Commercial Paper Outline from Book I. Negotiable Instruments (article 3) a. Negotiation and Liquidity 1. The goal negotiable instruments to create instruments which can be easily transfered and thus increase their liquidity. a. Self contained document b. Holder in Due Course c. Definitions 1. Holder 2. Promise 3. Order 4. Draft 5. Negotiate 6. Drawer /issuer (3-103(a)(3), 3-105(c). the person who creates the instrument 7. Remitter person who causes the instrument to be drafted (3-103(a)(11). 8. Payee the person to whom the payment is being made. 9. DraweeThe person order to make the payment
b. Requirements for negotiability 1. A written promise or order to pay (3-104(a)) a. Order (3-103(a)(6) A direct order to pay 1. Drawer orders the Drawee to pay the payee 2. Draft instrument that contains an order (3-104(e)) i. Check (3-104(f) draft drawn on a bank a. Bank (1-201(4)) any person engaged in the business of banking (ii). Cahier’s check (3-104(g) Drawee and drawer are the same person iii. Tellers check (3-10(h)) draft drawn by one bank on another. b. Promise (3-103(a)(9) a direct communication to pay 1. Maker The person who promises to pay 2. Note the instrument C. writing (1-201(43) “intentional reduction to tangible form.” 2. Unconditional (3-104(a)) (3-106) a. absolute b. include all terms of payment on its face c. the requirement to pay cannot be based on a condition d. may not be governed by another writing Exceptions 3-106(b) P. 406 in the book. 1. 3-106(i)notes given on collateral that contain references to the securities agreements (loans, security agreements, etc.) 2. 3-106((ii)) Instruments that contain clauses which limits recovery to particular funds d. DBA Enterprises 3. Must require money (currency of any country) 3-104(a) a. money (1-201(24)) b. the instrument can be payable in a foreign currency 3-107
4. Obligation must be fixed (the amount to be pad cannot change) (3-104(a)) a. can have a variable interest rate (3-104(b)) b. Nagel (p. 407) c. if an instrument is payable on demand until the fixed date and if demand for the payment is not made before that date becomes payable at a definite time on the fixed date.” 5. The obligation must be payable to bearer or order (3-104(a)(1)) a. The instrument must contain the precise words required under the 3-109 b. bearer 1. Payable to bearer 2. otherwise indicates that the instrument is payable to the bearer 3. Blank check (3-109(a)(2)) 4. Cash (3-109(a)(3) & c. 2 Order 1. payable to an identified person (3-109(b)(i)) 2. Payable to an identified person or order (3-109(b)((ii)) a. an instrument payable to just order is not valid b. or just a identified person is not valid. c. the instrument must include both elements 3. An instrument that is issued on a formed check, but does not contain the precise words may still be proper. (policy purpose) (3-104(c)) see comment 2 for policy reasons. 6. The obligation must be payable on demand or at a definite time. (3-104(a)(2)) a. On demand 1. “On demand” or “on sight” 2. no set time period (3-108(a)) b. Definite Time Period 1. may include: a. time extension 1. on a specific event 2. to a definite time period b. acceleration clauses c. prepayments options d. The point of these is you can still decide when the instrument is payable. 7. The obligation must not contain extraneous undertakings (3-104(a)(3)) 1. this means you must no do anything other present the document for payment 2. Exceptions (3-104(a)(3) a. Instruments containing clauses relating to the securities or collateral (3104(a)(3)(i) b. Instruments containing clauses related to the enforcement of judgment ( c. Permits conditions in which the borrower waivers laws intended for the benefit or protection or the barrowers or obligator (3-104(a)(3)((iii))) II. Transferring and Enforcement of negotiable instruments a. Negotiation and Status as a Holder
1. Central Concepts a. Holder who possesses the instrument has the right to enforce it (3-301(i)) b. negotiation (3-201(a)) a transfer of an instrument that causes the transferee to become a holder 1. Holder 1-201(21) a. must have possession of the instrument b. Bearer paper (1-201(21)) anybody in possession of bearer paper is the holder even if the new holder is a thief who took the paper illegally (3203, c 1) c. Order Paper (3-109) 1. The person identified by the order is the only person capable of being the holder (1-201(21) 2. Therefore, possession and identification must match up. 3. if the order is for X or Y either party may be a holder (3-110(d) c. 4) 4. Likewise, if the payment is made to X and Y, they must act concurrently. (“”””) 5. What if there is just two names? 6. if the order is to an account #, then the holder is the only of the account 7. If the account number and the name on the account do not match up the name is the holder.(3-110(c)(1)) 2. Special and Blank Endorsements (the ucc assumes any signature on an instrument that is not the in the bottom right hand corner is an endorsement…3-204(a). ) a. Special/Specific Endorsement (3-204(a)) transfer to a specific person makes the instrument a order paper. b. Blank Endorsement this is just a signature (the signature of the holder) with no additional information. c. A depository bank automatically becomes the holder of an instrument deposited by its customer regardless of whether the instrument contains the proper endorsement. (4205(1)). The banks need not endorse instruments they transfer to other banks absent any agreement among themselves (4-206) Additionally, no party other than a bank may become a holder of a check once the a bank has endorsed the instrument unless the bank specially endorses it to that person. (reg CC) 3. Restrictive and Anomalous Endorsements a. restrictive indorsements attempts to limit the indorsement in its use. (3-206(a)) 1. article invalidates must restrictive indorsements 2. It does allow “for deposit only” restrictions for instruments deposited in banks (3-206(c)) b. Anomalous endorsement (3-205(d) an indorsement made by someone who was not a holder at the time of the indorsement. 1. This type of indorsement does not negotiate because the indorser is not a holder 2. the indrosement does cause the indorse to be a guarantor of the instrument (3419). The person signing becomes an “accommodating party”
b. Enforcement and Collect of Instruments 1. The right to enforce an instrument
a. the holder is the person entitled to enforce a document. (3-301(i) they may call for payment from any party obigated tax payer pay the instrument. This is absolute. b. You do not have to be a holder to enforce an instrument (3-203(b)) under normal property rules. If you purchase a check, you receive the right to enforce the rights of the property owner who transferred his rights. 3-203(c) gives the buter the right to force the seller to indorse the instrument at any time after the sale. 2. Presenting and dishonoring instruments a. Presentment is nothing more than a demand for payment made by a person entitled to enforce an instrument (3-501(a)) The process is called presentment because the person obligated under the instrument has a right to demand presentment of the instrument before paying the obligation (3-501(b)(2)) 2. The person oblivated under the instrument has choice to honor or dishonor the instrument a. Dishonoring i. a instrument payable on demand that is not paid on demand is dishonored (3-502(a)(1)) ii. If the instrument is a check, the drawee is assumed to honor the check unless it acts promply to dishonor it. (3-502(b)(1)). 3. Defenses to Enforcement a. A holder not in due course i. any defense the obligator has against the payee with respect to the original transaction (3-305(a)(2)). ii. Any defense arising under article 3 (IE. Improper negotiation of the instrument) C. Liability on the Instrument 1. No party, absent presentment or transfer warranty liability is liable unless it signs the instrument(3-401) i. (Signature any name including a trade mark or assumed name as well as a word, mark or symbol executed or adopted by a person with present intent to authenticate a writing (3-401(b)) ii. Agents (3-402(a)) 1. the UCC defers to the customer common law rules for agency. 2. However, if common decides that the party was a representive, the party being represented is liable. (3-402(a)). 2. The party that issued the instrument is unconditionally liable on the instrument (3-412) 3. Drawee Is liable on any instrument he accepts (signs) (3-409(a)) At this point the drawee is directly liable on the instrument (3-413(a)). 4. The drawer is liable for any instrument is not liable on a draft unless it is dishonored (3414(b)). 5. The drawer of a check is no longer liable once the if the bank accepts the check. (3-414(c)) 6. Indorsors i. An indorser is only liable if the instrmet is dishonored (3-415(a)). ii. The indorser’s liability is discharged if the bank excepts the instrument after it has been indorsed (3-415(d)). iii. The indorser is not liable for instruments (other than checks) on which his indorsement limits his liability “without recourse.” (3-414(e)), (3-415(b)). Recap: Issuer absolute liability (3-412) Drawee Conditioned on acceptance (3-408) (3-413(a))
Drawer Conditioned on dishonor, discharged upon bank acceptance (3-414) Indorser Conditioned on dishonor, discharged upon bank acceptance (3-415) 5,000 D. The effect of the instrument on the underling obligation (3-310) 1. Near Cash Instruments (3-310(a)) i. Cashier’s Check’s (3-412) ii. Teller’s Checks (3-414(b)). iii. Certified Checks (3-409(d) iv. Other instruments on which the bank makes itself personally and directly liable (3310(a) III. Holder’s In Due Course a. Holder in Due Course Status 1. Requirements i. The instrument must be obtained through negotiation (ii). the instrument must purchased for value (3-302(a)(2)(i) any consideration sufficient to support a simple contract. (1-204(4)) (promises for future payment, though consideration, do not constitute value under 3303(a)(1). iii. the instrument must be purchased in good faith (3-302(a)((ii)) (3-103(a)(4)). 1. Honesty in fact 2. observance of reasonable commercial standards. 3. notice this is an objective and subjective test. iv. The instrument must be purchase absent notice (3-302(a)(2)((iii))) 1. Knowledge in fact (1-102(a)(1)) 2. Reason to know (neg.) (1-202(a)(3)) 3. Notice. The holder had more than just general knowledge that something was wrong with to the instrument. Must have had knowelge of a specific one of the following problems (a). The instrument is overdue i. Demand instrument (90 days after made) ii. Checks (90 days after date) iii. time dated instruments anytime after date b. The instrument has been dishonored c. The instrument or party is in default d. The instrument is subject to a forgery or alteration e. a third party claims to own part or all of the rights under the instrument f. The obligator has a defense on the instrument or its underlying obligation g. Otherwise sufficient to damage the tranfee’s good faith in acquiring the instrument. 2. Rights of Holder’s in Due Course a. A holder in due course is immune from all claims and defenses arising out of the underlying contract. (3-305(b)). a. The only defenses valid against a HDC are real defenses (DEFENSES that make the instrument VOID…not voidable) (3-305(a)(1) 1. Capacity i. infancy ii. minors 2. Legal capacity (3-305(a)(1)(ii) i. duress
3. fraud (iii) i. you must be tricked ii. you just can’t be dumb (farmer) 4. Discharge of debt in a federal bankruptcy hearing. (iv) 3. Payment and discharge a. The HDC is not affected by any notice of payment or actual payment toward the instrument. b. The fact that one party has been discharge from the instrument does not mean you may not enforce it against another party. 4. Transfers of HDC status a. You get the same rights as the person who transfers to you. Therefore, if a HDC transfers to you (3-203(b) (shelter rule) b. If you don’t get an indorsement you are not a holder IV. Checking Accounts a. The basic relationship a. Drawer (that’s you) draws checks on the drawee (the bank) (3-103(a)(2))(4-104(a)(8)(4105(3)) b. The drawer issues these checks to the payee (that’s the person getting the check) (3103(a)(3), (3-105(c)). c. The bank which the payee deposits the check is the depository bank (4-105(4)) d. The banks through which the check may travel before it gets to the payor bank are intermediary banks. e. Checks fall into two articles i. Artcle 3 regulating negotiable instruments ii. Article 4 regulating drafts b. Bank’s right to pay a. When is it proper to pay? i. The bank may charge its customer for any item which is properly payable (4-401(a)) 1. “the customer authorized the payment (comment 1, 4-401(a)) a. A customer authorizes payment by i. writing check 2. When the check is transferred to a depository bank , it becomes a person entitled to enforce the instrument (1-201(28)), (3-301) 3. If there is no money in the account the bank is free dishonor the check or to overdraft the account subject the agreement with the customer 4-401(a), 4402(a), (McGuire) 4. Banks may agree with customers to pay overdrafts 5. Some courts have suggested that fees associated with NSF checks must reasonably relate to the cost of returning the check. (pg. 14 of the book) 6. Banks may pay checks in any order that wish (4-303(b)) ii. Stopping payment 1. A check is no longer properly payable if the customer gives the bank a. Timely and b. Adequate notice of stop payment (4-403) 2. Limitations a. The customer must act promptly
i. In a time and manner which affords the bank a reason opportunity to act before any final action has been taken (midnight deadline) 4-403(a). b. Duration of stop order i. A written stop order is only valid for 6 months. It must be renewed after that. 4-403(b). c. The stop payment reinstates the underlying obligation that was suspended when the check was issued. 3-310(b) b. Remedies for improper payment by the bank i. Problems 1. customer did not write the check 2. an indorsement was forged 3. the bank failed to comply with a stop order ii. The bank must return 1. the amount of the item 2. any fees that may have been charge in relation to its improper payment 3. Any damages caused by the banks improper payment (4-402(b)) iii. Banks defense 1. bank may assert the rights of the payee arising from the underlying transaction.4-407 (McInyre) V. The Banks obligation to pay a. When are Funds available for Payment when funds are available the banks has an affirmative duty to the drawer to pay. The bank does not owe this duty to the payee. 1. Time of Evaluation a. The bank is free to chose when they want to evaluate the bank account to determine if there are sufficient funds anytime between when the check is receive and the check is dishonored. (4-402(c)). i. only one determination need be made (4-402(c)). Even if there are sufficient funds at the time the check is dishonored, the check may be properly dishonored if there were not sufficient funds at the time of the evaluation. 2. Availability of Funds a. 4-215e was the only thing until reg CC. It give the banks discretion. b. Cash Funds available the next BUSINESS day reg (12 CFR §229.109(a)) c. Funds drawn on a local branch of the same bank (on us) must be made available by the next business day (12 CFR §229.10(c)(1)(vi)). d. Funds drawn on a local bak must be made available made available the next business day for non cash withdraws. The first 100 dollars must be available of the first business day after the banking day (12 CFR §229.10(c)(1)(vii)). e. Non cash withdraws from local checks must be made available on the 5th business day after the banking day. However, the first 100 must be made available on the next business day. (12 CFR §229.10(c)(1)). f. Cash withdraw from a local check must be made available (12 CFR §229.10(d). i. 100 first business day after the banking day ii. 400 on the second business day iii. the remainder on the 3th business day. g. Cash withdraws from non local banks i. 100$ first business day ii. 400 on the 5th business day iii. the remainder on the 6th business day
Don’t forget the time period does not start running until the first BANKING DAY. Banking day is any day which the bank carries out a substantial all its banking functions (§229.(f)) Business day is any day that is not a federal holiday or a weekend (§229.2(g)) Business day ends at 2 p.m. h. low risk items §229.10(c)(10 1. cash deposits 2. on us deposits 3. government checks a. treasure checks b. post office checks i. unless deposited by someone else. See page 28. for complete rules. J. Limits 1. New accouts reg cc .13(a)(2) 2. Checks exceeding 5,000 dollars 3. repeat overdrafts CC 13.(d) 4. the bank has reasonable cause to show that the money will not be recoverable cc 13(e) 2. wrongful dishonor a. If a bank wrongfully dishonors a check. 1. customer may recover any damages proximity caused by the wrongful dishonorment 4-402(b). 2., First National Bank (live stock case pg. 30) VI. Collect of Checks a. Payor’s bank obligation to pay payee a. There is none b. Outdoor Technologies c. The bank may be liable to the drawer for wrongful dishonorment but not the payee. (see 3408). b. Process of collection a. Obtaining Payment directly i. Cashing the check (this is final payment)( 4-215(a)(2)) ii. Direct deposit in the same bank (on us) (provisional settlement) the bank then has till the midnight deadline to decide whether it wants to honor the check. 4-104(a)(10). iii. If the payor bank takes the check and fails to send notice by the midnight deadline, the payment is final (4-214(c). b. Obtaining payment through intermediaries i. When the customer deposits a check with his bank, the bank had a fiduciary responsibility to carryout the needs of the customer using ordinary casre. 4-105(5). The bank becomes a collecting bank. ii. The bank may give the customer a provisional settlement. iii. Once the depository bank has the check it may collect in any manner it feels appropriate subject only to the ordinary care provision (4-202, 4-204). Of course there are still the funds availability rule. iv. The bank retains the right to charge back, if the payor bank refuses to honor the check. 4-214. v. However, if the payor bank fails to meet its mid-night deadline, the despositary bank losses its right to charge back (Kimberly Allen Trust) (4-214). That is if there is a final settlement. c. Notice between banks.
i. The ucc simply requires that the return check be deposited in the mail before the deadline. 4-301(a). ii. Regulation cc return deadlines 1. The bank must retrun the check so that it is recived no later than the second business day for local checks and the fourth business day for non local check. Reg CC .30.(a)(1) 2. The bank satisfies the test if it returns the check through the same process by which it received the check. 3. The bank mat miss the midnight deadline if the check is return in a manner faster than that which it would have been if put in the mail reg CC.30(c)(1). 4. The notice of nonpayment deadlines a. For checks b. 2,500 or more c. the payor bank must notify the depository bank by 4 of the second business day after the banking day on which it received the check. DO NOT FORGET. 1. if you miss the deadline you are liable on the item 2. Failure to meet the Reg CC deadlines only evoke damages laid out in the code. VII. Risk of Los in the checking system a. non payment a. each party that indorses an instrument makes an implied contract with subsequent parties. 3415 b. the person who indorses an instrument is liable on that instrument if the instrument is dishonored under 3-415. i. The check must be deposited within 30 days of the indorsement 3-415e ii. The person seeking to inforce the warranty must give prompt notice to the indorser 3415(c). Notice must come within 30 days. iii. Unless the person put without recourse 3-415(b). I don’t think this applies to checks though. b. Forged Signatures a. Forged drawer’s signatures (completely forged). i. When the payor bank pays on the forgery 1. the bank bears the loss if it fails to notice the forgery 2. The bank has no right to charge the drawer’s account (4-401)(a)) 3. Remedies a. The bank may pursue any person for whom the benefit by the payment was for. 3-418(a)(ii). BUT NOT A HDC! 3-418(c) b. Presentment warranty i. if the present had know of an unauthorized sig and still presented it. 4-208(a)(3). ii. This more than notice. iii. Can be presented against all transferors and only by the payor bank 3-417. c. Transfer warranty i. Can be enforced against all transferor for consideration by all transferees 3-416 ii. The payor bank does receive transfer warranties because it does not transfer.
ii. iii.
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iii. Drawer no warranty because they do not transfer. They issue. When the payor bank dishonors the forgery Forged instruments 1. if payor bank dishonors a. this is the same as above 2. if the pay bank pays the indorsement a. the person is not properly payable and therefore the bank cannot charge the customer on the instrument 4-401(a) b. presentment warranties 4-208(a)(1) Stolen instruments. 1. The payee cannot bring a claim against the drawer based on the underlying obligation 3-310(b)(4). 2. The payee however can bring an act against those who process the check. 3420(a). But not intermediate banks. Alterations 1. the bank may only enforce the check as to its original terms (3-407) 2. The bank however can use presentment warranties to recover against those in the chain of transfer 4-208(a)(2).
VIII. Special Liability rules a. Negligence 1. The UCC shifts the loss of forgeries to the drawer when the bank can show that the drawer’s negligence contributed to the loss. 3-406(a). 2. Banks must also exercise ordinary care in processing and paying checks. IE its practices must conform to general banking usage 4-103(c). see also 3-103(a)(7) (defining ordinary care). c. Bank Statements a. When drawer fails to notify the bank of fraud that could have been stop if the drawer looked at the statements, the UCC hold the payor bank free from liability that occurred after the drawer’s negligence. 4-406(d)2 b. There is a little contributory neg. going on. 4-406(e) c. Stowell (the case where the guy’s neighbor was stealing his statements) d. Gina Chin (regardless of whether the other party was acting neg., you must show that you were not acting neg.) e. When there is a fictitious payee and indorse the drawer is liable (3-404(b)(ii) f. Where the person who creates the checks is normally authorized to create checks the drawer is liable. IX. The Credit-Card System a. The issuer – cardholder relationship i. A purchaser that holds the card ii. An issuer that issues the card iii. A merchant the makes the sale iv. An acquirer that obtains the transactions from the merchant and collects for the issuer. b. This area of law is control by the truth in lending act and regulation Z. i. TILA applies to any card used to obtain service, labor, money, goods §103K ii. In general the act only applies to consumers iii. It also does not apply to transactions for more than $25,000. iv. Credit card companies may not issue unsolicited cards (z §226.12(a)) v. Banks issuing cards must clearly and conspicuously notify the consumer of the terms (z § 226.5(a)(1)).
vi. Issuers may not deduct money from consumer’s banking accounts without written consent §169(a)(1). X. Debit Cards a. Debit cards are instant checks b. There are regulated by regulation E c. There are two types i. Pin ii. Pinless d. Rules concerning risk of loss i. Cards must have some security feature (EFTA §909(a)). Absent the security feature the card issuer may recover nothing from the consumer. 1. pin 2. signature 3. photo 4. fingerprint ii. The card issuer may hold the card holder liable for up to 50$ no matter what EFTA §909(a) iii. The cardholder may be liable for additional losses that are a result of the cardholders failure to timely notify (2 business days from learning of the thief) the issuer up to $500. iv. Notwithstanding the first rules, if a holder fails to review his statements within 60 days of SENDING them, the holder is responsible for ALL charges that result from that negligence. v. These rules DO NOT preempt state laws that afford the consumer create protection.