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Payment Systems
South Texas College of Law Houston
Rochvarg, Arnold

Payment Systems – Rochvarg – Spring 2018
Unit 1: The UCC and Negotiable Instruments
Negotiable Instruments
There are two basic types of negotiable instruments: [Makers: Notes]; [Drawers: Drafts (& checks)] Note: a “note” is a promise. “Promise” is a written undertaking to pay money signed by the person undertaking to pay.
An “acknowledgement” of a debt is not a promise to pay. Therefore, an “IOU” is not a note. Since there is no promise to pay then it’s not a promise or a note; just acknowledging that you owe someone money.
A note involves two persons: Maker and Payee
Maker – the person who promises to pay the money. The maker of the note. UCC 3-103(a)(7).
Payee- the person who is entitled to get the money.
“Certificate of Deposit” (CD) – note written by Bank (Maker)
Draft: A draft involves 3 persons. The first person orders a second person to pay a third person some money.
The Drawer is the first person who is ordering the payment.
The Payee is the person who is going to get the money.
The Drawee is the person being ordered by the Drawer to pay money to the Payee.
Check: A check is a Draft where the Drawee is a Bank. 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: An ordinary check is written by the customer as Drawer ordering her bank to pay the Payee when the Payee tries to cash the check.
Certified Check: A certified check is a check which has been accepted by the Drawee bank before the Drawer has issued the check to the Payee.
If before the Drawer gives the check to the Payee, the Drawee bank has agreed to pay the check, we say that the bank has accepted the check (before delivery to the Payee), and bank is called Acceptor.
Certified check comes from customer’s bank account.
Cashier’s Check: A cashier’s check is when a customer goes to bank and gives the bank cash, then the bank 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.
In this situation, the customer is called the Remitter.
Cashier Check comes from the bank’s account.
Teller’s Check: A teller’s check is when a customer takes cash to bank. Bank writes check to person identified by customer as the Payee. Bank writes check as Drawer on checking account that the Drawer bank (customer’s bank) has with a different bank. In other words, 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.
In this situation, the customer again called Remitter.
Unit 2: Negotiability
Elements of Negotiability
All the elements set forth in Article 3 for negotiability must be satisfied. If any one is missing, the instrument is not negotiable.
All elements must be satisfied at the time of issuance.
Issuance means the first delivery of an instrument by the Maker or Drawer. Both a Maker and Drawer are issuers.
If all elements of negotiability exist at time of issuance, we have a negotiable instrument and UCC applies.
Making a Negotiable Instrument Not Negotiable
If an instrument is NOT a check, the UCC provides that you can make a negotiable instrument into a NOT negotiable instrument if at the time of issuance, the instrument contains a conspicuous statement that is not negotiable or not governed by UCC Article 3. No magic words are required. UCC uses phrase “however, expressed,” but it must be conspicuous.
For checks, write “not negotiable” on it to make NOT negotiable.
Crossing out “pay to the order of” on check = still negotiable (this rule applies to checks ONLY, and not promissory notes)
Elements for Negotiability
A writing
Signed by a Maker or Drawer
Unconditional promise or order (no other undertaking or instruction)
To pay a fixed amount of money
Payable on demand or at a fixed time
Payable to Bearer or Order
A check is always governed by the UCC; there is no way to render it non-negotiable.
Negotiable instrument cannot be oral; cannot be in electronic form
Writing: A writing is a “printing, typewriting, or any other intentional reduction to tangible form.”
If internal contradictions within instrument: (Words > numbers); (Handwritten > Typewritten > Printed)
Order: An order is a “written instruction to pay money signed by the person giving the instruction.”
Promise: A promise is a “written undertaking to pay money signed by the person undertaking to pay.”
The definitions of “order” and “promise” require the instrument to be signed by Drawer / Maker.
Signature may be made manually or by means of a device or machine. Signature may be by use of any name, including an assumed name. A signature is valid even if person signs a false name. A forged signature is a valid signature of the person signing. (Any name that you sign is your signature and satisfies the signature requirement.) Signature can be on any part of the instrument. If signature is on an accompanying sheet of paper then it must be affixed to the instrument (“considered part of the instrument” [staple-good; paper clip-iffy]). Signed includes any symbol executed or adopted by a party with the present intent to authenticate a writing. Not necessarily your name. Can write a nickname.
Unconditional Promise
To be negotiable, the signed writing must be an unconditional promise or order to pay. Any conditions destroy negotiability.
No conditions to be negotiable. Must be an unconditional promise to pay
Rights or obligations with respect to the promise or order are stated in another writing make the writing not negotiable.
A promise or order that references another writing is still unconditional as long as it is not “subject to” the other writing.
 (can reference; not rely)
Language in the instrument such as “as per” would not defeat the negotiability of the instrument.
An implied condition does not make the promise or order unconditional.
It is often difficult to draw the line between express and implied conditions, and thus whether the instrument is negotiable.
NOTE: The phrase “only if” followed by a condition for payment makes it an express condition and destroys negotiability
A statement of consideration in the promise or order is still unconditional.
A statement with respect to collateral is still unconditional.
A promise or order that promises collateral is also unconditional.
A promise or order that includes a prepayment clause (giving obligor the right to pay prior to the due date) is unconditional, and thus could be negotiable.
A promise or order that permits the person owed the money to demand payment earlier than the due date is unconditional.
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.
An instrument that requires a countersignature is still unconditional.
Traveler’s checks – counter signature required (security measure) for payment
Even if Traveler’s check has NO countersignature, not meeting condition does NOT destroy negotiability
If Forged Countersignature, then it is only a PERSONAL defense to the Bank that issued the traveler’s check
Whether the Bank is a HDC depends on Notice (depends on whether forged signature was a good one or not).
Fixed Amount
To be negotiable, the promise or order must be for a fixed amount of money.
A person must be able to look at the instrument and know exactly what amount of principal must be paid. The maker has promised to pay this amount of money. The drawer has ordered this amount

Becoming a Holder
No one can be a holder without possession of the negotiable instrument.
If you are not a holder, you are not entitled to get paid. Therefore, possession is always required to get paid.
 (Bearer paper = only possession); (Order paper = possession AND proper indorsement)
A signature by someone other than the maker, drawer, or acceptor.
Made for the purpose of negotiating the instrument, or for restricting payment of the instrument, or for incurring indorser’s liability on the instrument.
Person who makes an indorsement is called an indorser.
Indorsement must be on the instrument.
But, a signature on a paper affixed to the instrument satisfies the on the instrument requirement.
Blank Indorsement: A blank indorsement occurs when payee signs without designating new payee.
Blank indorsement coverts order paper à bearer paper
Special Indorsement: A special indorsement occurs when payee signs her signature and adds words designating a new payee. Preserves Order characteristic even if special indorsement only has “Pay to ­­­­­identified payee(s)” without the word “order”.
A special indorsement can convert bearer paper àorder paper
Anomalous Indorsement: An anomalous indorsement occurs when someone who is not named on the instrument signs it. A signature by someone who is not a holder.
Anomalous indorsement does not negotiate the instrument.
Anomalous indorsement, although not significant to negotiation, is relevant to determining liability on the instrument.
 (See accommodation parties
Restrictive Indorsement: A restrictive indorsement occurs when payee signs signature and adds words limiting what can be done with the instrument.
Signature can be above or below the additional words.
Some restrictive indorsements are valid; others are not. (“For Deposit Only” = valid, and typical)
Multiple Payees: if order paper lists 2 identified payeesà “and” requires 2 signatures; “or” requires 1 signature
NOTE: slash, stacked names, or comma = “or”
Negotiation, Capacity, Fraud, Breach of Duty, and Illegality
Negotiation is effective even if obtained from a person lacking capacity such as an infant.
Negotiation is effective even if obtained by fraud, duress, mistake, breach of duty, or illegality.
Other remedies may be available, but the “lack of” negotiation is not the basis of the remedy. The negotiation is seen as valid. Remember, negotiation includes an involuntary transfer in its definition.
However, forgery does destroy negotiation. Once there is a forgery there are no holders.
Special Rule for Bank Deposits
A Depository Bank becomes the holder of a check even if the check has not been indorsed by its customer if the bank takes the check for DEPOSIT.
Depositing the check into Bank’s customer account grants Depository Bank Holder status. Merely crediting a depositor’s account in not Value because the bank would have the right to set aside the credit if the instrument was returned unpaid. Thus, the depository bank can obtain HDC status only for the amount withdrawn from account or actually given to customer.