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

I. Introduction to Payments Law
– Functions of Money
o 1. Medium of Exchange
§ Considering the three additional functions of money listed infra, Medium of Exchange is where we will focus our study.
o 2. Store of Value
o 3. Unit of Account
o 4. Standard of Deferred Value
– UCC § 1-201(24): Money—a medium of exchange currently authorized or adopted by a domestic or foreign government.
– UCC § 3-104: Negotiable Instrument—an unconditional promise or order to pay a fixed amount of money, w/ or w/o interest or other charges described in the promise or order.
Definitions (from page 61):
o Promise à Note
§ Note: a two-party instrument consisting of a promise by one party (the maker) to pay money to the order of a second party (the payee).
· Examples: credit purchase, loan, etc.
o Order à Draft
§ Draft: a three-party instrument consisting of an order by one person (the drawer) directed at a second party (the drawee) directing the drawee to pay a third party (the payee).
· Example: checks
– UCC § 3-109. Payable to Bearer or to Order
o (a) A Promise or order is payable to bearer if it:
§ (1) states that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment;
§ (2) does not state a payee; or
§ (3) states that it is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person.
o (b) A promise or order that is not payable to bearer is payable to order if it is payable: (i) to the order of an identified person; or (ii) to an identified person or order. A promise or order that is payable to order is payable to the identified person.
– UCC § 3-108. Payable on Demand
o (a) A promise or order is “payable on demand” if it: (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 of payment.
– Derivative Title Doctrine (also known as the Nemo Dat Rule): a transferee only receives title as good as that of his transferor.
o The UCC’s version of the Derivative Title Doctrine is found in § 2-403.
o HYPO: X owned a watch which was stolen by Y. Y sold it to Mother Teresa. Somehow the watch ends up with Z. A lawsuit ensues b/w Z and X over the watch? Whose property rights are superior, Z or X?
§ X, because Z’s title was only as good as that of his transferor, which derived from a theft (therefore, X always retained superior title).
o EXCEPTION 1: Money Rule—under certain conditions, a transferee receiving money obtains better title then that of his transferor.
§ POLICY: The money rule promotes the free transfer of money in commerce.
§ 2 Requirements—In order to apply the “money rule,” the transfer of money must be: (1) in good faith; and (2) for valuable consideration.
· Ex: You can’t steal money, give it to your cousin, and then argue the money rule (no consideration, not in good faith).
· Ex: You can’t steal money, use it for illegal gambling, and then argue the money rule (illega

owes the full balance to C.
· SOLUTION: § 3-501(b)(2)(i)—upon demand of the person to whom presentment is made, the person making presentment must exhibit the instrument . . . .
o WORLEY: This is the “Jerry McGuire” rule.
· POINT: if you make the party present the note b/f you pay them, you can ensure that you are paying the holder.
o 3. § 3-305 [Holder in Due Course]: in order to be a HDC[1], you must first be a holder.
– There are 2 ways to determine whether s/o qualifies as a Holder:
o 1. By Definition, § 1-201(21):
§ (A) the person in possession of a negotiable instrument [is a Holder if the instrument] is payable either to:
· 1. bearer; or
· 2. an identified person that is the person in possession.
o 2. By Negotiation, § 3-201(a, b):
§ (a) “Negotiation” means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.
§ (b) . . . if an instrument is payable to an identified person(i.e. it’s in “order form”), negotiation requires:
· 1. transfer of possession of the instrument; and
· 2. indorsement by the holder.

[1] For a more in depth discussion of “Holder in Due Course,” see infra Part IV.