Instrument = note or draft

note = written promise of maker to pay money to payee

draft = written order of drawer 3-103(a)(3) to the drawee/payor (3-103(a)(2)) to pay money to the payee (always a 3 party instrument)

all bank checks are drafts; drawee/payor is the drawer’s bank.

(1) consumer debit transfer (EFTA and Reg E)

(2) commercial funds transfer (Article 4A)

(3) consumer credit card transaction (TIL and Regulation Z)

(4) consumer credit contract with the FTC legend = still negotiable but no one can become a HIDC because of the legend; Article 3 can still apply

writing 3-103(a)(6) & (9)

signed 3-103 (a)(6) & (9)

1-201(39) defines it as symbol w/ present intention to authenticate a writing

3-401(b) says it can be made manually or by machine and can be trade name

unconditional promise or order 3-104(a); defined in 3-106

fixed amount of money

courier without luggage 3-104(a)(3)

payable on demand or at a definite time 3-104(a)(2)

payable to bearer or order 3-104(a)(1); defined in 3-109

Is there a "holder?" person in possession of the negotiable instrument

1-201(20) person in possession of bearer paper; identified person also in possession if order

can’t be a holder w/o valid negotiation (defined in 3-201(a))

negotiation = requires (1) transfer of posession and (2) indorsement if order; nothing if bearer

indorsement = blank = converts to bearer; special = remains order

drawee can never be an indorser; drawee can never be a holder

forged indorsement does not result in valid negotiation and no subsequent transferee can ever be a holder

holder (see above)

take for value 3-303 (e.g., not a gift; but not same as consideration)

in good faith (defined in 3-103(a)(4) subjectively and objectively)

w/o notice 1(notice defined in 1-201(25)), see 3-302

Then, rights are derivative of predecessor and take subject to all defenses good vs. predecessor

1. Maker’s Obligation 3-412

absolutely liable, primary liability, to "person entitled to enforce" defined in 3-301(i) as a holder etc. etc. and to an indorser who paid the instrument under 3-415

right of contribution from co-makers under 3-116(a) and (b)

2. Indorser’s Obligation 3-415

conditional secondary liability, only liable once primarily liable party has dishonored and indorser has been so notified

conditions precedent to liability:

1. NI presented to maker or drawee
2. Dishonor by maker or drawee
3. In certain cases indorser must have notice of dishonor 3-503

liability is to "person entitled to enforce" and subsequent indorser who paid the NI under 3-415 (downstream)

liability is for full amount of NI

Indorser’s Rights = presentment, notice of dishonor

if joint indorsers, right of contribution under 3-116

"Without recourse" is a qualified indorsement that avoids 3-415 indorser’s liability, 3-415(b), however, it only is good against depositary bank if a check (not good vs. collecting banks, 4-203, 3-206(c)(2-4)).

1. Surety’s Obligation (common law)

surety’s rights under common law

1. Exoneration - right to compel principal to perform
2. Subrogation - stands in creditor’s shoes as against principal 3-419(e)
3. Contribution - right to partial reimbursement against other co-sureties for %age 3-419(e)
4. Strictissimi juris - releases surety from liability when original NI is altered unless surety consents or [other situations] ...

1. Accommodation Party’s Obligation 3-419(a)

definition of accommodation party - has to sign the instrument itself for purpose of incurring liablity, no benefit

accommodation maker - has maker liability under 3-412

accommodation indorser - has indorser liability under 3-415

anomalous indorsement - see definition; results in presumption of surety status 3-419(e)

1. tender of payment, 3-603
2. impairment or release of collateral or other alteration in terms, see 3-605
3. others?

1. Drawer’s Obligation 3-414

secondary b/c draft must 1^st be presented to drawee and be dishonored

discharged if draft is "accepted" by a bank

rights = presentment, notice of dishonor, and protest, excuse

2. Drawee’s Obligation 3-413 (acceptor’s liablity)

only after "acceptance" 3-409(a); acceptance by a bank is called certification; certification results in discharge of drawer, 3-414(c) and indorsers, 3-415(d)

Theories of Liability:

Properly Payable 4-401

means authorized by customer and in accordance w/ contract btw bank and customer 4-401(a)

if so, bank is entitled to pay and can charge customer’s account

if not, bank must recredit customer’s account (except see below re: subrogation)

forged check, forged indorsement, is not properly payable

stale check 4-404

Liability Theories For Forgery (see good diagram p. 547 of White & Summers):

1. Not properly payable 4-401
2. Conversion 3-420

issuer or acceptor may not sue in conversion, nor may a payee who has not taken delivery

usually, payee sues in conversion against depositary bank and/or drawee bank

3. Breach of Presentment or Transfer Warranties 4-208 or 4-207
4. Btw Drawer and Payee: underlying obligation? (some commentators say can’t sue on underlying obligation, tho), 3-309, or 3-414(b)

(1) forged indorsement = loss rests on 1^st solvent party downstream from the wrongdoer

(2) forged drawer’s signature = loss falls on drawee (payor bank) = Price v. Neal

payor bank can then sue payee for restitution or upstream on breach of W (not usually applicable, e.g., no 4-208(a)(1) breach, could try 4-208(a)(3))

2. Impostor Rule 3-404 places loss on drawer/maker (impostor payee, fictitious payee, etc.)
3. Employee Indorsement Rule 3-405 places loss on employer for fraudulent indorsements
4. Negligence Rule 3-406 comparative negligence; apportion fault
5. Bank Sstatement Rule 4-406(c-f) customer estopped if fail to discover forgery

Alteration 3-407

1. Properly Payable Rule 4-401 - bank is only entitled to pay and can only charge customer’s account for items that are properly payable = (1) authorized by customer (excl. forged drawer’s signatures and forged indorsement items) and (2) in accordance w/ agreement btw customer and bank

-if not properly payable, bank must recredit account

-subrogation under 4-407: bank that makes improper payment (e.g., pays a not properly payable item 4-401) is subrogated to (a) drawer/maker as against payee or any holder, and (b) payee or any other holder or a HIDC as against maker/drawer (includes payment over stoppay order or any other reason for objection by drawer). If drawer = liable, then bank need not recredit drawer’s account (Canty case). Note: Drawer = usually always liable to a HIDC of an item.

check is properly payable b/4 its date

-depositary bank becomes a "holder" of a check when it takes the item for deposit if the depositor is a holder; if a "holder" then it is a "person entitled to enforce" 3-301

-depositary bank becomes a HIDC when it gives value for a deposited check by allowing its customer to w/draw funds on the check

2. Wrongful Dishonor 4-402 - customer can recover all actual damages for wrongful dishonor but BOP is on customer. Trend towards allowing mental anguish and suffering damages.

3. Stale Checks 4-404 - bank has no duty to pay checks > 6 months old but can opt to pay and then can charge customer’s acct

-drawer is still liable to the payee for the check

4. Death or Incompetence of Customer 4-405 - bank can pay checks up to 10 days after death unless told to stop by "heir" (Crazy Nelly), can pay checks until actual notice of death or adjudication of incompetence. Once stops paying b/c told to stop by "heir," no wrongful dishonor thereafter.

5. Bank’s Right of Setoff (common law) - bank can setoff a matured debt of customer vs. funds in checking account and no wrongful dishonor action if checks bounce as a result, but can’t be unmatured (Walter case). No setoff right once bankruptcy petition has been filed.

6. Customer’s Right to Stop Payment 4-403 - customer has this right if item is described w/reas. certainty (cases run in customers’ favor here) and order is received at time and manner to give bank reas. opp. to act on it

-valid for 6 months if written and 14 days if oral; can be renewed for 6-month extensions

-BOP to prove loss from payment and damages from dishonored other checks is on customer 4-403(c)

7. Subrogation 4-407 - bank that makes improper payment is subrogated to (a) drawer/maker as against payee or any holder, and (b) payee or any other holder or a HIDC as against maker/drawer (includes payment over stoppay order or any other reason for objection by drawer)

-Drawer almost always remains liable to a HIDC on the check, so no damages are recoverable from bank for paying a stopped item held by a HIDC b/c of subrogation rule. Bank need not recredit drawer’s account, even. Ex: Dep. Bk. = HIDC (4-205(1)) when it gives its customer credit on a deposited check (4-211, -210(a)), so when Pay. Bk. pays check, it steps into DB’s shoes as against drawer of check. (Problem 157 is good ex.)

8. Customer’s Duty to Examine Bank Statements 4-406 - bank has duty to return checks or sufficient info about them (#, amt, date of pyt), 4-406(a) & (b),

1. Funds Availability

UCC Rules: 4-215(f) - cash deposit must be available open of next banking day (subject to setoff)

banking day defined in 4-104(a)(3) (but bank can establish a 2 pm cutoff, for ex.)

--If PB = DB, then payee can remove funds at open of 2d banking day after day of receipt if final payment has been made, 4-215(e)(2).

2. Expedited Funds Availability (see Problem 171 and good schedule on p. 522-23)

--If PB = DB, EFAA requires same-bank checks to be available for w/drawal on business day after day of deposit

3. Final Payment

-Payor Bank/drawee is not liable until it (1) accepts check or (2) makes final payment.

-Final Payment occurs when (1) pays item in cash (e.g., OTC; cashier’s check is same as cash); (2) settles w/o reserving right to revoke (v. unusual, never done), or (3) provisional settlement becomes firm and final (e.g., by passage of midnight deadline w/o revoking, returning or sending notice of dishonor) 4-215(a); but note Reg CC 229.30(c) extends midnight deadline by 1 day if bank can return a check to the presenting bank b/4 close of that bank’s next banking day or uses highly expeditious means of return.

-once final payment occurs: (a) customer can w/draw funds on a deposited check; (b) payor bank is liable for any mistaken payment; (c) payor bank will charge drawer’s account for payment; (d) check is destroyed as a COA and Art. 3 = n/a; (e) no more right of chargeback 4-214.

-Midnight deadline 4-104(a)(10) = midnight of next banking day after banking day of receipt of check

(a) OTC items = have to be paid or returned/dishonored by the close of business on day of presentment OTC, 3-502(b)(2); 4-301(a) and Ofc Comt 2. If not, there’s been a conversion.

(b) NonOTC items = those deposited = 3-502(b)(1), 4-301 & -302 Midnight Deadline Rules: --Payor bank has to make provisional settlement or return it by end of banking day of presentment 4-301 Ofc Comt 1; if not, it becomes liable under 4-302(a).

--Then, must revoke provisional settlement by returning check, pay check, or send notice of dishonor, or do nothing by midnight of banking day after banking day of receipt under 4-302(a). If revoke provisional settlement, there is a chargeback of provisional settlement which was given to customer.

4. How to Undo Final Payment = fraud, mistake, restitution

Even after final payment, PB can use c/l theories to avoid liability:

(1) fraud 4-302(b) is a defense to bank’s liability on a "finally paid" item

(2) mistake/restitution 3-418(b) allows PB to revoke final payment if pyt. = by mistake (e.g., bank negligently pays an item over a valid stop payment item; then it can recover the check from the payee under 3-418(a) and Ofc Comt 1) as long as payee is not a 3-418(c) person who took in good faith for value (note: if payee loses, payee can recover check from bank and sues drawer on drawer’s 3-414(b) obligation). (ex: bank pays on mistaken belief that no stop payment order or that drawer’s signature was not forged or was authorized. No restitution action if check is NSF. Negligence of bank is n/a to restitution action. Restitution action barred if defendant took item in good faith and for value (need not be HIDC). If restitution succeeds, defendant then recovers check and sues upstream to drawer or indorser.

What if Payor Bank Makes Final Payment and Can’t Recover From Drawer’s Acct? (ex: NSF check): Then it has 2 remedies: (1) breach of presentment W 4-208; (2) restitution 3-418; (3) fraud 4-302(b).

5. Check Return and Dishonor

--Fed. Reg. CC 229.33 requires payor bank to send direct notice of dishonor to DB on items >= $2500 and timing = received by 4pm local time on 2d bus. day after baning day of presentment.

--Failure to comply w/ notice rule makes payor bank liable on the check (actual + conseq. dam.)

--Fed. Reg. CC 229.30, .31 are the forward collection test and 2day/4day test — require payor banks and returning banks to return checks quickly.

6. Charge Back 4-214

-- all collecting banks have right of chargeback against their customers after a dishonor or failure of provisional settlement to become final.

--To have this, bank must have returned check or sent notice of chargeback by midnight of banking day after banking day on which it learned of the return or w/in longer reas. time after it learns the facts. If it delays, it can still chargeback, but is liable for loss resulting from delay.

--Right to chargeback ends once final payment occurs.

7. The "Four Legals" 4-303(a) a "timing rule":

--If one of the four legals occurs after (1) check = acepted or certified; (2) bank pays check in cash or makes irrevocable settlement; (3) bank becomes accountable for check under 4-302 by failing to timely return; or (4) a cutoff hour no earlier than 1 hr after open of banking day after banking day of receipt of check and no later than the close of that next banking day (if no est’d. cutoff hr, then close of banking day after banking day of receipt), then four legals come too late and check must be paid.

--Four legals = (1) knowledge or notice of PB of some event; (2) stop payment order; (3) exercise of PB’s right to setoff; (4) legal process served upon PB like garnishmt or filing of bankrupcty.

-bank can pay checks until it gets actual notice of bankruptcy petition filing.

Defenses:

Real Defenses (good vs. HIDC and all others) 3-305(a)(1)

1. Infancy
2. Duress/Incapacity/Illegality
3. Fraud in the Factum
4. Discharge in Insolvency
5. (Forgery of the drawer’s signature) in effect is a real defense since drawer not liable; forger is, 3-403(a) and 3-401(a)
6. Discharge via payment where HIDC has notice of the discharge
7. Claim in Recoupment where claim is against the HIDC himself
8. Suretyship defenses where HIDC has knowledge that someone is a surety 3-605(h)

Personal Defenses (not good vs. HIDCs)

1. Claim to the instrument 3-306 (HIDC takes free of - last sentence)
2. Claim in Recoupment 3-305(a)(3) and (b) (HIDC prevails as long as claim is against someone other than that HIDC) PROBLEM 112
3. Discharge (via bankrupcty 3-305(a)(1)(iv) or via payment 3-601(b))
4. Forged countersignature on a traveler’s check Ofc Comt 2 to 3-106(c)
5. Want of consideration, no consideration
6. Failure of consideration, breach of contract, e.g., claim in recoupment, defective goods
7. Suretyship defenses: impairment of collateral 3-605(e-g), extension of time to pay 3-605(c), material modification 3-605(d)
8. Fraudulent Alteration discharges maker or drawer who is nonnegligent 3-407(b)
9. Tender of payment discharges indorser’s and accommodation parties’ liability to extent of tender

Merged when a NI is given for the debt arising from the underlying transaction

check suspends underlying obligation, is conditional payment, 3-310(b)(1)

(1) consumer debit transfer (EFTA and Reg E) - know limits on consumer’s liability for unauthorized EFT (here, need actual authority)

know scope of statute and reg.

(2) commercial funds transfer (Article 4A) - know effect of acceptance of payment order by beneficiary’s bank

4 ways acceptance by bene’s bank is made

effect of name/number discrepancy - 4A-207 bene bank can rely on number

security procedure established = presume bank is therefore not liable if follows procedure 4A-202(b)

defenses to completed funds transfer = unjust enrichment, restitution, mistake (Petrospek)

defenses to defenses = preexisting debt or lien (Sanati)

(3) consumer credit card transaction (TIL and Regulation Z) - know limits on consumer’s liability for unauthorized use (here only need apparent authority)

issue re: what is apparent authority to use

defenses to credit card bills - right not to pay disputed amounts