Payment is limited to a particular fund or account.
Fixed amount of money,
that an instrument reference amounts outside the instrument
does not destroy negotiably, provided that the interest is
ascertainable by reference to a formula or index.
The fixed amount applies only to the principal.
If the issuer promises or undertakes any act in addition to payment
of the money that is not authourized by the code, negotiably is
destroyed. The code authourizes,
An undertaking to provide collateral to secure payment
Admit default
A waiver of law intended to protect an obligor.
Be payable upon demand or at a definite time; and
A holder of an instrument must be able to tell when the note
becomes due. Otherwise the instrument is non-negotiable, but
there is no requirement that the instrument be dated. § 3-108.
The due date must be readily ascertainable at the time the
promise or order is issued, either by date, or upon demand.
If the option belongs to the holder, the holder is in control,
even if a later date is specified.
An extension of time to a specific date at the option of the
maker or upon a specified act or event.
An undated instrument that specifies no time is payable upon
demand of the holder. § 3-113.
The obligation must travel with the instrument. This can be done
with the "magic words" of "payable to bearer" or "order" or other
similar phrases (as a practical matter don't modify the terms).
If a specific person is named, only that person can cash the note.
If an entity or organization can be identified by a person, that
person is the person which may negotiate the note, e.g. the estate is
represented by an administrator. §3-110(c); §1-201(28).
If no person is specified, or to the order of cash, it is bearer paper,
payable to anyone.
If it had characteristics of both order or bearer, it's bearer (i.e.
"John Doe or bearer" is payable to bearer).
A special exception applies to checks where the words "the order
of" are omitted. These are still negotiable instruments. §3-104(c).
This exception applies because the checks are scanned by machine,
not by human eyes.
Order paper - the person who holds the note and is identifed as the
proper holder.
Indorsements
A blank indorsement on the back of the check can merely be their
signature. §3-205(b)
A special indorsment on the back of the check can be limited, e.g. on back,
"pay to John Clute /s/ payee" §3-205(a).
A depositary bank can be a holder regardless of their customer's signature.
The basis being that there is a special relationship between customers and
their banks. §4-205(1). Depository banks have a security interest in a note
and accompanying documents. §4-210. Therefore, value is given for the
negotiation of notes.
In the revised Article 3, a person entitled to enforce the instrument can sue
on the instrument. §3-301. Although this is generally a holder, it may also
include certain entities.
To qualify as a holder, a person must, (§1-201(20)).
Be in possession of the instrument and for non-bearer instruments,
Be the person identified in the instrument.
The number of endorsements depends on the joining language in the
"payable to" verbiage. See Problem 94 (6th Edition); (rick knight-simplot
soil builders case).
The indorsement must be physically affixed to the instrument itself. §3-203(a).
Forgery of the Payee's Name
Any unauthorized indorsement of the payee's name or any special
indorsee's name is not a valid negotiation and gives subsequent transferees
no legal rights, as an HDC or otherwise, regardless of how far removed
they are from that transaction. §3-205(a).
If the indorsement is made, absent limitations, the note becomes bearer
paper and is negotiable by anyone who comes into possession of the note.
§3-201(b).
A holder may convert a blank endorsement into a special indorsement by
including language indicating the negotiator. §3-205(c).
Holder in Due Course
A holder in due course (HDC) is one who, (§3-302(a))
Takes the instrument which does not appear to be forged
Consideration is not enough. Rather, there must be an
agreed performance that has been performed.
Examples include the acquisition of a security interest,
exchange of other instruments, paying off an underlying
debt, taking of an obligation or in satisfaction of a promise.
To promise to do something, does not constitute "for
value." Sea Air Support, Inc. v. Hermann, 613 P.2d 413
(Nev. 1980).
A bank acts as a HDC even though they act as an agent
when they give value for the instrument to the extent that
value has been given. §4-210; §4-211.
Defined: "honesty in fact in the conduct of the transaction
concerned." §1-201(19). This test from Article 3
encompasses both this subjective standard and an objective
standard which requires the "observance of reasonably
commercial standards of fair dealings." §3-103(4).
The holder is under no duty to inquire as to possible
defenses, unless the circumstances indicate that there is a
purpose not to inquire.
If a fiduciary breaches a duty, and the debt is applied to the
fiduciary's personal account, the principal is imputed
knowledge of the breach of the duty. §3-307.
Without notice of defenses or problems with the note
Notice may come from the instrument itself or other
sources.
It may be difficult at times to distinguish between good
faith and notice because they are often intertwined.
Types of notice that will prevent HDC status,
The instrument bears apparent evidence of forgery,
alteration so as to raise questions regarding its
authenticity. §3-302(a)(1).
Notice that the instrument has an unauthorized
signature or has been altered. §3-302(a)(2)(iv).
Facial challenges, such as incorrect dates may not
qualify as a problem, whereas a notation that notice
that an installment or interest payments have been
missed may qualify as notice, and may negate HDC
status. Problems 104 & 105; §3-302(a)(iii); §3-304(c).
An instrument is overdue 90 days after issuance.
§3-304(a)(2).
The inquiry of whether an entity has HDC status is when
the instrument is negotiated.
If the subsequent purchasers know nothing about
the transaction, they get the protection. If they
know about the transaction, they usually don't get
HDC protection.
Courts draw a distinction between knowing about
the transaction, and knowing about the defenses.
The plaintiff has the burden to establish that they are a holder of the note
and is entitled to enforce.
If the defendant raises a defense, the burden is on the plaintiff that they are
an HDC. Once HDC status is determined, the defense is revisited to
determine whether it is real or personal.
The burden is a preponderance of the evidence.
The Shelter Rule
The transferee has the same rights as the transferor. §3-203(b).
Use only if HDC status is unavailable to the holder of the instrument.
The string of rights is "chainlike," viz. if someone had HDC rights in the
past, those rights transfer on to all subsequent transferees.
If the instrument is reacquired by a prior holder, the holder is in the
position they were in when the first acquired the instrument.
Real and Personal Defenses
A person holding an instrument, other than an HDC, must take subject to
other instruments. §3-306.
Immune from defenses from parties with whom they have not dealt with,
but still subject to defenses from the immediate transferor, regardless of
HDC status. §3-305(d).
HDC's must take subject to Real Defenses. (§3-305(a)(1)).
Discharge in Insolvency
Fraud
State Law Defenses
Forged Signature. §3-401; 3-403. The signature is
admitted, unless specifically denied in the pleadings. §3-308(a). If denied, the plaintiff-holder has the burden of
showing the signature is valid, but presume that the
signature is valid until the defendant makes a sufficient
showing.
Discharge in bankruptcy
Lack of capacity.
Even if an infant negotiates an instrument, later
holders can still negotiate the instrument. §3-202.
HDC's need not listen to personal defenses, but non-HDC's must
take subject to personal defenses. §3-305(a)(2)
Any defense under a simple contract
Failure to countersign a travelers' check. §3-106(c)
The obligor may raise a claim in recoupment against
the original payee of the instrument if the claim
arose from the transaction that gave rise to the
instrument. §3-305(a)(3).
The recoupment can only reduce the amount owing
on the instrument.
This defense usually arises in a breach of warranty
situation where the buyer has accepted the goods,
and is thus responsible for the price of the goods,
but has a breach of warranty claim against eh seller
and wants to reduce the amount owing because of
the breach of warranty claim.
Policy
In third party actions, we do not pay attention to personal defenses.
Because we want people to utilize negotiable instruments, we give banks
extra privileges and allow them to be a holder without a signature.
The Nature of Liability
The underlying obligation
The underlying obligation is merged into the negotiable instrument when
the instrument is used to pay the underlying obligation. §3-310.
The obligation to pay the underlying obligation is suspended during the
merger. §3-310(b). If the note is one where a bank becomes obligated, the
issuance of the note becomes discharge unless there is an agreement to the
contrary. §3-310(a).
The destruction of the note by the holder has discharged the note. §3-604.
If the note has been destroyed, the obligation is suspended until the note
has can be honored. §3-310(b)(4). The suspension can end, and the
person seeking enforcement of a destroyed note if a court can be satisfied
that the obligation existed and the note is reconstructed. §3-309.
Liability on the Instrument
A maker of a note is obligated to pay the instrument on the terms at the
time the note was issued. §3-412.
Multiple makers of a note are jointly and severally liable. A party who
pays more than their proportionate share may seek contribution from co-makers. §3-116.
Indorsers are obligated to pay the amount due on the instrument if the note
is dishonored. §3-415. However, the maker of the note is primarily liable
on the note and the subsequent indorsers are secondarily liable.
Indorsers on the check that are listed prior to the payee are termed an
anomalous indorser. Anomalous indorsements modify the rule in §3-415
insofar as joint and several liability is imposed. §3-116(a). These third
parties must be notified of the action, or be bound by the result in an
action. §3-119.
Surety's Obligation
When a surety exists, there are three contracts,
Underlying obligation between the principal and the creditor
Promise of the surety to back up the obligation
Promise of the principal to reimburse the surety of the surety is
forced to pay off the obligation.
If the principal dishonors the note, the surety (as an accommodation party)
may seek either exoneration, reimbursement or subrogation. §3-419.
Exoneration. Once the obligation matures, the surety can compel
the debtor to perform.
Reimbursement. If the surety pays the creditor, the surety can
recover the entirety of the paid amount. §3-419(e).
Contribution. If the surety pays, the surety can assume the rights of
the creditor against the debtor. §3-419(e).
An accommodation maker receives extra protection if the language of the
instrument unambiguously indicates that the signature is done to guarantee
the note. The guarantor is entitled to reimbursement from the maker if the
payee either is unable or simply can't get the full amount from the maker.
§3-419. The emphasis is on guaranteeing collection of the debt, not
simply a garden variety guarantor. Therefore, the magic words,
"collection guarantor" ought be used Problem 130.
If the surety tenders payment to someone entitled to enforce
the instrument, and the money is accepted, the surety is
entitled to enforce the instrument against the maker.
If the maker tenders payment to someone entitled to enforce
the instrument, and tender is refused, the surety's obligation
is discharged, to the extent of the tendered amount.
Likewise, if tender is refused, the obligation of the surety to
pay interest is discharged.
Under common law and §3-605(e), (f), & (g), the nonconsenting
surety is sometimes discharged up to the value of the collateral, if
the creditor fails to protect the collateral and is thereby unavailable
to pay the debt.
Under §3-604, a holder of a note may discharge the obligation of
the party to discharge the obligation of the party by an intentional
voluntary act. This does not affect the rights of an indorser or an
accommodation party. §3-605(b).
If an extension to pay the obligation is given, the accommodation
party is discharged to the extent that the extension caused the
accommodation impaired the right of recourse (i.e. caused harm to
the accommodation party). §3-605(c). Usually an extension of
time will not harm the accommodation party. Nor does the failure
to timely present, absent an agreement, discharge the surety.
Material modifications other than an extension of time, discharges
the accommodation party to the extent that the accommodation
party caused harm. §3-605(d).
New Notes for Old
The underlying obligation as represented by a first note is
suspended when a second note is issued, and remains suspended
until the second note is dishonoured or paid. §3-310(b)(2).
The obligation of an accommodation party on an underlying note is
discharged to the extent that this party can show harm. §3-605(c).
Impairment of collateral
First, we must determine the status of the party seeking discharge
Indorsers and accommodation parties are discharged to the
extent of the impairment. §3-605(e). Examples,
Under-secured: Collateral- Ai = discharge
Over-secured: Note - Ai = discharge
Multiple makers and accommodation parties, who fail to
identify their status, are discharged to the extent the
impairment affects their right of contribution. §3-605(f).
Examples: (Note/Parties) - Ai = discharge.
The Drawer's Obligation
The drawer of a draft has an obligation to pay the draft, if the draft
has been dishonored on it's terms or of the drawer signed an
incomplete instrument. §3-414(a). Accordingly, the drawer is
secondarily liable and the maker is primarily liable. The obligation
is owed to someone entitled to enforce the instrument or to an
indorser who paid the draft. The drawer is discharged when the
bank's acceptance. §3-414(c).
Presentment
Presentment is the demand for payment made to the maker
of the note or, to accept a draft. §3-501.
Under presentment for payment, the presenter wants
the money.
Under presentment for acceptance, the presenter
wants the drawee to make the acceptor's contract
(i.e. become primarily liable on the draft). §3-502(b).
An indorser is discharged by an untimely presentment (i.e.
within 30 days), while a drawer is not discharged. §3-414(e). Presentment is waived by a drawer or indorser who
has no reason to expect that the instrument would be paid
or accepted. §3-504(a)(iv).
Notice of Dishonour
Dishonour occurs when the instrument is appropriately
presented and is not accepted or paid. §3-503.
Notice of dishonour must be given very quickly for it to be
effective. §3-504.
Notice of dishonoured is waived if presentment is waived.
Drawer does not always have right to notice of dishonour
If the draft has been accepted by a nonbank, drawer
is entitled to notice of dishonour. §3-414(d); §3-503.
If the draft has been accepted by a bank, drawer is
discharged so notice of dishonor is not applicable.
§3-414(c).
If the draft has not been accepted, drawer is not
entitled to notice of dishonour. §3-414(b); §3-503.
Indorser usually has the right to notice of dishonour
Indorser's obligation under §3-415 may not be
enforced unless notice of dishonour is given. §3-503.
Notice of dishonour may be "excused" in certain
circumstances under §3-504(b).
An indorser may "waive" the right to get notice of
dishonour. §3-504(d).
Determining when presentment for acceptance is timely,
Demand draft. There is no right to present the draft for
acceptance. §3-502(b)(2). If a drawee refuses to accept
when a demand draft is presented for acceptance, the
refusal is not a dishonour. Instead, the presenter should
make a demand for payment, and that refusal is a
dishonour.
Time draft. The draft is due on a particular date. §3-502(b)(3). The right to present for acceptance is optional.
If desired, the presentment must be done prior to the due
date. If the drawee refuses to accept presentment, the
refusal is treated as a dishonour.
Sight + time draft. The draft is due a specified time after
sight (presentment for acceptance). You must present the
draft for acceptance to start the time running. If the drawee
refuses to accept it, then dishonour occurs.
The Drawee's Obligation
A drawee is not liable on an instrument unless the drawee has
signed the instrument. §3-401; §3-408.
If the drawee dishonours the instrument, the drawer may have a
cause of action against the drawee under a contract or under
wrongful dishonour.
Certification
The drawee bank's acceptance of a check is certification.
There is no difference between acceptance by a non-bank and a
bank. §3-409(d); §3-411; §3-413.
The agent must unequivocally state that they are and authourized
representative of the signer, with such terms as "authourized
signature of the represented person."
The principal is bound by the signature of the agent, whether or not
identified as the agent.
To avoid liability, the agent is to name the principal and indicate
that they are signing in a representative capacity.
Banks and their Customers
Overview
Article 4 is inextricable intertwined with Article 3. When a conflict
occurs, Article 4 controls. §4-102(a).
Terminology.
The drawer is the person who makes the note.
The payee is the one who is listed on the face of the note.
The depository bank is 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. §4-105(2).
Intermediary banks are banks to which an item is transferred in
course of collection except the depositary or payor bank §4-105(4).
Presenting banks are banks presenting an item except a payor bank.
§4-105(6).
The drawee/payor bank is one handling an item for collection. The
payor bank is the drawee of a draft. §4-105(3); (5).
A bank may fulfill multiple roles. The terminology depends on who's
suing whom.
The checking account
Properly Payable Rule.
The bank must pay out the customer's money only if it exactly
follows the customer's orders. §4-401(a).
A customer is not liable for the amount of the overdraft if the
customer did not sign or benefitted from the proceeds of the action.
§4-401(b). This applies mostly in circumstances where several
people are properly authourized to draw on the account.
In the case of post-dated checks, the bank is not liable and the note
is properly payable, unless the bank has notice in advance. §4-401(c).
In the case of fraudulently altered notes, a bank that acts in good
faith may charge the account according to the original terms or on
the terms of the completed note, unless the bank has notice that the
completion was improper. §4-401(d).
Checks over six months old are not obligated to be paid by a bank,
but a bank may charge it's customer's account for the payment.
§4-404.
The statute of limitations is three years after the bank's action. §4-111.
Wrongful Dishonour
When a bank makes an improper payment from an account, the
customer may recover actual damages from the dishonour. §4-402.
Mental suffering and punitive damages are a possibility under §4-402. Strictly speaking, it is a matter of state law and is measured
akin to a defamation action. Twin City Banks v. Isaacs, 672
S.W.2d 651 (Ark. 1984).
A drawee bank may not impose conditions (i.e. bank fingerprinting
requirements) above and beyond giving reasonable identification to
negotiate the note. §3-501(b)(2).
Death or Incompetence of Customer
A drawee bank is not liable for the payment of a check before it
has notice of the death or incompetence of the drawer. §4-405(a).
A bank may pay or certify checks for ten (10) days after it has
notice, unless a person who has an interest in the account places a
hold order on the account. §4-405(b).
Bank's Right of Setoff
The code does not establish a right of setoff, but at common law, a
right of setoff existed. Setoff is the right of a bank to pay itself
from a customer's account. This is available only in a general
account.
This is a preference to banks that once the obligation is mature the
bank can exercise it's right of setoff. If it's not mature, the bank
must show intervening insolvency.
Customer's Right to Stop Payment
Anyone with access to an account may issue a stop payment order.
§4-403(a). The customer must describe the account with certainty
(account no., check number, date or name).
A stop payment order is effective for six months. An oral stop
payment order is effective for 14 calendar days. These may be
renewed for additional six-month terms. §4-403(b).
A payment in violation of a stop payment order subjects the payor
bank for damages. The customer has the responsibility to establish
the amount of loss. §4-403(c).
If the payor bank has mistakenly paid an improper note, the payor
is subrogated to the rights of an HDC, the payee, other holder or
the drawer. §4-407.
A payor bank can likewise step into the shoes of the maker against
the holder or payee of a note. This is to protect banks and makers
in the case of fraudulent transactions where the bank can get the
money back, to the extent that the maker can prove loss. §4-407(3).
Bank Statements
A bank must return "sufficient information" in a bank statement
showing which checks have been paid or make available the
canceled checks. §4-406(a). This information, which is the "safe
harbour" rule, includes at a minimum, must include item number,
amount and date of payment.
If the items are not returned, the bank must possess the notes for at
least seven years or a legible copy. §4-406(b).
If the bank sends a statement, the customer must be prompt in
determining errors or unauthourized signatures, and
communicating with the bank. §4-406(c).
Bank Collection
Funds Availability
Cash
Cash which is deposited in an account can be removed the
following banking day. §4-215(f). A banking day is when
the bank is open to the public for carrying on substantially
all of it's banking functions. §4-104(a)(3). Federal law
does not count weekends or holidays.
The bank can "cut off" it's banking day as early as 2pm.
§4-108. If presented after the cut off time, it is treated as
received during the next banking day.
Checks
For over the counter presentments, the bank is required to
make a decision that same day regarding the note. §3-502
(b)(2).
The money is available for removal the at the opening of
the second banking day following receipt of the item. §4-215(e)(2). Under the Expedited Funds Availability Act
(EFAA) (12 USC 4001-4010), same-bank checks ("on us"
notes) are available for withdrawal on the following day
after day of deposit. EFAA §603(a)(2)(E).
Under the midnight deadline rule, the bank must pay or
dishonour a note by the midnight of the next banking day
following the banking day of receipt. §4-301; §4-302. If it
has done neither, it must pay the instrument.
Depository banks do not need a customer's signature for the
note to become a holder. §4-205.
A bank may decide to honour notes on an overdrawn
account in any order. §4-303(a).
Final Payment
Final payment occurs when the drawee bank takes action (or fails
to take action). §4-215. This can occur when the bank pays the
item in cash, settles the item or does nothing by it's Midnight
deadline.
The payor bank can no longer dishonour the item.
This establishes the rights of others
Settlements can no longer be revoked.
Charge backs no longer possible.
Obligations on the item are "dead."
This time frame can be delayed if the delay is caused by the
interruption of communications and the bank exercises reasonable
diligence in taking action. §4-109.
Check Return
Under the EFAA, depositary banks are required to allow customers
quick access to funds represented by deposited checks.
For checks of $2,500 or more, payor banks are required to send
direct notice to the depositary bank at any time they decide to
dishonour the instrument. Reg. CC § 229.33.
The notice must include the name, routing number of
paying bank, name of payee, amount, reason for return, and
other information.
This notice must be given and received by 4:00 (local time)
on the second business day following the banking day on
which the check was presented to the paying bank.
This does not vary the midnight rule, but the midnight rule may be
excused, if the manner of informing the depositary bank is as
expeditiously as possible.
Charge Back
If a drawee bank dishonors the note, and returns it to the depositary
bank, the depositary bank will expect reimbursement regardless of
the time elapsed since the check was first deposited.
Under the concept of charge back, the depositary bank has the right
to remove the "deposited" funds from it's customer's account until
final payment. §4-214(a).
If the depositary bank fails to give adequate notice to the customer,
the depositary bank is liable for any loss resulting from any delay.
Undoing Final Payment
Creates a separate cause of action after final payment has been
made.
If the drawee bank that accepted a draft by mistake, the bank could
recover, buy not from one who took the instrument in good faith,
and for value or in good faith changed position in reliance. §3-418.
Restrictive Indorsements and Banks
Only the collecting bank's transferor can give it binding
instructions and the collecting bank need not examine the
document to see of other instructions or restricts are contained on
it. §4-203.
Only the depository bank faces liability for conversion because of
the non-compliance with the terms of the restrictive indorsement.
§3-206. This is because the teller is the one most likely to
ascertain whether such an endorsement existed.
Priorities in the Bank Account: The Four Legals
Addresses the issue of who gets paid first when one of four events
happens, notice, stop payment, service of legal process and the
bank's right of setoff.
If final payment has been made, it's too late for the bank to take
action. §4-303(a). If final payment has not been made, the bank
still needs reasonable time to react.
Wrongdoing and Error
Forgery of the Payee's Name
Warranty Liability
Arises when someone has handled an instrument, although they
didn't sign the instrument.
Direct transferee get the benefit of these warranties regardless of
the signature on the instrument, while remote transferees don't
necessarily get the warranties benefit if an indorser's signature is
missing, depending on whether Art. 3 or Art. 4 applies.
Transfer Warranties
Immediate transferee: Any person who transfers an
instrument for consideration makes the transfer warranties
to their immediate transferee.
Remote (Subsequent) Transferees.
Article 3: If the transferor signs the instrument, the
warranties are also given to subsequent transferees.
§3-416.
Article 4: a signature is not needed for the
warranties to be given the subsequent transferees.
§4-207.
A subsequent transferees are the plaintiffs in any actions
and any prior transferees could be the defendants.
Transfer Warranties (warranties of good title) arise because
the warrantor indicates that they are a person entitled to
enforce the instrument, that the signatures are authentic and
have not been altered, there are no defenses or claims in
recoupment on the instrument and that the warrantor has no
knowledge of any insolvency proceedings commenced with
respect to the maker or drawer. §3-416(a).
The holder of the note must give thirty (30) days notice
after the holder has reason to know of the breach. §4-207(d). The statute of limitations on such a suit is three (3)
years. §4-111.
Presentment Warranties
A person who presents an instrument makes presentments
warranties to the drawee being asked to pay or accept the
instrument. §3-417(a); §4-408(a).
Only the drawee can be a plaintiff while anyone in the
chain can be a defendant.
The payee warrants to the drawee that the warrantor that
they are entitled to enforce the draft, the draft has not been
altered and that they have no knowledge that the signature
of the drawer of the draft is unauthourized.
A drawer has no cause of action under a warranty theory,
but they do have one for wrongful payment.
Under §3-417(d), there are other presentment warranties.
These arise for instruments other than drafts. The bar exam
questions focus on promissary notes, which are specifically
included under this subpart. When presenting to the maker,
the holder warrants that title is good. The warranties in §3-417(a) do not apply because the maker is in the best
position not to pay a note which would otherwise be
protected in (d).
Under §3-417(d)(i), if the note is dishonoured by the
drawee, the immediate preceding holder, obtains
presentment warranties, for lack of good title.
Signatures are not required for those after the check is
deposited in order to impose transfer warranties.
Conversion
Defined: Civil liability for the misappropriation of
another's property. §3-420.
Only the person who's rights are affected may sue for
conversion. In other words, only the payee can be the
holder, and thus, a plaintiff in a conversion action.
The issuer of a draft cannot be a plaintiff, because
they have no further interests in the note. The
remedy is to have the maker's bank recredit their
account and make them whole. §4-401.
The action in conversation arises only when the note
has been delivered to the payee.
The cause of action accrues when the actual
conversion occurs, not when it is discovered.
Violation of a restrictive indorsement also gives rise
to a cause of action in conversion. §3-206(c).
Subsequent holders of non-bearer notes are subject to a suit
in conversation as they were not entitled to enforce the
instrument because they lacked good title. Intermediary
Banks, however, are immune from liability, unless they still
have proceeds in-hand. §3-420(c).
Validation of the Forged Indorsement
The Impostor Rule
In certain circumstances, a forged indorsement of the payee is
deemed to be valid. §3-404
If the impostor induces the maker of the instrument to make
the instrument to them, and they are impersonating that
person, the indorsement of the payee is valid. §3-404(a).
If the issuer does not intend for the named payee to receive
the money, the (forged) indorsement of the payee is
likewise valid. §3-404(b). (Evil Drawer rule).
If a fictitious person is named, again, the note is valid. §3-404(b).
In all these situations, title is good because the signature has been
validated.
The Employee Indorsement Rule
For employees, a forged indorsement of the payee is deemed to be
validated if: (§3-405)
The forger is an Entrusted Employee; or
Checks payable to employer; or
Checks issued by employer.
Policy: if the employer makes a bad choice in selecting employees,
they are in a better position to take appropriate action. Official
Comment No. 1.
The Bank Statement Rule
The customer has the duty to examine the bank statement or be
estopped from asserting unauthorized signatures or material
alterations that could have been discovered. §4-406(c) & (d). The
customer must have a reasonable time (30 days) to report the loss
from date of receipt of statement. Official Comment 2.
If the customer failed to examine the statement and the bank failed
to exercise ordinary care in paying the item, the loss is allocated
between the customer and bank. §4-406(e). The inquiry is
whether the failure of the bank contributed to the loss.
I.e. the customer may be negligent, but the bank may have
paid a not properly payable note. The bank cannot claim
the non-reading of the statement as a defense.
For exam purposes, where serial wrongdoing is involved,
add thirty (30) days after the date of the (first) statement.
Any checks prior to that date, must be recredited. All
checks written afterwards, the bank prevails.
The statute of limitation is one year, without reference to the
negligence of the bank or other entities. §4-406(f).
Alteration
Defined: an unauthorized change in an instrument that purports to modify
the obligation or the unauthorized addition of words or number to an
incomplete instrument. §3-407(a).
An alteration discharges a party whose obligation is affected by the
alteration. §3-407(b). A payor bank or drawee, taking value, in good faith
and without notice, may enforce the note on the original terms, or the
terms as completed, in the case of an uncomplete instrument. §3-407(c).
Electronic Banking
The Electric Fund Transfer Act
Generally
Applies only to consumer transactions
Geared towards the protection of consumers engaging in electronic
fund transfers.
Credit Cards
If the use of the card was authorized, the consumer must pay the
resulting bills. Reg. E. §205.6(a)
If the use of the card was unauthorized, the cardholder's liability is
limited to $50, or what has been charged before the cardholder
notifies the issuer for the amount of loss. If the cardholder notifies
the issuer of the loss prior to use, the consumer does not end up
paying. Reg. E. §205.6(b).
Defenses Against Credit Card Issuer
When a buyer and seller have a dispute relating to a consumer
goods transaction, the cardholder may assert all claims and
defenses against the card issuer pertaining to the claims. Reg. Z.
§226.12(c)(1).
During this process, if the cardholder withholds payment, the
issuer cannot report the delinquent amount. Reg. Z. § 226.12(c)(2).
This applies only if the parties have made a good faith attempt to
resolve the dispute and the claim or defense exceeds $50.00. Reg.
Z. §226.12(c)(3).
Billing Errors
If the cardholder complains to the issuer of a billing error, the card
issuer must acknowledge the complaint within thirty (30) days,
conduct a good faith investigation and resolve the difficulty within
ninety (90) days of the complaint. Reg. Z. §226.13.
Wire Transfers
Scope of Article 4A
Concerned with wholesale wire transfers, including "payment
orders," which pushes the funds out of the account of the sender
and into the bank account of the payee.
Acceptance of Payment Orders
The receiving, or beneficiary, bank makes a technical acceptance of
the payment order when it receives the funds. §4A-405(d). If the
bank does not want to make the acceptance, it must reject the
payment order.
Where the payment order specifies a payment date, a receiving
bank makes acceptance when,
payment of the amount of the order to the beneficiary
notification to the beneficiary that the amount is available
for withdrawal
receipt itself of full payment of the order
failure of the beneficiary bank to reject the payment order
within §4A-209(b)(3) time limits.
Transmission Errors
General rule: loss follows on the person making the error.