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Payment Systems
South Texas College of Law Houston
Rochvarg, Arnold

Payment Systems/Fall 2016/Rochvarg/Problems and Materials on Payment Law:Whaley
 
The UCC and Negotiable Instruments
Problem 1: Portia is a ‘remitter’ b/c she is a person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser.
Definitions: 3-103 (1-201 offers more definitions)
Acknowledgment – NOT a promise to pay, so IOU not a note
Allonge – a piece of paper attached to an original note for purposes of indorsement.
Note – a negotiable instrument containing a promise to pay money, signed by the person promising to pay. Involves 2 people, Maker and Payee
Draft – a NI containing an order to pay money (a check)
Acceptor – a drawee who has accepted a draft
Consumer transaction – where an individual incurs an allegation primarily for personal, family, or household purposes.
CD – a note where a bank promises to pay, making them a maker of the note
Check – a draft where the drawee is a bank, and the drawer is the customer of the bank. The payee is the person who gets the check from the drawer.
Ordinary check, written by customer as drawer ordering her bank to pay the payee when the payee tries to cash the check.
Certified check – a check that has been accepted by the drawee bank before the drawer has issued the check to the payee. (When the seller doesn’t believe you have the money)
If before the drawer gives the check to the payee, the drawee bank has agreed to pay the check, we say that the bank ‘accepted’ the check, and bank is called ‘acceptor.’
Cashier’s check – When customer goes to bank and gives the bank cash. The bank then writes a check for that amount payable to the payee requested by the customer. The bank’s check is written from the bank’s own checking account. The bank is the drawer and the drawee of the check. The customer is called a remitter. DIFFERENCE IS WHEN THE BANK IS DRAWER AND DRAWEE.
Teller’s check – where customer takes cash to bank. Bank writes check to person identified by customer as the payee. Bank writes check as drawer on a checking account that the drawer bank has with a different bank. Unlike cashier’s check where bank writes a check on an account that the bank has with its own bank, here the drawer bank has a checking account with another bank. Customer is again the remitter. Usually used by smaller banks and credit unions that maintain checking accounts with larger commercial banks.
Draft – where the 1st person orders a 2nd person to pay a 3rd person some money. 3rd person is Drawer. The 2nd person being ordered by the drawer to pay money to the payee is called the drawee. When a bank is the drawee, the draft is called a check.
Drawee – a person ordered in a draft to make payment (a bank)
Drawer – a person who signs or is identified in a draft as a person ordering payment (usually the buyer giving check to seller)
Good faith – honesty in fact and the observance of reasonable commercial standards of fair dealing
Holder – the person in possession of the instrument
Issuance
Maker – a person who signs or is identified in a note as a person undertaking to pay
Negotiable Instrument – 3-104 – an unconditional promise or order to pay a fixed amount of money with or without interest or other charges described in the promise or order. 2 basic types:
Note – involves 2 people
Draft – involves 3 people
Note – a means of evidencing a debt
Order – a written instruction to pay money signed by the person giving the instruction
Principal obligor – the accommodated party or other party to the instrument against whom a secondary obligor has recourse under UCC
Promise – a written undertaking to pay money signed by the person undertaking to pay
Prove – with respect to a fact means to meet the burden of establishing the fact
Remitter – a person who purchases and instrument from its issuer if the instrument is payable to an identified person other than the purchaser.
Transfer
Class Notes:
3-101 Title is ‘Negotiable Instruments’
3-102 Subject matter – applies to negotiable instruments, but not money
3-103 Definitions – see above
Short title of Art. 4 is ‘Bank Deposits and Collections’ If there is a conflict between Art’s 3 and 4, 4 controls.
Words that go together: Note, maker, payee.
Words that go together: Draft, payee, drawer,
Remotely created items:
Telephone and internet purchases through a checking account
Customer/drawer gives checking account information to payee. Payee gets paid electronically by drawee
Drawee is authorized to pay even though the check has not been signed or delivered
Not governed by UCC but is covered by federal laws.
Negotiability – whether something is negotiable – if the instrument does not satisfy the tests of negotiability, does that mean it is invalid? NO it just means that the UCC rules do not apply.
3-104 – a negotiable instrument is an unconditional promise or order to pay a fixed amount of money with or without interest of other charges if:
it is a signed writing, and the signer intended for the signing to be the signature
is an unconditional promise or order. It cannot say “ subject to, governed by another writing.
Principal sum must be payable in a fixed amount of money
Must be payable to bearer or to order
Must be payable on demand or at a definite time
Cannot contain any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money.
3-409 – ACCEPTANCE OF DRAFT; CERTIFIED CHECK.
“Acceptance” means the drawee's signed agreement to pay a draft as presented.It must be written on the draft and may consist of the drawee's signature alone.Acceptance may be made at any time and becomes effective when notification pursuant to instructions is given or the accepted draft is delivered for the purpose of giving rights on the acceptance to any person.
A draft may be accepted although it has not been signed by the drawer, is otherwise incomplete, is overdue, or has been dishonored.
If a draft is payable at a fixed period after sight and the acceptor fails to date the acceptance, the holder may complete the acceptance by supplying a date in good faith.
“Certified check” means a check accepted by the bank on which it is drawn.Acceptance may be made as stated in Subsection (a) or by a writing on the check that indicates that the check is certified.The drawee of a check has no obligation to certify the check, and refusal to certify is not dishonor of the check.
c.   3-105 – ISSUE OF INSTRUMENT.
“Issue” means the first delivery of an instrument by the maker or drawer, whether to a holder or non-holder, for the purpose of giving rights on the instrument to any person.
An unissued instrument, or an unissued incomplete instrument that is completed, is binding on the maker or drawer, but non-issuance is a defense.An instrument that is conditionally issued or is issued for a special purpose is binding on the maker or drawer, but failure of the condition or special purpose to be fulfilled is a defense.
“Issuer” applies to issued and unissued instruments and means a maker or drawer of an instrument.
1-201 – Definitions
3-401 – SIGNATURE.
a. A person is not liable on an instrument unless the person:
signed the instrument;or
is represente

nually or by means of a device or machine, and by the use of any name including a trade or assumed name, or by a work, ark, or symbol executed or adopted by a person with present intention to authenticate a writing.
Triffin v Dillabough p23
Issue: Whether the MOs did or did not contain an unconditional promise or order to pay due to a legend on the back of the checks.
Facts: Money orders were stolen from 2 locations in unrelated incidents, 3 from Chase and 100 from IW Levin while in transfer. Dillabough cached 2 MOs at Chuckie Enterprises that were from David W. Lynn presented 1 MO at Chuckies from Michael Pepe. Guinta owns Chuckies and was unaware that the MOs had been stolen. Once the MOs were returned Guinta sold the MOs to Triffin, a commercial discounter. Triffin filed complaints against Dillabough, Lynn, and American Express for payment of the money orders. Default judgments were obtained against D & L. Trial court found the MOs to be not negotiable instruments and entered verdict for AX. Superior court reversed and held Triffin was the holder.
Rule: 1. The UCC does not specifically define the term MO. Requisites to negotiability:
Signed by the maker or drawer (if intent to sign)
Contain an unconditional promise or order to pay a certain sum and no other promise or order, obligation or power
Be payable eon demand or at a definite time
Be payable to order or bearer
                                                2. an otherwise unconditional order to pay is not made conditional by including                                                                 implied or constructive conditions in the instrument. Purported conditions                                                             on an otherwise negotiable instrument that merely reflect other provisions                                                               of the law do not vitiate negotiability.
Ruling: The legend did not serve as a conditional promise to pay, but rather a warning (defense) to the person cashing the check to protect himself against fraud.
#4a. No, a promissory not is not an instrument defined by 3-104 if it says:
This note is subject to a contract of sale dated …
This note is subject to a loan and security agreement dated …
Rights and obligations of the parties with respect to this note are stated in an agreement dated…
IT is subject to the UCC if it contains the words “payable to the bearer” or “to the order of”
b. No, see above
c. Yes, see above 3-106bi
#5 No, see 3-108 not an unconditional promise to pay
#6 No, per 3-106bi in comment 1, it may be convenient to not include a statement concerning the collateral and rather have it accompany a security agreement or mortgage for that statement.
#7 No, per 3-112 The amount or rate of interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument.