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Payment Systems
South Texas College of Law Houston
Worley, John J.

The Purposes of Money and Payments Law
o   Payments Law
·         Purposes of Payments Law
o   Facilitate the use of substitutes for payment in specie, facilitate financing for smaller businesses, create a priority ranking among creditors, create default rules to govern payment transactions, allocate risks related to use of instruments among parties to the transaction
·         Types of Transactions
o   Money transfers and money substitutes
·         Types of Payment Systems
o   Cash, NIs, electronic fund transfers, and credit cards
·         Federal Law and Payment Systems
o   Federal law preempts much of Article 4
§  Ex: Electronic Fund Transfer Act, Truth in Lending Act
o   The UCC is regulation at the state level
§  Definition of Money
·         A medium of exchange currently authorized or adopted by a domestic or foreign government
o   Money is legal tender (§ 1-201)
o   Ex: 1800 U.S. copper coin is not currently adopted
o   Ex: A check is not money, it is a NI
·         State Theory of Money
o   The term “money” is properly restricted to a medium of exchange that is authorized by a government
·         Societal Theory of Money
o   Money is whatever is accepted by the members of a society as the medium of exchange, regardless of its endorsement or lack of endorsement by the government
§  Functions of Money (Economists Point of View)
·         Medium of exchange
o   People would have to barter in the absence of money
§  This is inefficient, “double coincidence of wants,” – may not have something the other person wants, some things depreciate quickly so have to worry about it being worth less by the time find a buyer
o   Customary acceptance can make any form of money a medium of exchange
·         Store of value
o   Permits individuals to hoard or transport valuable property
§  Ex: gold
o   Has to be durable, widely recognized as valuable
§  Ex: Real estate
o   Not all money is a store of value and not all stores of value are money (ie land)
·         Unit of account
o   A unit in which prices are quoted and accounts are kept
o   We need to be able to state the obligations of people in a uniform way
·         Standard of deferred payment
o   In long term transactions (loans, annuities) money can serve as the standard of deferred payment
o   The measure of what has to be paid in the future when the obligation matures is typically stated in terms of that economy’s money
·         Miller v Race – P receives a stolen bank note, sues the bank to force it to honor the note (payable on demand to bearer) – do you treat a bank note like money or goods?
o   Rule – Bank Notes are treated as money
o   Payee = Finney OR bearer of the note / Finney mails the note to Odenharty (to pay a debt) and it is stolen
o   Bearer = it is payable to the person who holds the note
§  UCC – is payable to the bearer if:
·         Says “payable to bearer” – I promise to pay $2000 to bearer
·         Says “payable to the order of bearer” – Pay $2000 to order of bearer
·         Does not state a payee – Pay $2000
·         States that it is payable to or to the order of cash – Pay to the order of cash $2000
o   Payable to Order = Not payable to bearer, the person must be identified
§  UCC
·         Payable to the order of an identified person – Pay to the order of John Worley
·         payable to the identified person or order – Pay to John Worley or order
o   Payable on Demand (vs payable at a definite time) (ex is an ordinary check)
§  UCC
·         States that it is payable on demand
·         Payable at sight
·         Payable at the will of holder
·         Does not state any time of payment (like a check)
o   Payable at a definite time
§  UCC
·         States a period of time after sight
·         States a fixed date or time readily ascertainable
Derivative Title Doctrine (Nemo dat non quod habet)
·         Applies to goods, not money
·         No one can transfer a greater right to property than they themselves have
o   The thief gets nothing, so they have nothing to transfer
o   So, a thief cannot even transfer title to a good faith purchaser for value
·         Power to Transfer; Good Faith Purchase of Goods; “Entrusting” (§ 2-403)
o   UCC version of the Derivative Title Doctrine
o   A transferor of property cannot convey a title superior to his own even to a bona fide purchaser for value.
·         Good Faith
o   Honesty in fact and the observance of reasonable commercial standards of fair dealing
·         Worley entitled to assert his rights as the true owner and recover the watch (replevin) or its value (conversion) from Guter.
·         Rationale?
o   Trying to promote efficiency – cheapest loss avoider. Between owner and BFP, BFP in better position to avoid losses associated with theft.
o   Not every purchaser needs to be concerned about this, but in situations where stolen goods may be sold, purchaser in better position to avoid the loss, can make inquiries of the seller, better position than the owner who cannot prevent the theft in the first place.
The Money Rule (exception to nemo dat)
·         provides that a third party who takes stolen money in good faith and for valuable consideration obtains good title and prevails over the victim of theft.
·         City of Portland v. Berry:
o   Bank received stolen money from W. Victims said they were entitled to money b/c money rule didn’t apply to those bills b/c rare and not made anymore.
o   Ct rejects.  Even though the bills have not been made since 1945 and the government has been withdrawing them from circulation, they still are money.
o   Bank took in GF and for consideration, prevail over victims.
o   Good faith:
§  Honesty in fact and Bank believed her story that it was inheritance.
o   Valuable consideration:
§  argued that not valuable consideration b/c paid face value instead of market value. Consideration is a bargained for exchange, doesn’t matter if equivalency of exchange.
o   If thief had not yet given to bank, victims could recover against thief.
§  Money rule only applies to 3P.
o   Policy for the money rule
§  The necessity that currency be readily acceptable as payment for debts.
§  Berry and Kelly say policy does not apply here because the bills are so rare and not many in circulation.
§  Court responds and states that it doesn’t matter whether the bills circulate often, instead the concern is to assure that they CAN freely circulate. Government wants to promote the free circulation of cash, regardless of the rarity of bills.
·         Why treat money and goods differently?
o   The relative positions of the true owner and transferee are not really any diffe

§  A written (§ 3-104(j)) acknowledgement by a bank that you made a deposit and that the bank promises to repay the money later
·         A note on the bank
·         2 Elements = acknowledgement of deposit and promise to repay
§  Uses of a CD:
·         Earn investment interest, medium of exchange, collateral for a loan, endorse and use to purchase an item
Orders / Drafts – an order to pay
·         A written instruction to pay money signed by the person giving the instruction
·         Elements of Drafts
o   A three-party instrument consisting of an order by one person (the drawer) directed at a second person (the drawee) directing the drawee to pay a third party (the payee)
§  The drawer orders the drawee to pay money to the payee
o   A draft is an order to pay (§ 3-104(e))
§  The word “pay” signifies that something is an order
o   An order is a written instruction to give money signed by the person giving the instruction(§ 3-103(8))
o   A draft is payable at a definite time(§ 3-108(b))
§  So, it is not payable on demand, and therefore not a check
·         Checks
o   A check is (§ 3-104(f)):
§  A draft (which is an order) that is:
·         payable on demand;
o   If the instrument does not say when to pay, it is payable on demand (§ 3-109)
·         or at sight;
·         or otherwise indicates that it is payable at the will of the holder;
·         or does not state any time of payment;
§  and is drawn on a bank
§  and signed by the drawer.
o   Parties to Checks
§  Drawer (§ 3-103(a)(5))
·         The party who signs the draft as the one ordering payment
·         Usually signs at lower rt corner by convention
§  Drawee (§ 3-103(a)(4))
·         The person ordered in a draft to make payment
·         Usually at lower left by convention
§  Acceptor (§ 3-103(a)(1))
·         A drawee who signs a draft undertaking to pay it
§  Payee
·         The person entitled to payment
o   Types of Checks
§  Bill of Lading/Exchange (Documentary Draft)
·         A draft that is used as a way for parties to avoid the risk in commercial transactions of having to perform first
o   Facilitates simultaneous exchange
·         The drawer and the payee are the seller, the drawee is the buyer
o   Ex: Seller takes goods to shipper and the shipper returns a bill of lading as a document of title to the seller (the possessor of this document has control of the goods).  The seller delivers the bill of lading to the bank, and then orders the buyer to pay.  The buyer first inspects the goods, and if they are satisfied with the quality they go to the bank and pay the bill of lading.  Then, the bank gives the bill of lading to the buyer and he gets the goods.