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

PAYMENT SYSTEMS (WORLEY) – S2012

I. Introduction

a. Functions of Money

i. Medium of Exchange

1. All commercial transactions involve an exchange of something for something else

a. Barter works for transactions but there are significant disadvantages to a barter system

b. The use of money as one of those “somethings” cures the problems that exist with bartering

i. Double Coincidence of Wants

ii. Depreciable Commodities

· Money solves this problem by there being an tacit agreement between the parties to the transaction as to the transaction costs.

ii. Store of Value

1. Not all money is a store of value

2. Not all stores of value is money (e.g., land, diamonds…)

iii. Unit of Account

1. Money provides us with a way to state how much something costs

iv. Statement of Deferred Payment

1. Measure of what must be paid in long term transactions like loans and annuities

v. Money – A medium of exchange currently authorized or adopted by a domestic or foreign government… § 1-201(24)

b. Characteristics of Money Substitutes

i. Miller v. Race

1. The case involved a bank note (a payment instrument which is a promise by the bank to pay a certain amount).

2. The parties to the note were the Bank of England (Maker / promisor) and William Finney or Bearer (Payee)

3. The parties to the litigation were Race (the bank clerk) and Miller (the person who ended up with the note)

4. § 3-109

a. Drafting Implications:

i. “States that it is payable to bearer”

· Ex.: I promise to pay $10,000 to bearer

ii. “States that it is payable… to the order of bearer”

· Ex.: Pay $10,000 to the order of bearer…

iii. “Does not state a payee”

· Ex.: Pay $10,000

iv. “States that it is payable to or to the order of cash…”

· Ex.: Pay to the order of cash $10,000

v. “A promise or order that is not payable to bearer is payable to order if it is payable to the order of an identified person”

· Ex.: Pay to the order of John Worley

vi. “A promise or order that is not payable to bearer is payable to order if it is payable… to an identified person or order”

· Ex.: Pay to John Worley or order

5. Payable on Demand

a. When is a note payable on demand?

i. § 3-108

· Payable on Demand: if (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 for payment. § 3-108(a)

· 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. § 3-108(b)

6. Miller’s Action against the Bank

a. Theory of Complaint: trover (CL action for conversion)

7. Bank’s Defense

a. The bank said Miller can’t have a claim for conversion of the bank note, because the note belongs to Finney, not to Miller

8. The basis of the bank’s argument

a. Should the note be treated like money or goods

i. The bank said that it should be treated like goods.

ii. A purchaser of goods acquires all title which his transferor had or had power to transfer…” § 2-403(1)

9. Mansfield’s Ruling

a. Bank notes are not like goods – they are like cash

b. He said they are treated as money in the normal course of transactions

i. “a bank-note is constantly and universally, both at home and abroad, treated as money, as cash and it is necessary that their” currency be firmly established.

ii. Essentially, he said we look at how people treat them.

10. What rule should govern bank notes?

a. The Money Rule

i. “The true reason is, upon account of the currency of it: it can not be recovered after it has passed into currency. So in the case of money stolen, the true owner can not recover it, after it has been paid away fairly and honestly (good faith) upon a valuable and bona fide consideration.”

b. The Money Rule in the Miller case

i. Miller took the bank note in good faith

ii. Miller took the bank note for consideration

· He provided goods and services in exchange

11. Negotiability Doctrine

a. A commodity is negotiable if and to the extent t

ion of a monetary policy within its territory

a. This means that new countries and governments should always want to create whatever incentives they need to in order to have that country’s residents transact exclusively in government sanctioned currency.

iv. Problems from pg. 36

1. Plotkin attempted to pay a fee to the moving company she used in 25 $100 bills. The driver refused saying that he could only accept check or money order.

a. What principle will Plotkin rely on?

i. Legal Tender statute – US coins and currency are legal tender for all debts.

b. Even if people cannot generally contract out of legal tender rules, would Plotkin win?

i. Nemser: reasonable time and place conditions for the use of legal tender are permissible.

ii. Was the moving company’s rule reasonable?

· They had a legitimate concern of being robbed or having a driver steal the money.

c. What penalties for someone unreasonably refusing to accept legal tender?

i. If they refuse to return your goods they can be sued for conversion.

v. Nemser v. New York City Transit Authority

1. Facts: The plaintiffs are two bus riders who sued NYCTA for a declaratory judgment that it was violation of state and federal law for the NYCTA to refuse to accept dollar bills as bus fare.

2. Opinion:

a. The statute which the plaintiffs point to (31 U.S.C. § 5103) is not to be applied as broadly as the plaintiff would have it done.

i. Congress didn’t intend the law to prohibit entities from limiting the locations where cash payments may be made.

· Here, NYCTA accepts cash at appropriate kiosks in return for tokens (tickets) which can be redeemed at any bus or subway.

b. The cause of action was dismissed.