Payment Systems – SPRING 2017 – Rochvarg
Unit 1 – the UCC and Negotiable Instruments
Methods of payment (payment systems)
Barter – K law | Credit cards | Electronic Payments | Negotiable Instruments | Cash
Fifi accidently flushed a $100 bill down the toilet. Can Fifi ask the U.S. government for $100? NO
Gigi stole $100 from Fifi. Gigi then used the $100 to go to Disney World. Can Fifi sue Gigi for $100? Can fifi sue Disney World for $100?
Yes – Gigi for conversion, NO – Disney if they accepted it in good faith
Fifi accidentally placed a $100 bill in a paper shredder. Can Fifi bring the shreds to Fed Reserve?
CFR rule says if you have at least 50% of the bill, you can get full value
Benefits and Disadvantages of Payment Options
Anonymity – is there a record of the transaction? Can the transaction be traced?
Electronic payments yes, Checks yes.
Good or bad? Depends. Illegal deals you don’t want anything traceable
Unauthorized Use – what happens if someone uses the payment method without authority?
Speed – Cash or credit payment at store vs. check.
Expense – credit card fees, checking account fees.
Convenience – carrying around cash, credit card and checks.
history of negotiable instruments
Ucc article 3 “negotiable instruments”
UCC 3-102 -Subject matter – Applies to negotiable instruments, but not money
UCC 3-103 – Definitions. Set forth in (a). 3-103(b) and (c) list where other definition can be found. 1-201 has more
UCC Article 4 “Bank Deposits and Collections”
If there is a conflict between Article 3 and Article 4, Article 4 controls. See 3-102(b) and 4-102(a)
Negotiable instruments (NI)
UCC only applies to NI as defined in UCC 3-104
Two basic types of NI: Note and Draft
A “note” is a promise. UCC 3-104(e).
A “Promise” is “a written undertaking to pay money signed by the person undertaking to pay” UCC 3-103(a)(12).
An “acknowledgment” of a debt is not a promise to pay (not like an IOU). 3-103(a)(12).
A Note involves two persons: Maker and Payee
Maker – Person who promises to pay the money. UCC 3-103(a)(7).
Payee – Person who is entitled to get the money.
If the maker is a bank, the note of the bank is called a CD. UCC 3-104(J).
A draft involves three persons: Drawer and Drawee and Payee
Drawer – 1st person orders a second person to pay a third person. UCC 3-103(a)(5)
Drawee (Payor) – 2nd person being ordered by the drawer to pay money to the payee. UCC 3-103(a)(4)
Payee – 3rd person who is going to get the money (like a note)
If a bank is the drawee, the draft is called a check. UCC 3-104(f)
The drawer is the customer of the bank where the customer/drawer has opened a checking account. The payee is the person who gets the check from the drawer.
Types of Checks
Ordinary Check – written by customer as drawer ordering bank to pay payee when payee tries to “cash” the check.
UCC 3-409 – If, before drawer gives check to the payee, the drawee bank has agreed to pay the check, the bank has “accepted” the check and bank is called the “acceptor.”
UCC 3-103(a)(1) – A check which has been accepted by the drawee bank before the drawer has issued the check to the payee is called a “certified check.”
UCC 3-104(g) – EX: 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 its own account. The bank is the drawer and drawee of the check. The customer becomes the “remitter.” UCC 3-103(a)(15).
This check is a “Cashier’s Check”
Drawer and Drawee are same financial institution.
Even though only two different persons involved, still a draft, and because a bank is the drawee, it is a check.
UCC 3-104(h) – EX: 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 (customer’s bank) has with a different bank. (Drawer bank has a checking account with another bank and uses that account). Customer again is the remitter.
This type of check is called a “Teller’s Check”
One bank is the drawer and another bank is the drawee
Usually used by smaller banks and credit unions banking with bigger banks
Remotely Created Item
Telephone and internet purchases paid through a checking account.
Customer/drawer gives checking info to payee -> Paid electronically by drawee.
Drawee is authorized to pay even though check hasn’t been signed/delivered.
Not governed by UCC 3 or 4 and NOT a negotiable instrument because not signed, but is covered by federal law (Electronic Funds Transfer Act).
When law student Portia went to buy a used car from a man who sold it through the newspaper, the seller told her he refused to take her personal check, demanding a cashier’s check payable to his order. Portia went to Octopus Bank and paid the bank the amount required, and the bank issued the cashier’s check, with Portia’s car seller being named as payee. The bank gave the check to Portia, and she in turn handed it over to the payee. What’s is the name that the Code gives to Portia in this situation? = Portia is the remitter
Unit 2 – NEGOTIABILITY
Objective: Deals with whether this “thing” is a negotiable instrument.
Article 3 only applies to a NI defined in Article 3. If the instrument does not satisfy the tests of negotiability, does that mean it is invalid?
No, just means the UCC rules do not apply. But other laws like contracts and agency might.
elements of negotiability
the elements set forth in Article 3 for negotiability must be met at time of “issuance”
If all elements of negotiability exist at time of issuance, we have a negotiable instrument, and UCC applies.
issuance – 3.105(a)
Issuance means the first delivery of an instrument by the maker or drawer.
Both a maker and drawer are “issuers” – 3.105(c)
Writing “NOT NEGOTIABLE”
If all elements of negotiability exist at the time of issuance, can you write “not negotiable” on the instrument?
Making a negotiable instrument NOT negotiable – UC 3-104(d)
If it is a check, NO – UCC applies
If not a check, YES – Can make not negotiable at time of issuance by a “conspicuous statement”
No “magic words” are required. UCC uses “however expressed” statement
Can you “conspicuously express” that
iable – Acceleration Clauses
A promise or order that permits the person owed the money to demand payment earlier than the due date is unconditional. 3-106(b)(i).
“Gigi promises to pay Fifi $10 on May 1, 2017. Fifi has the right to demand payment on the first of any month prior to May 1, 2017.” This is an unconditional promise to pay, and negotiable.
Resort to a Particular Fund or Source UCC 3-0(b)(ii)
A promise or order to pay which states that the payment is “limited to resort to a particular fund or source” is still viewed as unconditional, and thus could be negotiable.
“Gigi promises to pay Fifi $10,000 for her Ford Mustang. The money to pay for the Mustang will come from the sale of Gigi’s Camaro.” This is an unconditional promise to pay.
An instrument that requires a countersignature is still unconditional. UCC 3-96(c).
Traveler’s checks, UCC 3-104(i), are NI even though a condition of payment is a countersignature.
4) To Pay a Fixed Amount of Money
To be negotiable, the promise or order must be for a fixed amount of money. UCC 3-104(a)
Must be able to look at instrument and know exactly what amount of principal must be paid
Fixed amount and Interest
Fixed amount does not relate to interest due –just the principal that is due.
~Fifi promises to pay Gigi “$1,000 plus interest of 1% above the prime rate on April 1.”
This is still negotiable (even though Gigi (or subsequent holder) doesn’t know exactly what is owed by looking at note) because she does know the amount of principal that is due.
UCC 3-112(b) – Interest can be stated as a fixed amount or a variable amount of money, or it may be expressed as a fixed or variable rate.
We care about the principal, not the uncertainty of the amount of interest.
The amount or rate of interest can be stated on the instrument, but that is not necessary (it’s a bonus).
If stated on the instrument, may require reference to information not on the instrument (e.g., prime rate) but this would NOT destroy negotiability.
No Interest Rate
-Fifi agree to pay Gigi “$100 plus interest on April 1, 2017.” No interest rate was stated. Rate?
Since didn’t state interest rate, UCC 3-112(b) says interest rate is “judgment rate in effect at the place of payment and at the time interest first accrues.” Court decides judgment rate
-On April 1, Fifi gave Note to Gigi promising to pay her $100 on October 1. On October 1, Fifi paid Gigi $100. Gigi told Fifi that she owed her $102 based on $2 interest.
If no interest is mentioned on Note or Draft, no interest is owed.