (a) is without discharge
of drawers or indorsers. It therefore extends the times for
presentment or payment as specified in Article 3.
3. Subsection (b) is another escape clause from time limits. This
clause operates not only with respect to time limits imposed by the
Article itself but also time limits imposed by special instructions, by
agreement or by Federal regulations or operating circulars,
clearing-house rules or the like. The latter time limits are
"permitted" by the Code. For example, a payor bank that
fails to make timely return of a dishonored item may be accountable
for the amount of the item. Subsection (b) excuses a bank from this
liability when its failure to meet its midnight deadline resulted from,
for example, a computer breakdown that was beyond the control of
the bank, so long as the bank exercised the degree of diligence that
the circumstances required. In Port City State Bank v. American
National Bank, 486 F.2d 196 (10th Cir. 1973), the court held
that a bank exercised sufficient diligence to be excused under this
subsection. If delay is sought to be excused under this subsection, the
bank has the burden of proof on the issue of whether it exercised
"such diligence as the circumstances require." The
subsection is consistent with Regulation CC, Section 229.38(e).
Section 36-4-110. Electronic presentment.
(a) 'Agreement for electronic presentment' means an
agreement, clearing-house rule, or Federal Reserve regulation or
operating circular providing that presentment of an item may be made
by transmission of an image of an item or information describing the
item (presentment notice) rather than delivery of the item itself. The
agreement may provide for procedures governing retention,
presentment, payment, dishonor, and other matters concerning items
subject to the agreement.
(b) Presentment of an item pursuant to an agreement for
presentment is made when the presentment notice is received.
(c) If presentment is made by presentment notice, a reference
to 'item' or 'check' in this chapter means the presentment notice
unless the context otherwise indicates.
OFFICIAL COMMENT
1. "An agreement for electronic presentment" refers
to an agreement under which presentment may be made to a payor
bank by a presentment notice rather than by presentment of the item.
Under imaging technology now under development, the presentment
notice might be an image of the item. The electronic presentment
agreement may provide that the item may be retained by a depositary
bank, other collecting bank, or even a customer of the depositary
bank, or it may provide that the item will follow the presentment
notice. The identifying characteristic of an electronic presentment
agreement is that presentment occurs when the presentment notice is
received. "An agreement for electronic presentment"
does not refer to the common case of retention of items by payor
banks because the item itself is presented to the payor bank in these
cases. Payor bank check retention is a matter of agreement between
payor banks and their customers. Provisions on payor bank check
retention are found in Section 4-406(b).
2. The assumptions under which the electronic presentment
amendments are based are as follows: No bank will participate in an
electronic presentment program without an agreement. These
agreements may be either bilateral (Section 4-103(a)), under which
two banks that frequently do business with each other may agree to
depositary bank check retention, or multilateral (Section 4-103(b)),
in which large segments of the banking industry may participate in
such a program. In the latter case, federal or other uniform regulatory
standards would likely supply the substance of the electronic
presentment agreement, the application of which could be triggered
by the use of some form of identifier on the item. Regulation CC,
Section 229.36(c) authorizes truncation agreements but forbids them
from extending return times or otherwise varying requirements of the
part of Regulation CC governing check collection without the
agreement of all parties interested in the check. For instance, an
extension of return time could damage a depositary bank which must
make funds available to its customers under mandatory availability
schedules. The Expedited Funds Availability Act, 12 U.S.C. Section
4008(b)(2), directs the Federal Reserve Board to consider requiring
that banks provide for check truncation.
3. The parties affected by an agreement for electronic
presentment, with the exception of the customer, can be expected to
protect themselves. For example, the payor bank can probably be
expected to limit its risk of loss from drawer forgery by limiting the
dollar amount of eligible items (Federal Reserve program), by
reconcilement agreements (ABA Safekeeping program), by insurance
(credit union share draft program), or by other means. Because
agreements will exist, only minimal amendments are needed to make
clear that the UCC does not prohibit electronic presentment.
Section 36-4-111. Statute of limitations.
An action to enforce an obligation, duty, or right arising under this
chapter must be commenced within three years after the cause of
action accrues.
OFFICIAL COMMENT
This section conforms to the period of limitations set by Section
3-118(g) for actions for breach of warranty and to enforce other
obligations, duties or rights arising under Article 3. Bracketing
"cause of action" recognizes that some states use a
different term, such as "claim for relief."
Section 36-4-201. Status of collecting bank as agent and
provisional status of credits; applicability of chapter; item indorsed
'pay any bank'.
(a) Unless a contrary intent clearly appears and before the time
that a settlement given by a collecting bank for an item is or becomes
final, the bank, with respect to the item, is an agent or sub-agent of
the owner of the item and any settlement given for the item is
provisional. This provision applies regardless of the form of
indorsement or lack of indorsement and even though credit given for
the item is subject to immediate withdrawal as of right or is in fact
withdrawn; but the continuance of ownership of an item by its owner
and any rights of the owner to proceeds of the item are subject to
rights of a collecting bank, such as those resulting from outstanding
advances on the item and rights of recoupment or setoff. If an item
is handled by banks for purposes of presentment, payment, collection,
or return, the relevant provisions of this chapter apply even though
action of the parties clearly establishes that a particular bank has
purchased the item and is the owner of it.
(b) After an item has been indorsed with the words 'pay any bank'
or the like, only a bank may acquire the rights of a holder until the
item has been:
(1) returned to the customer initiating collection; or
(2) specially indorsed by a bank to a person who is not a
bank.
OFFICIAL COMMENT
1. This section states certain basic rules of the bank collection
process. One basic rule, appearing in the last sentence of subsection
(a), is that, to the extent applicable, the provisions of the Article
govern without regard to whether a bank handling an item owns the
item or is an agent for collection. Historically, much time has been
spent and effort expended in determining or attempting to determine
whether a bank was a purchaser of an item or merely an agent for
collection. See discussion of this subject and cases cited in 11 A.L.R.
1043, 16 A.L.R. 1084, 42 A.L.R. 492, 68 A.L.R. 725, 99 A.L.R. 486.
See also Section 4 of the American Bankers Association Bank
Collection Code. The general approach of Article 4, similar to that
of other articles, is to provide, within reasonable limits, rules or
answers to major problems known to exist in the bank collection
process without regard to questions of status and ownership but to
keep general principles such as status and ownership available to
cover residual areas not covered by specific rules. In line with this
approach, the last sentence of subsection (a) says in effect that Article
4 applies to practically every item moving through banks for the
purpose of presentment, payment or collection.
2. Within this general rule of broad coverage, the first two
sentences of subsection (a) state a rule of agency status.
"Unless a contrary intent clearly appears" the status of a
collecting bank is that of an agent or sub-agent for the owner of the
item. Although as indicated in Comment 1 it is much less important
under Article 4 to determine status than has been the case heretofore,
status may have importance in some residual areas not covered by
specific rules. Further, since status has been considered so important
in the past, to omit all reference to it might cause confusion. The
status of agency "applies regardless of the form of indorsement
or lack of indorsement and even though credit given for the item is
subject to immediate withdrawal as of right or is in fact
withdrawn." Thus questions heretofore litigated as to whether
ordinary indorsements "for deposit," "for
collection" or in blank have the effect of creating an agency
status or a purchase, no longer have significance in varying the prima
facie rule of agency. Similarly, the nature of the credit given for an
item or whether it is subject to immediate withdrawal as of right or
is in fact withdrawn, does not alter the agency status. See A.L.R.
references supra in Comment 1.
A contrary intent can change agency status but this must be clear.
An example of a clear contrary intent would be if collateral papers
established or the item bore a legend stating that the item was sold
absolutely to the depositary bank.
3. The prima facie agency status of collecting banks is consistent
with prevailing law and practice today. Section 2 of the American
Bankers Association Bank Collection Code so provided. Legends on
deposit tickets, collection letters and acknowledgments of items and
Federal Reserve operating circulars consistently so provide. The
status is consistent with rights of charge-back (Section 4-214 and
Section 11 of the ABA Code) and risk of loss in the event of
insolvency (Section 4-216 and Section 13 of the ABA Code). The
right of charge-back with respect to checks is limited by Regulation
CC, Section 226.36(d).
4. Affirmative statement of a prima facie agency status for
collecting banks requires certain limitations and qualifications.
Under current practices substantially all bank collections sooner or
later merge into bank credits, at least if collection is effected.
Usually, this takes place within a few days of the initiation of
collection. An intermediary bank receives final collection and
evidences the result of its collection by a "credit" on its
books to the depositary bank. The depositary bank evidences the
results of its collection by a "credit" in the account of its
customer. As used in these instances the term "credit"
clearly indicates a debtor-creditor relationship. At some stage in the
bank collection process the agency status of a collecting bank
changes to that of debtor, a debtor of its customer. Usually at about
the same time it also becomes a creditor for the amount of the item,
a creditor of some intermediary, payor or other bank. Thus the
collection is completed, all agency aspects are terminated and the
identity of the item has become completely merged in bank accounts,
that of the customer with the depositary bank and that of one bank
with another.
Although Section 4-215(a) provides that an item is finally paid
when the payor bank takes or fails to take certain action with respect
to the item, the final payment of the item may or may not result in the
simultaneous final settlement for the item in the case of all prior
parties. If a series of provisional debits and credits for the item have
been entered in accounts between banks, the final payment of the
item by the payor bank may result in the automatic firming up of all
these provisional debits and credits under Section 4-215(c), and the
consequent receipt of final settlement for the item by each collecting
bank and the customer of the depositary bank simultaneously with
such action of the payor bank. However, if the payor bank or some
intermediary bank accounts for the item with a remittance draft, the
next prior bank usually does not receive final settlement for the item
until the remittance draft finally clears. See Section 4-213(c). The
first sentence of subsection (a) provides that the agency status of a
collecting bank (whether intermediary or depositary) continues until
the settlement given by it for the item is or becomes final. In the case
of the series of provisional credits covered by Section 4-215(c), this
could be simultaneously with the final payment of the item by the
payor bank. In cases in which remittance drafts are used or in
straight noncash collections, this would not be until the times
specified in Sections 4-213(c) and 4-215(d). With respect to checks
Regulation CC Sections 229.31(c), 229.32(b), and 229.36(d) provide
that all settlements between banks are final in both the forward
collection and return of checks.
Under Section 4-213(a) settlements for items may be made by any
means agreed to by the parties. Since it is impossible to contemplate
all the kinds of settlements that will be utilized, no attempt is made
in Article 4 to provide when settlement is final in all cases. The
guiding principle is that settlements should be final when the
presenting person has received usable funds. Section 4-213(c) and
(d) and Section 4-215(c) provide when final settlement occurs with
respect to certain kinds of settlement, but these provisions are not
intended to be exclusive.
A number of practical results flow from the rule continuing the
agency status of a collecting bank until its settlement for the item is
or becomes final, some of which are specifically set forth in this
Article. One is that risk of loss continues in the owner of the item
rather than the agent bank. See Section 4-214. Offsetting rights
favorable to the owner are that pending such final settlement, the
owner has the preference rights of Section 4-216 and the direct rights
of Section 4-302 against the payor bank. It also follows from this
rule that the dollar limitations of Federal Deposit Insurance are
measured by the claim of the owner of the item rather than that of the
collecting bank. With respect to checks, rights of the parties in
insolvency are determined by Regulation CC Section 229.39 and the
liability of a bank handling a check to a subsequent bank that does
not receive payment because of suspension of payments by another
bank is stated in Regulation CC Section 229.35(b).
5. In those cases in which some period of time elapses between
the final payment of the item by the payor bank and the time that the
settlement of the collecting bank is or becomes final, e.g., if the payor
bank or an intermediary bank accounts for the item with a remittance
draft or in straight noncash collections, the continuance of the agency
status of the collecting bank necessarily carries with it the
continuance of the owner's status as principal. The second sentence
of subsection (a) provides that whatever rights the owner has to
proceeds of the item are subject to the rights of collecting banks for
outstanding advances on the item and other valid rights, if any. The
rule provides a sound rule to govern cases of attempted attachment of
proceeds of a noncash item in the hands of the payor bank as property
of the absent owner. If a collecting bank has made an advance on an
item which is still outstanding, its right to obtain reimbursement for
this advance should be superior to the rights of the owner to the
proceeds or to the rights of a creditor of the owner. An intentional
crediting of proceeds of an item to the account of a prior bank known
to be insolvent, for the purpose of acquiring a right of setoff, would
not produce a valid setoff. See 8 Zollman, Banks and Banking
(1936) Sec. 5443.
6. This section and Article 4 as a whole represent an intentional
abandonment of the approach to bank collection problems appearing
in Section 4 of the American Bankers Association Bank Collection
Code. Because the tremendous volume of items handled makes
impossible the examination by all banks of all indorsements on all
items and thus in fact this examination is not made, except perhaps
by depositary banks, it is unrealistic to base the rights and duties of
all banks in the collection chain on variations in the form of
indorsements. It is anomalous to provide throughout the ABA Code
that the prima facie status of collecting banks is that of agent or
sub-agent but in Section 4 to provide that subsequent holders
(sub-agents) shall have the right to rely on the presumption that the
bank of deposit (the primary agent) is the owner of the item. It is
unrealistic, particularly in this background, to base rights and duties
on status of agent or owner. Thus Section 4-201 makes the pertinent
provisions of Article 4 applicable to substantially all items handled
by banks for presentment, payment or collection, recognizes the
prima facie status of most banks as agents, and then seeks to state
appropriate limits and some attributes to the general rules so
expressed.
7. Subsection (b) protects the ownership rights with respect to an
item indorsed "pay any bank or banker" or in similar
terms of a customer initiating collection or of any bank acquiring a
security interest under Section 4-210, in the event the item is
subsequently acquired under improper circumstances by a person
who is not a bank and transferred by that person to another person,
whether or not a bank. Upon return to the customer initiating
collection of an item so indorsed, the indorsement may be cancelled
(Section 3-207). A bank holding an item so indorsed may transfer
the item out of banking channels by special indorsement; however,
under Section 4-103(e), the bank would be liable to the owner of the
item for any loss resulting therefrom if the transfer had been made in
bad faith or with lack of ordinary care. If briefer and more simple
forms of bank indorsements are developed under Section 4-206 (e.g.,
the use of bank transit numbers in lieu of present lengthy forms of
bank indorsements), a depositary bank having the transit number
"X100" could make subsection (b) operative by
indorsements such as "Pay any bank--X100." Regulation
CC Section 229.35(c) states the effect of an indorsement on a check
by a bank.
Section 36-4-202. Responsibility for collection or return;
when action timely.
(a) A collecting bank must exercise ordinary care in:
(1) presenting an item or sending it for presentment;
(2) sending notice of dishonor or nonpayment or returning an
item other than a documentary draft to the bank's transferor after
learning that the item has not been paid or accepted, as the case may
be;
(3) settling for an item when the bank receives final settlement;
and
(4) notifying its transferor of any loss or delay in transit within
a reasonable time after discovery thereof.
(b) A collecting bank exercises ordinary care under subsection (a)
by taking proper action before its midnight deadline following receipt
of an item, notice, or settlement. Taking proper action within a
reasonably longer time may constitute the exercise of ordinary care,
but the bank has the burden of establishing timeliness.
(c) Subject to subsection (a)(1), a bank is not liable for the
insolvency, neglect, misconduct, mistake, or default of another bank
or person or for loss or destruction of an item in the possession of
others or in transit.
OFFICIAL COMMENT
1. Subsection (a) states the basic responsibilities of a collecting
bank. Of course, under Section 1-203 a collecting bank is subject to
the standard requirement of good faith. By subsection (a) it must also
use ordinary care in the exercise of its basic collection tasks. By
Section 4-103(a) neither requirement may be disclaimed.
2. If the bank makes presentment itself, subsection (a)(1) requires
ordinary care with respect both to the time and manner of
presentment. (Sections 3-501 and 4-212.) If it forwards the item to
be presented the subsection requires ordinary care with respect to
routing (Section 4-204), and also in the selection of intermediary
banks or other agents.
3. Subsection (a) describes types of basic action with respect to
which a collecting bank must use ordinary care. Subsection (b) deals
with the time for taking action. It first prescribes the general standard
for timely action, namely, for items received on Monday, proper
action (such as forwarding or presenting) on Monday or Tuesday is
timely. Although under current "production line"
operations banks customarily move items along on regular schedules
substantially briefer than two days, the subsection states an outside
time within which a bank may know it has taken timely action. To
provide flexibility from this standard norm, the subsection further
states that action within a reasonably longer time may be timely but
the bank has the burden of proof. In the case of time items, action
after the midnight deadline, but sufficiently in advance of maturity
for proper presentation, is a clear example of a "reasonably
longer time" that is timely. The standard of requiring action
not later than Tuesday in the case of Monday items is also subject to
possibilities of variation under the general provisions of Section
4-103, or under the special provisions regarding time of receipt of
items (Section 4-108), and regarding delays (Section 4-109). This
subsection (b) deals only with collecting banks. The time limits
applicable to payor banks appear in Sections 4-301 and 4-302.
4. At common law the so-called New York collection rule
subjected the initial collecting bank to liability for the actions of
subsequent banks in the collection chain; the so-called Massachusetts
rule was that each bank, subject to the duty of selecting proper
intermediaries, was liable only for its own negligence. Subsection (c)
adopts the Massachusetts rule. But since this is stated to be subject
to subsection (a)(1) a collecting bank remains responsible for using
ordinary care in selecting properly qualified intermediary banks and
agents and in giving proper instructions to them. Regulation CC
Section 229.36(d) states the liability of a bank during the forward
collection of checks.
Section 36-4-203. Effect of instructions.
Subject to Chapter 3 concerning conversion of instruments (Section
36-3-420) and restrictive indorsements (Section 36-3-206), only a
collecting bank's transferor can give instructions that affect the bank
or constitute notice to it, and a collecting bank is not liable to prior
parties for any action taken pursuant to the instructions or in
accordance with any agreement with its transferor.
OFFICIAL COMMENT
This section adopts a "chain of command" theory which
renders it unnecessary for an intermediary or collecting bank to
determine whether its transferor is "authorized" to give
the instructions. Equally the bank is not put on notice of any
"revocation of authority" or "lack of
authority" by notice received from any other person. The
desirability of speed in the collection process and the fact that, by
reason of advances made, the transferor may have the paramount
interest in the item requires the rule.
The section is made subject to the provisions of Article 3
concerning conversion of instruments (Section 3-420) and restrictive
indorsements (Section 3-206). Of course instructions from or an
agreement with its transferor does not relieve a collecting bank of its
general obligation to exercise good faith and ordinary care. See
Section 4-103(a). If in any particular case a bank has exercised good
faith and ordinary care and is relieved of responsibility by reason of
instructions of or an agreement with its transferor, the owner of the
item may still have a remedy for loss against the transferor (another
bank) if such transferor has given wrongful instructions.
The rules of the section are applied only to collecting banks. Payor
banks always have the problem of making proper payment of an item;
whether such payment is proper should be based upon all of the rules
of Articles 3 and 4 and all of the facts of any particular case, and
should not be dependent exclusively upon instructions from or an
agreement with a person presenting the item.
Section 36-4-204. Methods of sending and presenting;
sending directly to payor bank.
(a) A collecting bank shall send items by a reasonably prompt
method, taking into consideration relevant instructions, the nature of
the item, the number of those items on hand, the cost of collection
involved, and the method generally used by it or others to present
those items.
(b) A collecting bank may send:
(1) an item directly to the payor bank;
(2) an item to a nonbank payor if authorized by its transferor;
and
(3) an item other than documentary drafts to a nonbank payor,
if authorized by Federal Reserve regulation or operating circular,
clearing-house rule, or the like.
(c) Presentment may be made by a presenting bank at a place
where the payor bank or other payor has requested that presentment
be made.
OFFICIAL COMMENT
1. Subsection (a) prescribes the general standards applicable to
proper sending or forwarding of items. Because of the many types
of methods available and the desirability of preserving flexibility any
attempt to prescribe limited or precise methods is avoided.
2. Subsection (b)(1) codifies the practice of direct mail, express,
messenger or like presentment to payor banks. The practice is now
country-wide and is justified by the need for speed, the general
responsibility of banks, Federal Deposit Insurance protection and
other reasons.
3. Full approval of the practice of direct sending is limited to
cases in which a bank is a payor. Since nonbank drawees or payors
may be of unknown responsibility, substantial risks may be attached
to placing in their hands the instruments calling for payments from
them. This is obviously so in the case of documentary drafts.
However, in some cities practices have long existed under
clearing-house procedures to forward certain types of items to certain
nonbank payors. Examples include insurance loss drafts drawn by
field agents on home offices. For the purpose of leaving the door
open to legitimate practices of this kind, subsection (b)(3)
affirmatively approves direct sending of any item other than
documentary drafts to any nonbank payor, if authorized by Federal
Reserve regulation or operating circular, clearing-house rule or the
like.
On the other hand subsection (b)(2) approves sending any item
directly to a nonbank payor if authorized by a collecting bank's
transferor. This permits special instructions or agreements out of the
norm and is consistent with the "chain of command"
theory of Section 4-203. However, if a transferor other than the
owner of the item, e.g., a prior collecting bank, authorizes a direct
sending to a nonbank payor, such transferor assumes responsibility
for the propriety or impropriety of such authorization.
4. Section 3-501(b) provides where presentment may be made.
This provision is expressly subject to Article 4. Section 4-204(c)
specifically approves presentment by a presenting bank at any place
requested by the payor bank or other payor. The time when a check
is received by a payor bank for presentment is governed by
Regulation CC Section 229.36(b).
Section 36-4-205. Depositary bank holder of unindorsed
item.
If a customer delivers an item to a depositary bank for collection:
(1) the depositary bank becomes a holder of the item at the time
it receives the item for collection if the customer at the time of
delivery was a holder of the item, whether or not the customer
indorses the item, and, if the bank satisfies the other requirements of
Section 36-3-302, it is a holder in due course; and
(2) the depositary bank warrants to collecting banks, the payor
bank or other payor, and the drawer that the amount of the item was
paid to the customer or deposited to the customer's account.
OFFICIAL COMMENT
Section 3-201(b) provides that negotiation of an instrument payable
to order requires indorsement by the holder. The rule of former
Section 4-205(1) was that the depositary bank may supply a missing
indorsement of its customer unless the item contains the words
"payee's indorsement required" or the like. The cases
have differed on the status of the depositary bank as a holder if it fails
to supply its customer's indorsement. Marine Midland Bank,
N.A. v. Price, Miller, Evans & Flowers, 446 N.Y.S.2d 797
(N.Y.Apo. Div.4th Dept. 1981), rev'd, 455 N.Y.S.2d 565
(N.Y. 1982). It is common practice for depositary banks to receive
unindorsed checks under so-called "lock-box"
agreements from customers who receive a high volume of checks.
No function would be served by requiring a depositary bank to run
these items through a machine that would supply the customer's
indorsement except to afford the drawer and the subsequent banks
evidence that the proceeds of the item reached the customer's
account. Paragraph (1) provides that the depositary bank becomes a
holder when it takes the item for deposit if the depositor is a holder.
Whether it supplies the customer's indorsement is immaterial.
Paragraph (2) satisfies the need for a receipt of funds by the
depositary bank by imposing on that bank a warranty that it paid the
customer or deposited the item to the customer's account. This
warranty runs not only to collecting banks and to the payor bank or
nonbank drawee but also to the drawer, affording protection to these
parties that the depositary bank received the item and applied it to the
benefit of the holder.
Section 36-4-206. Transfer between banks.
Any agreed method that identifies the transferor bank is sufficient
for the item's further transfer to another bank.
OFFICIAL COMMENT
This section is designed to permit the simplest possible form of
transfer from one bank to another, once an item gets in the bank
collection chain, provided only identity of the transferor bank is
preserved. This is important for tracing purposes and if recourse is
necessary. However, since the responsibilities of the various banks
appear in the Article it becomes unnecessary to have liability or
responsibility depend on more formal indorsements. Simplicity in
the form of transfer is conducive to speed. If the transfer is between
banks, this section takes the place of the more formal requirements of
Section 3-201.
Section 36-4-207. Transfer warranties.
(a) A customer or collecting bank that transfers an item and
receives a settlement or other consideration warrants to the transferee
and to any subsequent collecting bank that:
(1) the warrantor is a person entitled to enforce the
item;
(2) all signatures on the item are authentic and
authorized;
(3) the item has not been altered;
(4) the item is not subject to a defense or claim in
recoupment (Section 36-3-305(a)) of any party that can be asserted
against the warrantor; and
(5) the warrantor has no knowledge of any insolvency
proceeding commenced with respect to the maker or acceptor or, in
the case of an unaccepted draft, the drawer.
(b) If an item is dishonored, a customer or collecting bank
transferring the item and receiving settlement or other consideration
is obliged to pay the amount due on the item (i) according to the
terms of the item at the time it was transferred, or (ii) if the transfer
was of an incomplete item, according to its terms when completed as
stated in Sections 36-3-115 and 36-3-407. The obligation of a
transferor is owed to the transferee and to any subsequent collecting
bank that takes the item in good faith. A transferor cannot disclaim
its obligation under this subsection by an indorsement stating that it
is made 'without recourse' or otherwise disclaiming liability.
(c) A person to whom the warranties under subsection (a) are
made and who took the item in good faith may recover from the
warrantor as damages for breach of warranty an amount equal to the
loss suffered as a result of the breach, but not more than the amount
of the item plus expenses and loss of interest incurred as a result of
the breach.
(d) The warranties stated in subsection (a) cannot be
disclaimed with respect to checks. Unless notice of a claim for
breach of warranty is given to the warrantor within thirty days after
the claimant has reason to know of the breach and the identity of the
warrantor, the warrantor is discharged to the extent of any loss caused
by the delay in giving notice of the claim.
(e) A cause of action for breach of warranty under this
section accrues when the claimant has reason to know of the
breach.
OFFICIAL COMMENT
Except for subsection (b), this section conforms to Section 3-416
and extends its coverage to items. The substance of this section is
discussed in the Comment to Section 3-416. Subsection (b) provides
that customers or collecting banks that transfer items, whether by
indorsement or not, undertake to pay the item if the item is
dishonored. This obligation cannot be disclaimed by a
"without recourse" indorsement or otherwise. With
respect to checks, Regulation CC Section 229.34 states the warranties
made by paying and returning banks.
Section 36-4-208. Presentment warranties.
(a) If an unaccepted draft is presented to the drawee for
payment or acceptance and the drawee pays or accepts the draft, (i)
the person obtaining payment or acceptance, at the time of
presentment, and (ii) a previous transferor of the draft, at the time of
transfer, warrant to the drawee that pays or accepts the draft in good
faith that:
(1) the warrantor is, or was, at the time the warrantor
transferred the draft, a person entitled to enforce the draft or
authorized to obtain payment or acceptance of the draft on behalf of
a person entitled to enforce the draft;
(2) the draft has not been altered; and
(3) the warrantor has no knowledge that the signature of
the purported drawer of the draft is unauthorized.
(b) A drawee making payment may recover from a warrantor
damages for breach of warranty equal to the amount paid by the
drawee less the amount the drawee received or is entitled to receive
from the drawer because of the payment. In addition, the drawee is
entitled to compensation for expenses and loss of interest resulting
from the breach. The right of the drawee to recover damages under
this subsection is not affected by any failure of the drawee to exercise
ordinary care in making payment. If the drawee accepts the draft (i)
breach of warranty is a defense to the obligation of the acceptor, and
(ii) if the acceptor makes payment with respect to the draft, the
acceptor is entitled to recover from a warrantor for breach of
warranty the amounts stated in this subsection.
(c) If a drawee asserts a claim for breach of warranty under
subsection (a) based on an unauthorized indorsement of the draft or
an alteration of the draft, the warrantor may defend by proving that
the indorsement is effective under Section 36-3-404 or 36-3-405 or
the drawer is precluded under Section 36-3-406 or 36-4-406 from
asserting against the drawee the unauthorized indorsement or
alteration.
(d) If (i) a dishonored draft is presented for payment to the
drawer or an indorser or (ii) any other item is presented for payment
to a party obliged to pay the item, and the item is paid, the person
obtaining payment and a prior transferor of the item warrant to the
person making payment in good faith that the warrantor is, or was, at
the time the warrantor transferred the item, a person entitled to
enforce the item or authorized to obtain payment on behalf of a
person entitled to enforce the item. The person making payment may
recover from any warrantor for breach of warranty an amount equal
to the amount paid plus expenses and loss of interest resulting from
the breach.
(e) The warranties stated in subsections (a) and (d) cannot be
disclaimed with respect to checks. Unless notice of a claim for
breach of warranty is given to the warrantor within thirty days after
the claimant has reason to know of the breach and the identity of the
warrantor, the warrantor is discharged to the extent of any loss caused
by the delay in giving notice of the claim.
(f) A cause of action for breach of warranty under this section
accrues when the claimant has reason to know of the breach.
OFFICIAL COMMENT
This section conforms to Section 3-417 and extends its coverage to
items. The substance of this section is discussed in the Comment to
Section 3-417. "Draft" is defined in Section 4-104 as
including an item that is an order to pay so as to make clear that the
term "draft" in Article 4 may include items that are not
instruments within Section 3-104.
Section 36-4-209. Encoding and retention warranties.
(a) A person who encodes information on or with respect to
an item after issue warrants to any subsequent collecting bank and to
the payor bank or other payor that the information is correctly
encoded. If the customer of a depositary bank encodes, that bank
also makes the warranty.
(b) A person who undertakes to retain an item pursuant to an
agreement for electronic presentment warrants to any subsequent
collecting bank and to the payor bank or other payor that retention
and presentment of the item comply with the agreement. If a
customer of a depositary bank undertakes to retain an item, that bank
also makes this warranty.
(c) A person to whom warranties are made under this section
and who took the item in good faith may recover from the warrantor
as damages for breach of warranty an amount equal to the loss
suffered as a result of the breach, plus expenses and loss of interest
incurred as a result of the breach.
OFFICIAL COMMENT
1. Encoding and retention warranties are included in Article 4
because they are unique to the bank collection process. These
warranties are breached only by the person doing the encoding or
retaining the item and not by subsequent banks handling the item.
Encoding and check retention may be done by customers who are
payees of a large volume of checks; hence, this section imposes
warranties on customers as well as banks. If a customer encodes or
retains, the depositary bank is also liable for any breach of this
warranty.
2. A misencoding of the amount on the MICR line is not an
alteration under Section 3-407(a) which defines alteration as
changing the contract of the parties. If a drawer wrote a check for
$2,500 and the depositary bank encoded $25,000 on the MICR line,
the payor bank could debit the drawer's account for only $2,500.
This subsection would allow the payor bank to hold the depositary
bank liable for the amount paid out over $2,500 without first
pursuing the person who received payment. Intervening collecting
banks would not be liable to the payor bank for the depositary bank's
error. If a drawer wrote a check for $25,000 and the depositary bank
encoded $2,500, the payor bank becomes liable for the full amount
of the check. The payor bank's rights against the depositary bank
depend on whether the payor bank has suffered a loss. Since the
payor bank can debit the drawer's account for $25,000, the payor
bank has a loss only to the extent that the drawer's account is less
than the full amount of the check. There is no requirement that the
payor bank pursue collection against the drawer beyond the amount
in the drawer's account as a condition to the payor bank's action
against the depositary bank for breach of warranty. See Georgia
Railroad Bank & Trust Co. v. First National Bank &
Trust, 229 S.E.2d 482 (Ga. App. 1976), aff'd, 235 S.E.2d 1 (Ga.
1977), and First National Bank of Boston v. Fidelity Bank,
National Association, 724 F.Supp. 1168 (E.D. Pa. 1989).
3. A person retaining items under an electronic presentment
agreement (Section 4-110) warrants that it has complied with the
terms of the agreement regarding its possession of the item and its
sending a proper presentment notice. If the keeper is a customer, its
depositary bank also makes this warranty.
Section 36-4-210. Security interest of collecting bank in
items, accompanying documents and proceeds.
(a) A collecting bank has a security interest in an item and any
accompanying documents or the proceeds of either:
(1) in case of an item deposited in an account, to the extent to
which credit given for the item has been withdrawn or applied;
(2) in case of an item for which it has given credit available for
withdrawal as of right, to the extent of the credit given, whether or
not the credit is drawn upon or there is a right of charge-back; or
(3) if it makes an advance on or against the item.
(b) If credit given for several items received at one time or
pursuant to a single agreement is withdrawn or applied in part, the
security interest remains upon all the items, any accompanying
documents or the proceeds of either. For the purpose of this section,
credits first given are first withdrawn.
(c) Receipt by a collecting bank of a final settlement for an item
is a realization on its security interest in the item, accompanying
documents, and proceeds. So long as the bank does not receive final
settlement for the item or give up possession of the item or
accompanying documents for purposes other than collection, the
security interest continues to that extent and is subject to Chapter 9,
but:
(1) no security agreement is necessary to make the security
interest enforceable (Section 36-9-203(1)(a));
(2) no filing is required to perfect the security interest; and
(3) the security interest has priority over conflicting perfected
security interests in the item, accompanying documents, or
proceeds.
OFFICIAL COMMENT
1. Subsection (a) states a rational rule for the interest of a bank in
an item. The customer of the depositary bank is normally the owner
of the item and the several collecting banks are agents of the
customer (Section 4-201). A collecting agent may properly make
advances on the security of paper held for collection, and acquires at
common law a possessory lien for these advances. Subsection (a)
applies an analogous principle to a bank in the collection chain which
extends credit on items in the course of collection. The bank has a
security interest to the extent stated in this section. To the extent of
its security interest it is a holder for value (Sections 3-303, 4-211)
and a holder in due course if it satisfies the other requirements for
that status (Section 3-302). Subsection (a) does not derogate from the
banker's general common law lien or right of setoff against
indebtedness owing in deposit accounts. See Section 1-103. Rather
subsection (a) specifically implements and extends the principle as a
part of the bank collection process.
2. Subsection (b) spreads the security interest of the bank over all
items in a single deposit or received under a single agreement and a
single giving of credit. It also adopts the "first-in,
first-out" rule.
3. Collection statistics establish that the vast majority of items
handled for collection are in fact collected. The first sentence of
subsection (c) reflects the fact that in the normal case the bank's
security interest is self-liquidating. The remainder of the subsection
correlates the security interest with the provisions of Article 9,
particularly for use in the cases of noncollection in which the security
interest may be important.
Section 36-4-211. When bank gives value for purposes of
holder in due course.
For purposes of determining its status as a holder in due course, a
bank has given value to the extent it has a security interest in an
item, if the bank otherwise complies with the requirements of
Section 36-3-302 on what constitutes a holder in due course.
OFFICIAL COMMENT
The section completes the thought of the previous section and
makes clear that a security interest in an item is "value"
for the purpose of determining the holder's status as a holder in due
course. The provision is in accord with the prior law (N.I.L. Section
27) and with Article 3 (Section 3-303). The section does not
prescribe a security interest under Section 4-210 as a test of
"value" generally because the meaning of
"value" under other Articles is adequately defined in
Section 1-201.
Section 36-4-212. Presentment by notice of item not payable
by, through, or at bank; liability of drawer or indorser.
(a) Unless otherwise instructed, a collecting bank may present an
item not payable by, through, or at a bank by sending to the party to
accept or pay a written notice that the bank holds the item for
acceptance or payment. The notice must be sent in time to be
received on or before the day when presentment is due and the bank
must meet any requirement of the party to accept or pay under
Section 36-3-501 by the close of the bank's next banking day after it
knows of the requirement.
(b) If presentment is made by notice and payment, acceptance, or
request for compliance with a requirement under Section 36-3-501 is
not received by the close of business on the day after maturity or, in
the case of demand items, by the close of business on the third
banking day after notice was sent, the presenting bank may treat the
item as dishonored and charge any drawer or indorser by sending it
notice of the facts.
OFFICIAL COMMENT
1. This section codifies a practice extensively followed in
presentation of trade acceptances and documentary and other drafts
drawn on nonbank payors. It imposes a duty on the payor to respond
to the notice of the item if the item is not to be considered
dishonored. Notice of such a dishonor charges drawers and
indorsers. Presentment under this section is good presentment under
Article 3. See Section 3-501.
2. A drawee not receiving notice is not, of course, liable to the
drawer for wrongful dishonor.
3. A bank so presenting an instrument must be sufficiently close
to the drawee to be able to exhibit the instrument on the day it is
requested to do so or the next business day at the latest.
Section 36-4-213. Medium and time of settlement by bank.
(a) With respect to settlement by a bank, the medium and time of
settlement may be prescribed by Federal Reserve regulations or
circulars, clearing-house rules, and the like, or agreement. In the
absence of such prescription:
(1) the medium of settlement is cash or credit to an account in
a Federal Reserve bank of or specified by the person to receive
settlement; and
(2) the time of settlement, is with respect to tender of settlement
by:
(i) cash, a cashier's check, or teller's check, when the cash
or check is sent or delivered;
(ii) credit in an account in a Federal Reserve Bank, when the
credit is made;
(iii) a credit or debit to an account in a bank, when the credit
or debit is made or, in the case of tender of settlement by authority to
charge an account, when the authority is sent or delivered; or
(iv) a funds transfer, when payment is made pursuant to
Section 36-4-406(a) to the person receiving settlement.
(b) If the tender of settlement is not by a medium authorized by
subsection (a) or the time of settlement is not fixed by subsection
(a), no settlement occurs until the tender of settlement is accepted by
the person receiving settlement.
(c) If settlement for an item is made by cashier's check or teller's
check and the person receiving settlement, before its midnight
deadline:
(1) presents or forwards the check for collection, settlement is
final when the check is finally paid; or
(2) fails to present or forward the check for collection,
settlement is final at the midnight deadline of the person receiving
settlement.
(d) If settlement for an item is made by giving authority to charge
the account of the bank giving settlement in the bank receiving
settlement, settlement is final when the charge is made by the bank
receiving settlement if there are funds available in the account for the
amount of the item.
OFFICIAL COMMENT
1. Subsection (a) sets forth the medium of settlement that the
person receiving settlement must accept. In nearly all cases the
medium of settlement will be determined by agreement or by Federal
Reserve regulations and circulars, clearing-house rules, and the like.
In the absence of regulations, rules or agreement, the person
receiving settlement may demand cash or credit in a Federal Reserve
bank. If the person receiving settlement does not have an account in
a Federal Reserve bank, it may specify the account of another bank
in a Federal Reserve bank. In the unusual case in which there is no
agreement on the medium of settlement and the bank making
settlement tenders settlement other than cash or Federal Reserve bank
credit, no settlement has occurred under subsection (b) unless the
person receiving settlement accepts the settlement tendered. For
example, if a payor bank, without agreement, tenders a teller's check,
the bank receiving the settlement may reject the check and return it
to the payor bank or it may accept the check as settlement.
2. In several provisions of Article 4 the time that a settlement
occurs is relevant. Subsection (a) sets out a general rule that the time
of settlement, like the means of settlement, may be prescribed by
agreement. In the absence of agreement, the time of settlement for
tender of the common agreed media of settlement is that set out in
subsection (a)(2). The time of settlement by cash, cashier's or teller's
check or authority to charge an account is the time the cash, check or
authority is sent, unless presentment is over the counter in which case
settlement occurs upon delivery to the presenter. If there is no
agreement on the time of settlement and the tender of settlement is
not made by one of the media set out in subsection (a), under
subsection (b) the time of settlement is the time the settlement is
accepted by the person receiving settlement.
3. Subsections (c) and (d) are special provisions for settlement by
remittance drafts and authority to charge an account in the bank
receiving settlement. The relationship between final settlement and
final payment under Section 4-215 is addressed in subsection (b) of
Section 4-215. With respect to settlement by cashier's checks or
teller's checks, other than in response to over-the-counter
presentment, the bank receiving settlement can keep the risk that the
check will not be paid on the bank tendering the check in settlement
by acting to initiate collection of the check within the midnight
deadline of the bank receiving settlement. If the bank fails to initiate
settlement before its midnight deadline, final settlement occurs at the
midnight deadline, and the bank receiving settlement assumes the risk
that the check will not be paid. If there is no agreement that permits
the bank tendering settlement to tender a cashier's or teller's check,
subsection (b) allows the bank receiving the check to reject it, and, if
it does, no settlement occurs. However, if the bank accepts the
check, settlement occurs and the time of final settlement is governed
by subsection (c).
With respect to settlement by tender of authority to charge the
account of the bank making settlement in the bank receiving
settlement, subsection (d) provides that final settlement does not take
place until the account charged has available funds to cover the
amount of the item. If there is no agreement that permits the bank
tendering settlement to tender an authority to charge an account as
settlement, subsection (b) allows the bank receiving the tender to
reject it. However, if the bank accepts the authority, settlement
occurs and the time of final settlement is governed by subsection (d).
Section 36-4-214. Right of charge-back or refund; liability of
collecting bank; return of item.
(a) If a collecting bank has made provisional settlement with its
customer for an item and fails by reason of dishonor, suspension of
payments by a bank, or otherwise to receive settlement for the item
which is or becomes final, the bank may revoke the settlement given
by it, charge back the amount of any credit given for the item to its
customer's account, or obtain refund from its customer, whether or
not it is able to return the item, if by its midnight deadline or within
a longer reasonable time after it learns the facts it returns the item or
sends notification of the facts. If the return or notice is delayed
beyond the bank's midnight deadline or a longer reasonable time
after it learns the facts, the bank may revoke the settlement, charge
back the credit, or obtain refund from its customer, but it is liable for
any loss resulting from the delay. These rights to revoke, charge
back, and obtain refund terminate if and when a settlement for the
item received by the bank is or becomes final.
(b) A collecting bank returns an item when it is sent or delivered
to the bank's customer or transferor or pursuant to its instructions.
(c) A depositary bank that is also the payor may charge back the
amount of an item to its customer's account or obtain refund in
accordance with the section governing return of an item received by
a payor bank for credit on its books (Section 36-4-301).
(d) The right to charge back is not affected by:
(1) previous use of a credit given for the item; or
(2) failure by any bank to exercise ordinary care with respect to
the item, but a bank so failing remains liable.
(e) A failure to charge back or claim refund does not affect other
rights of the bank against the customer or any other party.
(f) If credit is given in dollars as the equivalent of the value of an
item payable in foreign money, the dollar amount of any
charge-back or refund must be calculated on the basis of the
bank-offered spot rate for the foreign money prevailing on the day
when the person entitled to the charge-back or refund learns that it
will not receive payment in ordinary course.
OFFICIAL COMMENT
1. Under current bank practice, in a major portion of cases banks
make provisional settlement for items when they are first received
and then await subsequent determination of whether the item will be
finally paid. This is the principal characteristic of what are referred
to in banking parlance as "cash items." Statistically, this
practice of settling provisionally first and then awaiting final payment
is justified because the vast majority of such cash items are finally
paid, with the result that in this great preponderance of cases it
becomes unnecessary for the banks making the provisional
settlements to make any further entries. In due course the provisional
settlements become final simply with the lapse of time. However, in
those cases in which the item being collected is not finally paid or if
for various reasons the bank making the provisional settlement does
not itself receive final payment, provision is made in subsection (a)
for the reversal of the provisional settlements, charge-back of
provisional credits and the right to obtain refund.
2. Various causes of a bank's not receiving final payment, with
the resulting right of charge-back or refund, are stated or suggested
in subsection (a). These include dishonor of the original item;
dishonor of a remittance instrument given for it; reversal of a
provisional credit for the item; suspension of payments by another
bank. The causes stated are illustrative; the right of charge-back or
refund is stated to exist whether the failure to receive final payment
in ordinary course arises through one of them "or
otherwise."
3. The right of charge-back or refund exists if a collecting bank
has made a provisional settlement for an item with its customer but
terminates if and when a settlement received by the bank for the item
is or becomes final. If the bank fails to receive such a final settlement
the right of charge-back or refund must be exercised promptly after
the bank learns the facts. The right exists (if so promptly exercised)
whether or not the bank is able to return the item. The second
sentence of subsection (a) adopts the view of Appliance Buyers
Credit Corp. v. Prospect National Bank, 708 F.2d 290 (7th Cir.
1983), that if the midnight deadline for returning an item or giving
notice is not met, a collecting bank loses its rights only to the extent
of damages for any loss resulting from the delay.
4. Subsection (b) states when an item is returned by a collecting
bank. Regulation CC, Section 229.31 preempts this subsection with
respect to checks by allowing direct return to the depositary bank.
Because a returned check may follow a different path than in forward
collection, settlement given for the check is final and not provisional
except as between the depositary bank and its customer. Regulation
CC Section 229.36(d). See also Regulations CC Sections 229.31(c)
and 229.32(b). Thus owing to the federal preemption, this subsection
applies only to noncheck items.
5. The rule of subsection (d) relating to charge-back (as
distinguished from claim for refund) applies irrespective of the cause
of the nonpayment, and of the person ultimately liable for
nonpayment. Thus charge-back is permitted even if nonpayment
results from the depositary bank's own negligence. Any other rule
would result in litigation based upon a claim for wrongful dishonor
of other checks of the customer, with potential damages far in excess
of the amount of the item. Any other rule would require a bank to
determine difficult questions of fact. The customer's protection is
found in the general obligation of good faith (Sections 1-203 and
4-103). If bad faith is established the customer's recovery
"includes other damages, if any, suffered by the party as a
proximate consequence" (Section 4-103(e); see also Section
4-402).
6. It is clear that the charge-back does not relieve the bank from
any liability for failure to exercise ordinary care in handling the item.
The measure of damages for such failure is stated in Section
4-103(e).
7. Subsection (f) states a rule fixing the time for determining the
rate of exchange if there is a charge-back or refund of a credit given
in dollars for an item payable in a foreign currency. Compare
Section 3-107. Fixing such a rule is desirable to avoid disputes. If
in any case the parties wish to fix a different time for determining the
rate of exchange, they may do so by agreement.
Section 36-4-215. Final payment of item by payor bank; when
provisional debits and credits become final; when certain credits
become available for withdrawal.
(a) An item is finally paid by a payor bank when the bank has first
done any of the following:
(1) paid the item in cash;
(2) settled for the item without having a right to revoke the
settlement under statute, clearing-house rule, or agreement; or
(3) made a provisional settlement for the item and failed to
revoke the settlement in the time and manner permitted by statute,
clearing-house rule, or agreement.
(b) If provisional settlement for an item does not become final, the
item is not finally paid.
(c) If provisional settlement for an item between the presenting
and payor banks is made through a clearing-house or by debits or
credits in an account between them, then to the extent that provisional
debits or credits for the item are entered in accounts between the
presenting and payor banks or between the presenting and successive
prior collecting banks seriatim, they become final upon final payment
of the items by the payor bank.
(d) If a collecting bank receives a settlement for an item which is
or becomes final, the bank is accountable to its customer for the
amount of the item and any provisional credit given for the item in an
account with its customer becomes final.
(e) Subject to (i) applicable law stating a time for availability of
funds and (ii) any right of the bank to apply the credit to an
obligation of the customer, credit given by a bank for an item in a
customer's account becomes available for withdrawal as of right:
(1) if the bank has received a provisional settlement for the
item, when the settlement becomes final and the bank has had a
reasonable time to receive return of the item and the item has not
been received within that time;
(2) if the bank is both the depositary bank and the payor bank,
and the item is finally paid, at the opening of the bank's second
banking day following receipt of the item.
(f) Subject to applicable law stating a time for availability of
funds and any right of a bank to apply a deposit to an obligation of
the depositor, a deposit of money becomes available for withdrawal
as of right at the opening of the bank's next banking day after receipt
of the deposit.
OFFICIAL COMMENT
1. By the definition and use of the term "settle"
(Section 4-104(a)(11)) this Article recognizes that various debits or
credits, remittances, settlements or payments given for an item may
be either provisional or final, that settlements sometimes are
provisional and sometimes are final and sometimes are provisional
for awhile but later become final. Subsection (a) defines when
settlement for an item constitutes final payment.
Final payment of an item is important for a number of reasons. It
is one of several factors determining the relative priorities between
items and notices, stop-payment orders, legal process and setoffs
(Section 4-303). It is the "end of the line" in the
collection process and the "turn around" point
commencing the return flow of proceeds. It is the point at which
many provisional settlements become final. See Section 4-215(c).
Final payment of an item by the payor bank fixes preferential rights
under Section 4-216.
2. If an item being collected moves through several states, e.g.,
is deposited for collection in California, moves through two or three
California banks to the Federal Reserve Bank of San Francisco, to the
Federal Reserve Bank of Boston, to a payor bank in Maine, the
collection process involves the eastward journey of the item from
California to Maine and the westward journey of the proceeds from
Maine to California. Subsection (a) recognizes that final payment
does not take place, in this hypothetical case, on the journey of the
item eastward. It also adopts the view that neither does final payment
occur on the journey westward because what in fact is journeying
westward are proceeds of the item.
3. Traditionally and under various decisions payment in cash of
an item by a payor bank has been considered final payment.
Subsection (a)(1) recognizes and provides that payment of an item in
cash by a payor bank is final payment.
4. Section 4-104(a)(11) defines "settle" as meaning
"to pay in cash, by clearing-house settlement, in a charge or
credit or by remittance, or otherwise as agreed. A settlement may be
either provisional or final." Subsection (a)(2) of Section 4-215
provides that an item is finally paid by a payor bank when the bank
has "settled for the item without having a right to revoke the
settlement under statute, clearing-house rule or agreement."
Former subsection (1)(b) is modified by subsection (a)(2) to make
clear that a payor bank cannot make settlement provisional by
unilaterally reserving a right to revoke the settlement. The right must
come from a statute (e.g., Section 4-301), clearing-house rule or other
agreement. Subsection (a)(2) provides in effect that if the payor bank
finally settles for an item this constitutes final payment of the item.
The subsection operates if nothing has occurred and no situation
exists making the settlement provisional. If under statute,
clearing-house rule or agreement, a right of revocation of the
settlement exists, the settlement is provisional. Conversely, if there
is an absence of a right to revoke under statute, clearing-house rule
or agreement, the settlement is final and such final settlement
constitutes final payment of the item.
A primary example of a statutory right on the part of the payor bank
to revoke a settlement is the right to revoke conferred by Section
4-301. The underlying theory and reason for deferred posting
statutes (Section 4-301) is to require a settlement on the date of
receipt of an item but to keep that settlement provisional with the
right to revoke prior to the midnight deadline. In any case in which
Section 4-301 is applicable, any settlement by the payor bank is
provisional solely by virtue of the statute, subsection (a)(2) of Section
4-215 does not operate, and such provisional settlement does not
constitute final payment of the item. With respect to checks,
Regulation CC Section 229.36(d) provides that settlement between
banks for the forward collection of checks is final. The relationship
of this provision to Article 4 is discussed in the Commentary to that
section.
A second important example of a right to revoke a settlement is that
arising under clearing-house rules. It is very common for
clearing-house rules to provide that items exchanged and settled for
in a clearing (e.g., before 10:00 a.m. on Monday) may be returned
and the settlements revoked up to but not later than 2:00 p.m. on the
same day (Monday) or under deferred posting at some hour on the
next business day (e.g., 2:00 p.m. Tuesday). Under this type of rule
the Monday morning settlement is provisional and being provisional
does not constitute a final payment of the item.
An example of an agreement allowing the payor bank to revoke a
settlement is a case in which the payor bank is also the depositary
bank and has signed a receipt or duplicate deposit ticket or has made
an entry in a passbook acknowledging receipt, for credit to the
account of A, of a check drawn on it by B. If the receipt, deposit
ticket, passbook or other agreement with A is to the effect that any
credit so entered is provisional and may be revoked pending the time
required by the payor bank to process the item to determine if it is in
good form and there are funds to cover it, the agreement keeps the
receipt or credit provisional and avoids its being either final
settlement or final payment.
The most important application of subsection (a)(2) is that in which
presentment of an item has been made over the counter for immediate
payment. In this case Section 4-301(a) does not apply to make the
settlement provisional, and final payment has occurred unless a rule
or agreement provides otherwise.
5. Former Section 4-213(1)(c) provided that final payment
occurred when the payor bank completed the "process of
posting." The term was defined in former Section 4-109. In
the present Article, Section 4-109 has been deleted and the
process-of-posting test has been abandoned in Section 4-215(a) for
determining when final payment is made. Difficulties in determining
when the events described in former Section 4-109 take place make
the process-of-posting test unsuitable for a system of automated
check collection or electronic presentment.
6. The last sentence of former Section 4-213(1) is deleted as an
unnecessary source of confusion. Initially the view that payor bank
may be accountable for, that is, liable for the amount of, an item that
it has already paid seems incongruous. This is particularly true in the
light of the language formerly found in Section 4-302 stating that the
payor bank can defend against liability for accountability by showing
that it has already settled for the item. But, at least with respect to
former Section 4-213(1)(c), such a provision was needed because
under the process-of-posting test a payor bank may have paid an item
without settling for it. Now that Article 4 has abandoned the
process-of-posting test, the sentence is no longer needed. If the payor
bank has neither paid the item nor returned it within its midnight
deadline, the payor bank is accountable under Section 4-302.
7. Subsection (a)(3) covers the situation in which the payor bank
makes a provisional settlement for an item, and this settlement
becomes final at a later time by reason of the failure of the payor
bank to revoke it in the time and manner permitted by statute,
clearing-house rule or agreement. An example of this type of
situation is the clearing-house settlement referred to in Comment 4.
In the illustration there given if the time limit for the return of items
received in the Monday morning clearing is 2:00 p.m. on Tuesday
and the provisional settlement has not been revoked at that time in a
manner permitted by the clearing-house rules, the provisional
settlement made on Monday morning becomes final at 2:00 p.m. on
Tuesday. Subsection (a)(3) provides specifically that in this situation
the item is finally paid at 2:00 p.m. Tuesday. If on the other hand a
payor bank receives an item in the mail on Monday and makes some
provisional settlement for the item on Monday, it has until midnight
on Tuesday to return the item or give notice and revoke any
settlement under Section 4-301. In this situation subsection (a)(3) of
Section 4-215 provides that if the provisional settlement made on
Monday is not revoked before midnight on Tuesday as permitted by
Section 4-301, the item is finally paid at midnight on Tuesday. With
respect to checks, Regulation CC Section 229.30 (c) allows an
extension of the midnight deadline under certain circumstances. If a
bank does not expeditiously return a check liability may accrue under
Regulation CC Section 229.38. For the relationship of that liability
to responsibility under this Article, see Regulation CC Sections
229.30 and 229.38.
8. Subsection (b) relates final settlement to final payment under
Section 4-215. For example, if a payor bank makes provisional
settlement for an item by sending a cashier's or teller's check and that
settlement fails to become final under Section 4-213(c), subsection
(b) provides that final payment has not occurred. If the item is not
paid, the drawer remains liable, and under Section 4-302(a) the payor
bank is accountable unless it has returned the item before its midnight
deadline. In this regard, subsection (b) is an exception to subsection
(a)(3). Even if the payor bank has not returned an item by its
midnight deadline there is still no final payment if provisional
settlement had been made and settlement failed to become final.
However, if presentment of the item was over the counter for
immediate payment, final payment has occurred under Section
4-215(a)(2). Subsection (b) does not apply because the settlement
was not provisional. Section 4-301(a). In this case the presenting
person, often the payee of the item, has the right to demand cash or
the cash equivalent of federal reserve credit. If the presenting person
accepts another medium of settlement such as a cashier's or teller's
check, the presenting person takes the risk that the payor bank may
fail to pay a cashier's check because of insolvency or that the drawee
of a teller's check may dishonor it.
9. Subsection (c) states the country-wide usage that when the
item is finally paid by the payor bank under subsection (a) this final
payment automatically without further action "firms up"
other provisional settlements made for it. However, the subsection
makes clear that this "firming up" occurs only if the
settlement between the presenting and payor banks was made either
through a clearing-house or by debits and credits in accounts between
them. It does not take place if the payor bank remits for the item by
sending some form of remittance instrument. Further, the
"firming up" continues only to the extent that provisional
debits and credits are entered seriatim in accounts between banks
which are successive to the presenting bank. The automatic
"firming up" is broken at any time that any collecting
bank remits for the item by sending a remittance draft, because final
payment to the remittee then usually depends upon final payment of
the remittance draft.
10. Subsection (d) states the general rule that if a collecting bank
receives settlement for an item which is or becomes final, the bank is
accountable to its customer for the amount of the item. One means
of accounting is to remit to its customer the amount it has received on
the item. If previously it gave to its customer a provisional credit for
the item in an account its receipt of final settlement for the item
"firms up" this provisional credit and makes it final.
When this credit given by it so becomes final, in the usual case its
agency status terminates and it becomes a debtor to its customer for
the amount of the item. See Section 4-201(a). If the accounting is by
a remittance instrument or authorization to charge further time will
usually be required to complete its accounting (Section 4-213).
11. Subsection (e) states when certain credits given by a bank to
its customer become available for withdrawal as of right. Subsection
(e)(1) deals with the situation in which a bank has given a credit
(usually provisional) for an item to its customer and in turn has
received a provisional settlement for the item from an intermediary
or payor bank to which it has forwarded the item. In this situation
before the provisional credit entered by the collecting bank in the
account of its customer becomes available for withdrawal as of right,
it is not only necessary that the provisional settlement received by the
bank for the item becomes final but also that the collecting bank has
a reasonable time to receive return of the item and the item has not
been received within that time. How much time is
"reasonable" for these purposes will of course depend on
the distance the item has to travel and the number of banks through
which it must pass (having in mind not only travel time by regular
lines of transmission but also the successive midnight deadlines of
the several banks) and other pertinent facts. Also, if the provisional
settlement received is some form of a remittance instrument or
authorization to charge, the "reasonable" time depends on
the identity and location of the payor of the remittance instrument,
the means for clearing such instrument, and other pertinent facts.
With respect to checks Regulation CC Sections 229.10-229.13 or
similar applicable state law (Section 229.20) control. This is also
time for the situation described in Comment 12.
12. Subsection (e)(2) deals with the situation of a bank that is both
a depositary bank and a payor bank. The subsection recognizes that
if A and B are both customers of a depositary-payor bank and A
deposits B's check on the depositary-payor in A's account on
Monday, time must be allowed to permit the check under the deferred
posting rules of Section 4-301 to reach the bookkeeper for B's
account at some time on Tuesday, and, if there are insufficient funds
in B's account, to reverse or charge back the provisional credit in A's
account. Consequently this provisional credit in A's account does
not become available for withdrawal as of right until the opening of
business on Wednesday. If it is determined on Tuesday that there are
insufficient funds in B's account to pay the check, the credit to A's
account can be reversed on Tuesday. On the other hand if the item
is in fact paid on Tuesday, the rule of subsection (e)(2) is desirable to
avoid uncertainty and possible disputes between the bank and its
customer as to exactly what hour within the day the credit is
available.
Section 36-4-216. Insolvency and preference.
(a) If an item is in or comes into the possession of a payor or
collecting bank that suspends payment and the item has not been
finally paid, the item must be returned by the receiver, trustee, or
agent in charge of the closed bank to the presenting bank or the
closed bank's customer.
(b) If a payor bank finally pays an item and suspends payments
without making a settlement for the item with its customer or the
presenting bank which settlement is or becomes final, the owner of
the item has a preferred claim against the payor bank.
(c) If a payor bank gives or a collecting bank gives or receives a
provisional settlement for an item and thereafter suspends payments,
the suspension does not prevent or interfere with the settlement's
becoming final if the finality occurs automatically upon the lapse of
certain time or the happening of certain events.
(d) If a collecting bank receives from subsequent parties
settlement for an item, which settlement is or becomes final and the
bank suspends payments without making a settlement for the item
with its customer which settlement is or becomes final, the owner of
the item has a preferred claim against the collecting bank.
OFFICIAL COMMENT
1. The underlying purpose of the provisions of this section is not
to confer upon banks, holders of items or anyone else preferential
positions in the event of bank failures over general depositors or any
other creditors of the failed banks. The purpose is to fix as definitely
as possible the cut-off point of time for the completion or cessation
of the collection process in the case of items that happen to be in the
process at the time a particular bank suspends payments. It must be
remembered that in bank collections as a whole and in the handling
of items by an individual bank, items go through a whole series of
processes. It must also be remembered that at any particular point of
time a particular bank (at least one of any size) is functioning as a
depositary bank for some items, as an intermediary bank for others,
as a presenting bank for still others and as a payor bank for still
others, and that when it suspends payments it will have close to its
normal load of items working through its various processes. For the
convenience of receivers, owners of items, banks, and in fact
substantially everyone concerned, it is recognized that at the
particular moment of time that a bank suspends payment, a certain
portion of the items being handled by it have progressed far enough
in the bank collection process that it is preferable to permit them to
continue the remaining distance, rather than to send them back and
reverse the many entries that have been made or the steps that have
been taken with respect to them. Therefore, having this background
and these purposes in mind, the section states what items must be
turned backward at the moment suspension intervenes and what items
have progressed far enough that the collection process with respect
to them continues, with the resulting necessary statement of rights of
various parties flowing from this prescription of the cut-off time.
2. The rules stated are similar to those stated in the American
Bankers Association Bank Collection Code, but with the
abandonment of any theory of trust. On the other hand, some law
previous to this Act may be relevant. See Note, Uniform Commercial
Code: Stopping Payment of an Item Deposited with an Insolvent
Depositary Bank, 40 Okla. L. Rev. 689 (1987). Although for
practical purposes Federal Deposit Insurance affects materially the
result of bank failures on holders of items and banks, no attempt is
made to vary the rules of the section by reason of such insurance.
3. It is recognized that in view of Jennings v. United States
Fidelity & Guaranty Co., 294 U.S. 216, 55 S.Ct. 394, 79
L.Ed. 869, 99 A.L.R. 1248 (1935), amendment of the National Bank
Act would be necessary to have this section apply to national banks.
But there is no reason why it should not apply to others. See Section
1-108.
Section 36-4-301. Deferred posting; recovery of payment by
return of items; time of dishonor; return of items by payor bank.
(a) If a payor bank settles for a demand item other than a
documentary draft presented otherwise than for immediate payment
over the counter before midnight of the banking day of receipt, the
payor bank may revoke the settlement and recover the settlement if,
before it has made final payment and before its midnight deadline,
it
(1) returns the item; or
(2) sends written notice of dishonor or nonpayment if the item
is unavailable for return.
(b) If a demand item is received by a payor bank for credit on its
books, it may return the item or send notice of dishonor and may
revoke any credit given or recover the amount thereof withdrawn by
its customer, if it acts within the time limit and in the manner
specified in subsection (a).
(c) Unless previous notice of dishonor has been sent, an item is
dishonored at the time when for purposes of dishonor it is returned or
notice sent in accordance with this section.
(d) An item is returned:
(1) as to an item presented through a clearing-house, when it is
delivered to the presenting or last collecting bank or to the
clearing-house or is sent or delivered in accordance with
clearing-house rules; or
(2) in all other cases, when it is sent or delivered to the bank's
customer or transferor or pursuant to instructions.
OFFICIAL COMMENT
1. The term "deferred posting" appears in the caption
of Section 4-301. This refers to the practice permitted by statute in
most of the states before the UCC under which a payor bank receives
items on one day but does not post the items to the customer's
account until the next day. Items dishonored were then returned after
the posting on the day after receipt. Under Section 4-301 the concept
of "deferred posting" merely allows a payor bank that has
settled for an item on the day of receipt to return a dishonored item
on the next day before its midnight deadline, without regard to when
the item was actually posted. With respect to checks Regulation CC
Section 229.30(c) extends the midnight deadline under the UCC
under certain circumstances. See the Commentary to Regulation CC
Section 229.38(d) on the relationship between the UCC and
Regulation CC on settlement.
2. The function of this section is to provide the circumstances
under which a payor bank that has made timely settlement for an item
may return the item and revoke the settlement so that it may recover
any settlement made. These circumstances are: (1) the item must be
a demand item other than a documentary draft; (2) the item must be
presented otherwise than for immediate payment over the counter;
and (3) the payor bank must return the item (or give notice if the item
is unavailable for return) before its midnight deadline and before it
has paid the item. With respect to checks, see Regulation CC Section
229.31(f) on notice in lieu of return and Regulation CC Section
229.33 as to the different requirement of notice of nonpayment. An
instance of when an item may be unavailable for return arises under
a collecting bank check retention plan under which presentment is
made by a presentment notice and the item is retained by the
collecting bank. Subsection 4-215(a)(2) provides that final payment
occurs if the payor bank has settled for an item without a right to
revoke the settlement under statute, clearing-house rule or agreement.
In any case in which Section 4-301(a) is applicable, the payor bank
has a right to revoke the settlement by statute; therefore, Section
4-215(a)(2) is inoperable, and the settlement is provisional. Hence,
if the settlement is not over the counter and the payor bank settles in
a manner that does not constitute final payment, the payor bank can
revoke the settlement by returning the item before its midnight
deadline.
3. The relationship of Section 4-301(a) to final settlement and
final payment under Section 4-215 is illustrated by the following
case. Depositary Bank sends by mail an item to Payor Bank with
instructions to settle by remitting a teller's check drawn on a bank in
the city where Depositary Bank is located. Payor Bank sends the
teller's check on the day the item was presented. Having made
timely settlement, under the deferred posting provisions of Section
4-301(a), Payor Bank may revoke that settlement by returning the
item before its midnight deadline. If it fails to return the item before
its midnight deadline, it has finally paid the item if the bank on which
the teller's check was drawn honors the check. But if the teller's
check is dishonored there has been no final settlement under Section
4-213(c) and no final payment under Section 4-215(b). Since the
Payor Bank has neither paid the item nor made timely return, it is
accountable for the item under Section 4-302(a).
4. The time limits for action imposed by subsection (a) are
adopted by subsection (b) for cases in which the payor bank is also
the depositary bank, but in this case the requirement of a settlement
on the day of receipt is omitted.
5. Subsection (c) fixes a base point from which to measure the
time within which notice of dishonor must be given. See Section
3-503.
6. Subsection (d) leaves banks free to agree upon the manner of
returning items but establishes a precise time when an item is
"returned." For definition of "sent" as used
in paragraphs (1) and (2) see Section 1-201(38). Obviously the
subsection assumes that the item has not been "finally
paid" under Section 4-215(a). If it has been, this provision has
no operation.
7. The fact that an item has been paid under proposed Section
4-215 does not preclude the payor bank from asserting rights of
restitution or revocation under Section 3-418. National Savings
and Trust Co. v. Park Corp., 722 F.2d 1303 (6th Cir. 1983), cert.
denied, 466 U.S. 939 (1984), is the correct interpretation of the
present law on this issue.
Section 36-4-302. Payor bank's responsibility for late return
of item.
(a) If an item is presented to and received by a payor bank, the
bank is accountable for the amount of:
(1) a demand item, other than a documentary draft, whether
properly payable or not, if the bank, in any case in which it is not
also the depositary bank, retains the item beyond midnight of the
banking day of receipt without settling for it or, whether or not it is
also the depositary bank, does not pay or return the item or send
notice of dishonor until after its midnight deadline; or
(2) any other properly payable item unless, within the time
allowed for acceptance or payment of that item, the bank either
accepts or pays the item or returns it and accompanying documents.
(b) The liability of a payor bank to pay an item pursuant to
subsection (a) is subject to defenses based on breach of a presentment
warranty (Section 36-4-208) or proof that the person seeking
enforcement of the liability presented or transferred the item for the
purpose of defrauding the payor bank.
OFFICIAL COMMENT
1. Subsection (a)(1) continues the former law distinguishing
between cases in which the payor bank is not also the depositary bank
and those in which the payor bank is also the depositary bank
("on us" items). For "on us" items the payor
bank is accountable if it retains the item beyond its midnight deadline
without settling for it. If the payor bank is not the depositary bank it
is accountable if it retains the item beyond midnight of the banking
day of receipt without settling for it. It may avoid accountability
either by settling for the item on the day of receipt and returning the
item before its midnight deadline under Section 4-301 or by returning
the item on the day of receipt. This rule is consistent with the
deferred posting practice authorized by Section 4-301 which allows
the payor bank to make provisional settlement for an item on the day
of receipt and to revoke that settlement by returning the item on the
next day. With respect to checks, Regulation CC Section 229.36(d)
provides that settlements between banks for forward collection of
checks are final when made. See the Commentary on that provision
for its effect on the UCC.
2. If the settlement given by the payor bank does not become
final, there has been no payment under Section 4-215(b), and the
payor bank giving the failed settlement is accountable under
subsection (a)(1) of Section 4-302. For instance, the payor bank
makes provisional settlement by sending a teller's check that is
dishonored. In such a case settlement is not final under Section
4-213(c) and no payment occurs under Section 4-215(b). Payor bank
is accountable on the item. The general principle is that unless
settlement provides the presenting bank with usable funds, settlement
has failed and the payor bank is accountable for the amount of the
item.
3. Subsection (b) is an elaboration of the deleted introductory
language of former Section 4-302: "In the absence of a valid
defense such as breach of a presentment warranty (subsection (1) of
Section 4-207), settlement effected or the like ... ." A payor
bank can defend an action against it based on accountability by
showing that the item contained a forged indorsement or a fraudulent
alteration. Subsection (b) drops the ambiguous "or the
like" language and provides that the payor bank may also raise
the defense of fraud. Decisions that hold an accountable bank's
liability to be "absolute" are rejected. A payor bank that
makes a late return of an item should not be liable to a defrauder
operating a check kiting scheme. In Bank of Leumi Trust Co. v.
Bally's Park Place Inc., 528 F.Supp. 349 (S.D.N.Y. 1981), and
American National Bank v. Foodbasket, 497 P.2d 546 (Wyo.
1972), banks that were accountable under Section 4-302 for missing
their midnight deadline were successful in defending against parties
who initiated collection knowing that the check would not be paid.
The "settlement effected" language is deleted as
unnecessary. If a payor bank is accountable for an item it is liable to
pay it. If it has made final payment for an item, it is no longer
accountable for the item.
Section 36-4-303. When items subject to notice,
stop-payment order, legal process, or setoff; order in which items
may be charged or certified.
(a) Any knowledge, notice, or stop-payment order received by,
legal process served upon, or setoff exercised by a payor bank comes
too late to terminate, suspend, or modify the bank's right or duty to
pay an item or to charge its customer's account for the item if the
knowledge, notice, stop-payment order, or legal process is received
or served and a reasonable time for the bank to act thereon expires or
the setoff is exercised after the earliest of the following:
(1) the bank accepts or certifies the item;
(2) the bank pays the item in cash;
(3) the bank settles for the item without having a right to
revoke the settlement under statute, clearing-house rule, or
agreement;
(4) the bank becomes accountable for the amount of the item
under Section 36-4-302 dealing with the payor bank's responsibility
for late return of items; or
(5) with respect to checks, a cutoff hour no earlier than one hour
after the opening of the next banking day after the banking day on
which the bank received the check and no later than the close of that
next banking day or, if no cutoff hour is fixed, the close of the next
banking day after the banking day on which the bank received the
check.
(b) Subject to subsection (a), items may be accepted, paid,
certified, or charged to the indicated account of its customer in any
order.
OFFICIAL COMMENT
1. While a payor bank is processing an item presented for
payment, it may receive knowledge or a legal notice affecting the
item, such as knowledge or a notice that the drawer has filed a
petition in bankruptcy or made an assignment for the benefit of
creditors; may receive an order of the drawer stopping payment on
the item; may have served on it an attachment of the account of the
drawer; or the bank itself may exercise a right of setoff against the
drawer's account. Each of these events affects the account of the
drawer and may eliminate or freeze all or part of whatever balance is
available to pay the item. Subsection (a) states the rule for
determining the relative priorities between these various legal events
and the item.
2. The rule is that if any one of several things has been done to
the item or if it has reached any one of several stages in its processing
at the time the knowledge, notice, stop-payment order or legal
process is received or served and a reasonable time for the bank to act
thereon expires or the setoff is exercised, the knowledge, notice,
stop-payment order, legal process or setoff comes too late, the item
has priority and a charge to the customer's account may be made and
is effective. With respect to the effect of the customer's bankruptcy,
the bank's rights are governed by Bankruptcy Code Section 542(c)
which codifies the result of Bank of Marin v. England, 385
U.S. 99 (1966). Section 4-405 applies to the death or incompetence
of the customer.
3. Once a payor bank has accepted or certified an item or has paid
the item in cash, the event has occurred that determines priorities
between the item and the various legal events usually described as the
"four legals." Paragraphs (1) and (2) of subsection (a) so
provide. If a payor bank settles for an item presented over the
counter for immediate payment by a cashier's check or teller's check
which the presenting person agrees to accept, paragraph (3) of
subsection (a) would control and the event determining priority has
occurred. Because presentment was over the counter, Section
4-301(a) does not apply to give the payor bank the statutory right to
revoke the settlement. Thus the requirements of paragraph (3) have
been met unless a clearing-house rule or agreement of the parties
provides otherwise.
4. In the usual case settlement for checks is by entries in bank
accounts. Since the process-of-posting test has been abandoned as
inappropriate for automated check collection, the determining event
for priorities is a given hour on the day after the item is received.
(Paragraph (5) of subsection (a).) The hour may be fixed by the bank
no earlier than one hour after the opening on the next banking day
after the bank received the check and no later than the close of that
banking day. If an item is received after the payor bank's regular
Section 4-108 cutoff hour, it is treated as received the next banking
day. If a bank receives an item after its regular cutoff hour on
Monday and an attachment is levied at noon on Tuesday, the
attachment is prior to the item if the bank had not before that hour
taken the action described in paragraphs (1), (2), and (3) of
subsection (a). The Commentary to Regulation CC Section
229.36(d) explains that even though settlement by a paying bank for
a check is final for Regulation CC purposes, the paying bank's right
to return the check before its midnight deadline under the UCC is not
affected.
5. Another event conferring priority for an item and a charge to
the customer's account based upon the item is stated by the language
"become accountable for the amount of the item under Section
4-302 dealing with the payor bank's responsibility for late return of
items." Expiration of the deadline under Section 4-302 with
resulting accountability by the payor bank for the amount of the item,
establishes priority of the item over notices, stop-payment orders,
legal process or setoff.
6. In the case of knowledge, notice, stop-payment orders and
legal process the effective time for determining whether they were
received too late to affect the payment of an item and a charge to the
customer's account by reason of such payment, is receipt plus a
reasonable time for the bank to act on any of these communications.
Usually a relatively short time is required to communicate to the
accounting department advice of one of these events but certainly
some time is necessary. Compare Sections 1-201(27) and 4-403. In
the case of setoff the effective time is when the setoff is actually
made.
7. As between one item and another no priority rule is stated.
This is justified because of the impossibility of stating a rule that
would be fair in all cases, having in mind the almost infinite number
of combinations of large and small checks in relation to the available
balance on hand in the drawer's account; the possible methods of
receipt; and other variables. Further, the drawer has drawn all the
checks, the drawer should have funds available to meet all of them
and has no basis for urging one should be paid before another; and
the holders have no direct right against the payor bank in any event,
unless of course, the bank has accepted, certified or finally paid a
particular item, or has become liable for it under Section 4-302.
Under subsection (b) the bank has the right to pay items for which it
is itself liable ahead of those for which it is not.
Section 36-4-401. When bank may charge customer's
account.
(a) A bank may charge against the account of a customer an item
that is properly payable from that account even though the charge
creates an overdraft. An item is properly payable if it is authorized
by the customer and is in accordance with any agreement between the
customer and bank.
(b) A customer is not liable for the amount of an overdraft if the
customer neither signed the item nor benefited from the proceeds of
the item.
(c) A bank may charge against the account of a customer a check
that is otherwise properly payable from the account, even though
payment was made before the date of the check, unless the customer
has given notice to the bank of the postdating describing the check
with reasonable certainty. The notice is effective for the period stated
in Section 36-4-403(b) for stop-payment orders, and must be received
at such time and in such manner as to afford the bank a reasonable
opportunity to act on it before the bank takes any action with respect
to the check described in Section 36-4-303. If a bank charges against
the account of a customer a check before the date stated in the notice
of postdating, the bank is liable for damages for the loss resulting
from its act. The loss may include damages for dishonor of
subsequent items under Section 36-4-402.
(d) A bank that in good faith makes payment to a holder may
charge the indicated account of its customer according to:
(1) the original terms of the altered item; or
(2) the terms of the completed item, even though the bank
knows the item has been completed unless the bank has notice that
the completion was improper.
OFFICIAL COMMENT
1. An item is properly payable from a customer's account if the
customer has authorized the payment and the payment does not
violate any agreement that may exist between the bank and its
customer. For an example of a payment held to violate an agreement
with a customer, see Torrance National Bank v. Enesco Federal
Credit Union, 285 P.2d 737 (Cal.App. 1955). An item drawn for
more than the amount of a customer's account may be properly
payable. Thus under subsection (a) a bank may charge the
customer's account for an item even though payment results in an
overdraft. An item containing a forged drawer's signature or forged
indorsement is not properly payable. Concern has arisen whether a
bank may require a customer to execute a stop-payment order when
the customer notifies the bank of the loss of an unindorsed or
specially indorsed check. Since such a check cannot be properly
payable from the customer's account, it is inappropriate for a bank to
require stop-payment order in such a case.
2. Subsection (b) adopts the view of case authority holding that
if there is more than one customer who can draw on an account, the
nonsigning customer is not liable for an overdraft unless that person
benefits from the proceeds of the item.
3. Subsection (c) is added because the automated check collection
system cannot accommodate postdated checks. A check is usually
paid upon presentment without respect to the date of the check.
Under the former law, if a payor bank paid a postdated check before
its stated date, it could not charge the customer's account because the
check was not "properly payable." Hence, the bank
might have been liable for wrongfully dishonoring subsequent checks
of the drawer that would have been paid had the postdated check not
been prematurely paid. Under subsection (c) a customer wishing to
postdate a check must notify the payor bank of its postdating in time
to allow the bank to act on the customer's notice before the bank has
to commit itself to pay the check. If the bank fails to act on the
customer's timely notice, it may be liable for damages for the
resulting loss which may include damages for dishonor of subsequent
items. This Act does not regulate fees that banks charge their
customers for a notice of postdating or other services covered by the
Act, but under principles of law such as unconscionability or good
faith and fair dealing, courts have reviewed fees and the bank's
exercise of a discretion to set fees. Perdue v. Crocker National
Bank, 38 Cal.3d 913 (1985) (unconscionability); Best v.
United Bank of Oregon, 739 P.2d 554, 562-566 (1987) (good
faith and fair dealing). In addition, Section 1-203 provides that every
contract or duty within this Act imposes an obligation of good faith
in its performance or enforcement.
4. Section 3-407(c) states that a payor bank or drawee which pays
a fraudulently altered instrument in good faith and without notice of
the alteration may enforce rights with respect to the instrument
according to its original terms or, in the case of an incomplete
instrument altered by unauthorized completion, according to its terms
as completed. Section 4-401(d) follows the rule stated in Section
3-407(c) by applying it to an altered item and allows the bank to
enforce rights with respect to the altered item by charging the
customer's account.
Section 36-4-402. Bank's liability to customer for wrongful
dishonor; time of determining insufficiency of account.
(a) Except as otherwise provided in this chapter, a payor bank
wrongfully dishonors an item if it dishonors an item that is properly
payable, but a bank may dishonor an item that would create an
overdraft unless it has agreed to pay the overdraft.
(b) A payor bank is liable to its customer for damages proximately
caused by the wrongful dishonor of an item. Liability is limited to
actual damages proved and may include damages for an arrest or
prosecution of the customer or other consequential damages.
Whether any consequential damages are proximately caused by the
wrongful dishonor is a question of fact to be determined in each case.
(c) A payor bank's determination of the customer's account
balance on which a decision to dishonor for insufficiency of available
funds is based may be made at any time between the time the item is
received by the payor bank and the time that the payor bank returns
the item or gives notice in lieu of return, and no more than one
determination need be made. If, at the election of the payor bank, a
subsequent balance determination is made for the purpose of
reevaluating the bank's decision to dishonor the item, the account
balance at that time is determinative of whether a dishonor for
insufficiency of available funds is wrongful.
OFFICIAL COMMENT
1. Subsection (a) states positively what has been assumed under
the original Article: that if a bank fails to honor a properly payable
item it may be liable to its customer for wrongful dishonor. Under
subsection (b) the payor bank's wrongful dishonor of an item gives
rise to a statutory cause of action. Damages may include
consequential damages. Confusion has resulted from the attempts of
courts to reconcile the first and second sentences of former Section
4-402. The second sentence implied that the bank was liable for
some form of damages other than those proximately caused by the
dishonor if the dishonor was other than by mistake. But nothing in
the section described what these noncompensatory damages might be.
Some courts have held that in distinguishing between mistaken
dishonors and nonmistaken dishonors, the so-called
"trader" rule has been retained that allowed a
"merchant or trader" to recover substantial damages for
wrongful dishonor without proof of damages actually suffered.
Comment 3 to former Section 4-402 indicated that this was not the
intent of the drafters. White & Summers, Uniform Commercial
Code, Section 18-4 (1988), states: "The negative implication
is that when wrongful dishonors occur not 'through mistake' but
willfully, the court may impose damages greater than 'actual
damages' ... . Certainly the reference to 'mistake' in the second
sentence of 4-402 invites a court to adopt the relevant pre-Code
distinction." Subsection (b) by deleting the reference to
mistake in the second sentence precludes any inference that Section
4-402 retains the "trader" rule. Whether a bank is liable
for noncompensatory damages, such as punitive damages, must be
decided by Section 1-103 and Section 1-106 ("by other rule of
law").
2. Wrongful dishonor is different from "failure to exercise
ordinary care in handling an item," and the measure of damages
is that stated in this section, not that stated in Section 4-103(e). By
the same token, if a dishonor comes within this section, the measure
of damages of this section applies and not another measure of
damages. If the wrongful refusal of the beneficiary's bank to make
funds available from a funds transfer causes the beneficiary's check
to be dishonored, no specific guidance is given as to whether
recovery is under this section or Article 4A. In each case this issue
must be viewed in its factual context, and it was thought unwise to
seek to establish certainty at the cost of fairness.
3. The second and third sentences of the subsection (b) reject
decisions holding that as a matter of law the dishonor of a check is
not the "proximate cause" of the arrest and prosecution
of the customer and leave to determination in each case as a question
of fact whether the dishonor is or may be the "proximate
cause."
4. Banks commonly determine whether there are sufficient funds
in an account to pay an item after the close of banking hours on the
day of presentment when they post debit and credit items to the
account. The determination is made on the basis of credits available
for withdrawal as of right or made available for withdrawal by the
bank as an accommodation to its customer. When it is determined
that payment of the item would overdraw the account, the item may
be returned at any time before the bank's midnight deadline the
following day. Before the item is returned new credits that are
withdrawable as of right may have been added to the account.
Subsection (c) eliminates uncertainty under Article 4 as to whether
the failure to make a second determination before the item is returned
on the day following presentment is a wrongful dishonor if new
credits were added to the account on that day that would have
covered the amount of the check.
5. Section 4-402 has been construed to preclude an action for
wrongful dishonor by a plaintiff other than the bank's customer.
Loucks v. Albuquerque National Bank, 418 P.2d 191
(N.Mex. 1966). Some courts have allowed a plaintiff other than the
customer to sue when the customer is a business entity that is one and
the same with the individual or individuals operating it.
Murdaugh Volkswagen, Inc. v. First National Bank, 801
F.2d 719 (4th Cir. 1986) and Karsh v. American City Bank,
113 Cal.App.3d 419, 169 Cal.Rptr. 851 (1980). However, where the
wrongful dishonor impugns the reputation of an operator of the
business, the issue is not merely, as the court in Koger v. East
First National Bank, 443 So.2d 141 (Fla.App. 1983), put it, one
of a literal versus a liberal interpretation of Section 4-402. Rather the
issue is whether the statutory cause of action in Section 4-402
displaces, in accordance with Section 1-103, any cause of action that
existed at common law in a person who is not the customer whose
reputation was damaged. See Marcum v. Security Trust and
Savings Co., 221 Ala. 419, 129 So.74 (1930). While Section
4-402 should not be interpreted to displace the latter cause of action,
the section itself gives no cause of action to other than a
"customer," however that definition is construed, and
thus confers no cause of action on the holder of a dishonored item.
First American National Bank v. Commerce Union Bank,
692 S.W.2d 642 (Tenn.App. 1985).
Section 36-4-403. Customer's right to stop payment; burden
of proof of loss.
(a) A customer or any person authorized to draw on the account
if there is more than one person may stop payment of any item drawn
on the customer's account or close the account by an order to the
bank describing the item or account with reasonable certainty
received at a time and in a manner that affords the bank a reasonable
opportunity to act on it before any action by the bank with respect to
the item described in Section 36-4-303. If the signature of more than
one person is required to draw on an account, any of these persons
may stop payment or close the account.
(b) A stop-payment order is effective for six months, but it lapses
after fourteen calendar days if the original order was oral and was not
confirmed in writing within that period. A stop-payment order may
be renewed for additional six-month periods by a writing given to the
bank within a period during which the stop-payment order is
effective.
(c) The burden of establishing the fact and amount of loss
resulting from the payment of an item contrary to a stop-payment
order or order to close an account is on the customer. The loss from
payment of an item contrary to a stop-payment order may include
damages for dishonor of subsequent items under Section 36-4-402.
OFFICIAL COMMENT
1. The position taken by this section is that stopping payment or
closing an account is a service which depositors expect and are
entitled to receive from banks notwithstanding its difficulty,
inconvenience and expense. The inevitable occasional losses through
failure to stop or close should be borne by the banks as a cost of the
business of banking.
2. Subsection (a) follows the decisions holding that a payee or
indorsee has no right to stop payment. This is consistent with the
provision governing payment or satisfaction. See Section 3-602. The
sole exception to this rule is found in Section 4-405 on payment after
notice of death, by which any person claiming an interest in the
account can stop payment.
3. Payment is commonly stopped only on checks; but the right to
stop payment is not limited to checks, and extends to any item
payable by any bank. If the maker of a note payable at a bank is in
a position analogous to that of a drawer (Section 4-106) the maker
may stop payment of the note. By analogy the rule extends to
drawees other than banks.
4. A cashier's check or teller's check purchased by a customer
whose account is debited in payment for the check is not a check
drawn on the customer's account within the meaning of subsection
(a); hence, a customer purchasing a cashier's check or teller's check
has no right to stop payment of such a check under subsection (a). If
a bank issuing a cashier's check or teller's check refuses to pay the
check as an accommodation to its customer or for other reasons, its
liability on the check is governed by Section 3-411. There is no right
to stop payment after certification of a check or other acceptance of
a draft, and this is true no matter who procures the certification. See
Sections 3-411 and 4-303. The acceptance is the drawee's own
engagement to pay, and it is not required to impair its credit by
refusing payment for the convenience of the drawer.
5. Subsection (a) makes clear that if there is more than one person
authorized to draw on a customer's account any one of them can stop
payment of any check drawn on the account or can order the account
closed. Moreover, if there is a customer, such as a corporation, that
requires its checks to bear the signatures of more than one person,
any of these persons may stop payment on a check. In describing the
item, the customer, in the absence of a contrary agreement, must meet
the standard of what information allows the bank under the
technology then existing to identify the item with reasonable
certainty.
6. Under subsection (b), a stop-payment order is effective after
the order, whether written or oral, is received by the bank and the
bank has a reasonable opportunity to act on it. If the order is written
it remains in effect for six months from that time. If the order is oral
it lapses after 14 days unless there is written confirmation. If there
is written confirmation within the 14-day period, the six-month
period dates from the giving of the oral order. A stop-payment order
may be renewed any number of times by written notice given during
a six-month period while a stop order is in effect. A new
stop-payment order may be given after a six-month period expires,
but such a notice takes effect from the date given. When a
stop-payment order expires it is as though the order had never been
given, and the payor bank may pay the item in good faith under
Section 4-404 even though a stop-payment order had once been
given.
7. A payment in violation of an effective direction to stop
payment is an improper payment, even though it is made by mistake
or inadvertence. Any agreement to the contrary is invalid under
Section 4-103(a) if in paying the item over the stop-payment order
the bank has failed to exercise ordinary care. An agreement to the
contrary which is imposed upon a customer as part of a standard form
contract would have to be evaluated in the light of the general
obligation of good faith. Sections 1-203 and 4-104(c). The drawee
is, however, entitled to subrogation to prevent unjust enrichment
(Section 4-407); retains common law defenses, e.g., that by conduct
in recognizing the payment the customer has ratified the bank's
action in paying over a stop-payment order (Section 1-103); and
retains common law rights, e.g., to recover money paid under a
mistake under Section 3-418. It has sometimes been said that
payment cannot be stopped against a holder in due course, but the
statement is inaccurate. The payment can be stopped but the drawer
remains liable on the instrument to the holder in due course (Sections
3-305, 3-414) and the drawee, if it pays, becomes subrogated to the
rights of the holder in due course against the drawer. Section 4-407.
The relationship between Sections 4-403 and 4-407 is discussed in
the Comments to Section 4-407. Any defenses available against a
holder in due course remain available to the drawer, but other
defenses are cut off to the same extent as if the holder were bringing
the action.
Section 36-4-404. Bank not obliged to pay check more than
six months old.
A bank is under no obligation to a customer having a checking
account to pay a check, other than a certified check, which is
presented more than six months after its date, but it may charge its
customer's account for a payment made thereafter in good faith.
OFFICIAL COMMENT
This section incorporates a type of statute that had been adopted in
26 jurisdictions before the Code. The time limit is set at six months
because banking and commercial practice regards a check
outstanding for longer than that period as stale, and a bank will
normally not pay such a check without consulting the depositor. It
is therefore not required to do so, but is given the option to pay
because it may be in a position to know, as in the case of dividend
checks, that the drawer wants payment made.
Certified checks are excluded from the section because they are the
primary obligation of the certifying bank (Sections 3-409 and 3-413).
The obligation runs directly to the holder of the check. The
customer's account was presumably charged when the check was
certified.
Section 36-4-405. Death or incompetence of customer.
(a) A payor or collecting bank's authority to accept, pay, or
collect an item or to account for proceeds of its collection, if
otherwise effective, is not rendered ineffective by incompetence of
a customer of either bank existing at the time the item is issued or its
collection is undertaken if the bank does not know of an adjudication
of incompetence. Neither death nor incompetence of a customer
revokes the authority to accept, pay, collect, or account until the
bank knows of the fact of death or of an adjudication of
incompetence and has reasonable opportunity to act on it.
(b) Even with knowledge, a bank may for 10 days after the date of
death pay or certify checks drawn on or before that date unless
ordered to stop payment by a person claiming an interest in the
account.
OFFICIAL COMMENT
1. Subsection (a) follows existing decisions holding that a drawee
(payor) bank is not liable for the payment of a check before it has
notice of the death or incompetence of the drawer. The justice and
necessity of the rule are obvious. A check is an order to pay which
the bank must obey under penalty of possible liability for dishonor.
Further, with the tremendous volume of items handled any rule that
required banks to verify the continued life and competency of
drawers would be completely unworkable.
One or both of these same reasons apply to other phases of the bank
collection and payment process and the rule is made wide enough to
apply to these other phases. It applies to all kinds of
"items"; to "customers" who own items as
well as "customers" who draw or make them; to the
function of collecting items as well as the function of accepting or
paying them; to the carrying out of instructions to account for
proceeds even though these may involve transfers to third parties; to
depositary and intermediary banks as well as payor banks; and to
incompetency existing at the time of the issuance of an item or the
commencement of the collection or payment process as well as to
incompetency occurring thereafter. Further, the requirement of actual
knowledge makes inapplicable the rule of some cases that an
adjudication of incompetency is constructive notice to all the world
because obviously it is as impossible for banks to keep posted on
such adjudications (in the absence of actual knowledge) as it is to
keep posted as to death of immediate or remote customers.
2. Subsection (b) provides a limited period after death during
which a bank may continue to pay checks (as distinguished from
other items) even though it has notice. The purpose of the provision,
as of the existing statutes, is to permit holders of checks drawn and
issued shortly before death to cash them without the necessity of
filing a claim in probate. The justification is that these checks
normally are given in immediate payment of an obligation, that there
is almost never any reason why they should not be paid, and that
filing in probate is a useless formality, burdensome to the holder, the
executor, the court and the bank.
This section does not prevent an executor or administrator from
recovering the payment from the holder of the check. It is not
intended to affect the validity of any gift causa mortis or other
transfer in contemplation of death, but merely to relieve the bank of
liability for the payment.
3. Any surviving relative, creditor or other person who claims an
interest in the account may give a direction to the bank not to pay
checks, or not to pay a particular check. Such notice has the same
effect as a direction to stop payment. The bank has no responsibility
to determine the validity of the claim or even whether it is
"colorable." But obviously anyone who has an interest
in the estate, including the person named as executor in a will, even
if the will has not yet been admitted to probate, is entitled to claim an
interest in the account.
Section 36-4-406. Customer's duty to discover and report
unauthorized signature or alteration.
(a) A bank that sends or makes available to a customer a statement
of account showing payment of items for the account shall either
return or make available to the customer the items paid or provide
information in the statement of account sufficient to allow the
customer reasonably to identify the items paid. The statement of
account provides sufficient information if the item is described by
item number, amount, and date of payment.
(b) If the items are not returned to the customer, the person
retaining the items shall either retain the items or, if the items are
destroyed, maintain the capacity to furnish legible copies of the items
until the expiration of seven years after receipt of the items. A
customer may request an item from the bank that paid the item, and
that bank must provide in a reasonable time either the item or, if the
item has been destroyed or is not otherwise obtainable, a legible copy
of the item.
(c) If a bank sends or makes available a statement of account or
items pursuant to subsection (a), the customer must exercise
reasonable promptness in examining the statement or the items to
determine whether any payment was not authorized because of an
alteration of an item or because a purported signature by or on behalf
of the customer was not authorized. If, based on the statement or
items provided, the customer should reasonably have discovered the
unauthorized payment, the customer must promptly notify the bank
of the relevant facts.
(d) If the bank proves that the customer failed, with respect to an
item, to comply with the duties imposed on the customer by
subsection (c), the customer is precluded from asserting against the
bank:
(1) the customer's unauthorized signature or any alteration on
the item, if the bank also proves that it suffered a loss by reason of
the failure; and
(2) the customer's unauthorized signature or alteration by the
same wrongdoer on any other item paid in good faith by the bank if
the payment was made before the bank received notice from the
customer of the unauthorized signature or alteration and after the
customer had been afforded a reasonable period of time, not
exceeding thirty days, in which to examine the item or statement of
account and notify the bank.
(e) If subsection (d) applies and the customer proves that the bank
failed to exercise ordinary care in paying the item and that the failure
substantially contributed to loss, the loss is allocated between the
customer precluded and the bank asserting the preclusion according
to the extent to which the failure of the customer to comply with
subsection (c) and the failure of the bank to exercise ordinary care
contributed to the loss. If the customer proves that the bank did not
pay the item in good faith, the preclusion under subsection (d) does
not apply.
(f) Without regard to care or lack of care of either the customer or
the bank, a customer who does not within one year after the
statement or items are made available to the customer (subsection
(a)) discover and report the customer's unauthorized signature on or
any alteration on the item is precluded from asserting against the
bank the unauthorized signature or alteration. If there is a
preclusion under this subsection, the payor bank may not recover for
breach of warranty under Section 36-4-208 with respect to the
unauthorized signature or alteration to which the preclusion
applies.
OFFICIAL COMMENT
1. In order to impose on its customer the duty stated in subsection
(c) to examine a statement or the returned items and report
unauthorized signatures of the customer or alterations, the bank must
comply with subsection (a) in sending or making available to the
customer a statement of account. Whether the bank returns to the
customer the items paid is a matter for bank-customer agreement. If
the agreement is that the bank does not return the items paid, a
general standard is stated that the customer must be given
information "sufficient to allow the customer reasonably to
identify the items paid." If the bank supplies its customer with
an image of an item, it complies with this standard. But a safe harbor
rule is provided. If the item is described by item number, amount,
and date of payment, the bank does comply. This information was
chosen because it can be obtained by the bank's computer from the
check's MICR line without examination of the items involved. The
other two items of information that the customer would normally
want to know -- the name of the payee and the date of the item --
cannot currently be obtained from the MICR line. The safe harbor
rule is important in determining the feasibility of payor or collecting
bank check retention plans. A customer who keeps a record of items
written will have sufficient information to identify the item on the
basis of item number, amount and date of payment. But customers
who don't keep records may not. The policy decision is that
accommodating these customers is not as desirable as
accommodating others who keep more careful records at less cost to
the check collection system and, thus, to all customers of the system.
It is expected that technological advances may make it possible for
banks to give customers more information in the future in a manner
that is fully compatible with automation or truncation systems. At
that time the Permanent Editorial Board may wish to make
recommendations for an amendment revising the safe harbor
requirements in the light of those advances.
2. Subsection (b) applies if the items are not returned to the
customer. Check retention plans may include a simple payor bank
check retention plan or the kind of check retention plan that would be
authorized by a truncation agreement in which a collecting bank or
the payee may retain the items. Even after agreeing to a check
retention plan, a customer may need to see one or more checks for
litigation or other purposes. The customer's request for the check
may always be made to the payor bank. Under subsection (b)
retaining banks may destroy items but must maintain the capacity to
furnish legible copies for seven years. A legible copy may include
an image of an item. This Act does not define the length of the
reasonable period of time for a bank to provide the check or copy of
the check. What is reasonable depends on the capacity of the bank
and the needs of the customer. This Act does not specify sanctions
for failure to retain or furnish the items or legible copies; this is left
to other laws regulating banks. See Comment 3 to Section 4-101.
Moreover, this Act does not regulate fees that banks charge their
customers for furnishing items or copies or other services covered by
the Act, but under principles of law such as unconscionability or
good faith and fair dealing, courts have reviewed fees and the bank's
exercise of a discretion to set fees. Perdue v. Crocker National
Bank, 38 Cal.3d 913 (1985) (unconscionability); Best v.
United Bank of Oregon, 739 P.2d 554, 562-566 (1987) (good
faith and fair dealing). In addition, Section 1-203 provides that every
contract or duty within this Act imposes an obligation of good faith
in its performance or enforcement.
3. Subsection (c) imposes on the customer the duty to examine
for and report unauthorized payments. Subsection (d)(2) changes
former subsection (2)(b) by adopting a 30-day period in place of a
14-day period. Although the 14-day period may have been sufficient
when the original version of Article 4 was drafted in the 1950s, given
the much greater volume of checks at the time of the revision, a
longer period was viewed as more appropriate. The rule of
subsection (d)(2) follows pre-Code case law that payment of an
additional item or items bearing an unauthorized signature or
alteration by the same wrongdoer is a loss suffered by the bank
traceable to the customer's failure to exercise reasonable care in
examining the statement and notifying the bank of objections to it.
One of the most serious consequences of failure of the customer to
comply with the requirements of subsection (c) is the opportunity
presented to the wrongdoer to repeat the misdeeds. Conversely, one
of the best ways to keep down losses in this type of situation is for
the customer to promptly examine the statement and notify the bank
of an unauthorized signature or alteration so that the bank will be
alerted to stop paying further items. Hence, the rule of subsection
(d)(2) is prescribed, and to avoid dispute a specific time limit, 30
days, is designated for cases to which the subsection applies. These
considerations are not present if there are no losses resulting from the
payment of additional items. In these circumstances, a reasonable
period for the customer to comply with its duties under subsection (c)
would depend on the circumstances (Section 1-204(2)) and the
subsection (d)(2) time limit should not be imported by analogy into
subsection (c).
4. Subsection (e) replaces former subsection (3) and poses a
modified comparative negligence test for determining liability. See
the discussion on this point in the Comments to Sections 3-404,
3-405, and 3-406. The term "good faith" is defined in
Section 3-103(a)(4) as including "observance of reasonable
commercial standards of fair dealing." The connotation of this
standard is fairness and not absence of negligence.
The term "ordinary care" used in subsection (e) is
defined in Section 3-103(a)(7), made applicable to Article 4 by
Section 4-104(c), to provide that sight examination by a payor bank
is not required if its procedure is reasonable and is commonly
followed by other comparable banks in the area. The case law is
divided on this issue. The definition of "ordinary care"
in Section 3-103 rejects those authorities that hold, in effect, that
failure to use sight examination is negligence as a matter of law. The
effect of the definition of "ordinary care" on Section
4-406 is only to provide that in the small percentage of cases in
which a customer's failure to examine its statement or returned items
has led to loss under subsection (d) a bank should not have to share
that loss solely because it has adopted an automated collection or
payment procedure in order to deal with the great volume of items at
a lower cost to all customers.
5. Several changes are made in former Section 4-406(5). First,
former subsection (5) is deleted and its substance is made applicable
only to the one-year notice preclusion in former subsection (4)
(subsection (f)). Thus if a drawer has not notified the payor bank of
an unauthorized check or material alteration within the one-year
period, the payor bank may not choose to recredit the drawer's
account and pass the loss to the collecting banks on the theory of
breach of warranty. Second, the reference in former subsection (4)
to unauthorized indorsements is deleted. Section 4-406 imposes no
duties on the drawer to look for unauthorized indorsements. Section
4-111 sets out a statute of limitations allowing a customer a
three-year period to seek a credit to an account improperly charged
by payment of an item bearing an unauthorized indorsement. Third,
subsection (c) is added to Section 4-208 to assure that if a depositary
bank is sued for breach of a presentment warranty, it can defend by
showing that the drawer is precluded by Section 3-406 or Section
4-406(c) and (d).
Section 36-4-407. Payor bank's right to subrogation on
improper payment.
If a payor bank has paid an item over the order of the drawer or
maker to stop payment, or after an account has been closed, or
otherwise under circumstances giving a basis for objection by the
drawer or maker, to prevent unjust enrichment and only to the extent
necessary to prevent loss to the bank by reason of its payment of the
item, the payor bank is subrogated to the rights of:
(1) any holder in due course on the item against the drawer or
maker;
(2) the payee or any other holder of the item against the drawer
or maker either on the item or under the transaction out of which the
item arose; and
(3) the drawer or maker against the payee or any other holder of
the item with respect to the transaction out of which the item
arose.
OFFICIAL COMMENT
1. Section 4-403 states that a stop-payment order or an order to
close an account is binding on a bank. If a bank pays an item over
such an order it is prima facie liable, but under subsection (c) of
Section 4-403 the burden of establishing the fact and amount of loss
from such payment is on the customer. A defense frequently
interposed by a bank in an action against it for wrongful payment
over a stop-payment order is that the drawer or maker suffered no
loss because it would have been liable to a holder in due course in
any event. On this argument some cases have held that payment
cannot be stopped against a holder in due course. Payment can be
stopped, but if it is, the drawer or maker is liable and the sound rule
is that the bank is subrogated to the rights of the holder in due course.
The preamble and paragraph (1) of this section state this rule.
2. Paragraph (2) also subrogates the bank to the rights of the
payee or other holder against the drawer or maker either on the item
or under the transaction out of which it arose. It may well be that the
payee is not a holder in due course but still has good rights against
the drawer. These may be on the check but also may not be as, for
example, where the drawer buys goods from the payee and the goods
are partially defective so that the payee is not entitled to the full price,
but the goods are still worth a portion of the contract price. If the
drawer retains the goods it is obligated to pay a part of the agreed
price. If the bank has paid the check it should be subrogated to this
claim of the payee against the drawer.
3. Paragraph (3) subrogates the bank to the rights of the drawer
or maker against the payee or other holder with respect to the
transaction out of which the item arose. If, for example, the payee
was a fraudulent salesman inducing the drawer to issue a check for
defective securities, and the bank pays the check over a stop-payment
order but reimburses the drawer for such payment, the bank should
have a basis for getting the money back from the fraudulent
salesman.
4. The limitations of the preamble prevent the bank itself from
getting any double recovery or benefits out of its subrogation rights
conferred by the section.
5. The spelling out of the affirmative rights of the bank in this
section does not destroy other existing rights (Section 1-103).
Among others these may include the defense of a payor bank that by
conduct in recognizing the payment a customer has ratified the
bank's action in paying in disregard of a stop-payment order or right
to recover money paid under a mistake.
Section 36-4-501. Handling of documentary drafts; duty to
send for presentment and to notify customer of dishonor.
A bank that takes a documentary draft for collection shall present
or send the draft and accompanying documents for presentment and,
upon learning that the draft has not been paid or accepted in due
course, shall seasonably notify its customer of the fact even though
it may have discounted or bought the draft or extended credit
available for withdrawal as of right.
OFFICIAL COMMENT
This section states the duty of a bank handling a documentary draft
for a customer. "Documentary draft" is defined in
Section 4-104. The duty stated exists even if the bank has bought the
draft. This is because to the customer the draft normally represents
an underlying commercial transaction, and if that is not going
through as planned the customer should know it promptly.
Section 36-4-502. Presentment of 'on arrival' drafts.
If a draft or the relevant instructions require presentment 'on
arrival', 'when goods arrive' or the like, the collecting bank need not
present until in its judgment a reasonable time for arrival of the goods
has expired. Refusal to pay or accept because the goods have not
arrived is not dishonor; the bank must notify its transferor of the
refusal but need not present the draft again until it is instructed to do
so or learns of the arrival of the goods.
OFFICIAL COMMENT
The section is designed to establish a definite rule for "on
arrival" drafts. The term includes not only drafts drawn
payable "on arrival" but also drafts forwarded with
instructions to present "on arrival." The term refers to
the arrival of the relevant goods. Unless a bank has actual knowledge
of the arrival of the goods, as for example, when it is the
"notify" party on the bill of lading, the section only
requires the exercise of such judgment in estimating time as a bank
may be expected to have. Commonly the buyer-drawee will want the
goods and will therefore call for the documents and take up the draft
when they do arrive.
Section 36-4-503. Responsibility of presenting bank for
documents and goods; report of reasons for dishonor; referee in case
of need.
Unless otherwise instructed and except as provided in Chapter 5, a
bank presenting a documentary draft:
(1) must deliver the documents to the drawee on acceptance of the
draft if it is payable more than three days after presentment;
otherwise, only on payment; and
(2) upon dishonor, either in the case of presentment for acceptance
or presentment for payment, may seek and follow instructions from
any referee in case of need designated in the draft or, if the presenting
bank does not choose to utilize the referee's services, it must use
diligence and good faith to ascertain the reason for dishonor, must
notify its transferor of the dishonor and of the results of its effort to
ascertain the reasons therefor, and must request instructions.
However the presenting bank is under no obligation with respect to
goods represented by the documents except to follow any reasonable
instructions seasonably received; it has a right to reimbursement for
any expense incurred in following instructions and to prepayment of
or indemnity for those expenses.
OFFICIAL COMMENT
1. This section states the rules governing, in the absence of
instructions, the duty of the presenting bank in case either of honor
or of dishonor of a documentary draft. The section should be read in
connection with Section 2-514 on when documents are deliverable on
acceptance, when on payment.
2. If the draft is drawn under a letter of credit, Article 5 controls.
See Sections 5-109 through 5-114.
Section 36-4-504. Privilege of presenting bank to deal with
goods; security interest for expenses.
(a) A presenting bank that, following the dishonor of a
documentary draft, has seasonably requested instructions but does not
receive them within a reasonable time may store, sell, or otherwise
deal with the goods in any reasonable manner.
(b) For its reasonable expenses incurred by action under
subsection (a), the presenting bank has a lien upon the goods or their
proceeds, which may be foreclosed in the same manner as an unpaid
seller's lien."
OFFICIAL COMMENT
The section gives the presenting bank, after dishonor, a privilege to
deal with the goods in any commercially reasonable manner pending
instructions from its transferor and, if still unable to communicate
with its principal after a reasonable time, a right to realize its
expenditures as if foreclosing on an unpaid seller's lien (Section
2-706). The provision includes situations in which storage of goods
or other action becomes commercially necessary pending receipt of
any requested instructions, even if the requested instructions are later
received.
The "reasonable manner" referred to means one
reasonable in the light of business factors and the judgment of a
business man.
SECTION 3. Item (20), as last amended by Act 161 of 1991, and
items (24) and (43) of Section 36-1-201 of the 1976 Code are
amended to read:
"(20) 'Holder', with respect to a negotiable
instrument, means a the person who is
in possession of a document of title or an instrument or an
investment security drawn, issued, or indorsed to him or to his order
or to bearer or in blank if the instrument is payable to bearer
or, in the case of an instrument payable to an identified person, if the
identified person is in possession. 'Holder', with respect to a
document of title, means the person in possession if the goods are
deliverable to bearer or to the order of the person in possession.
(24) 'Money' means a medium of exchange authorized or adopted
by a domestic or foreign government as a part of its currency
and includes a monetary unit of account established by an
intergovernmental organization or by agreement between two or
more nations.
(43) 'Unauthorized' signature or indorsement means one
made without actual, implied, or apparent authority and
includes a forgery."
OFFICIAL COMMENT
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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