Payment Systems- Summer 2015- Professor Lavoie
State Law
UCC- Uniform Commercial Code- adopted at state level, so federal gov. can override provisions.
• Article 3 – Negotiable Instruments
– Identification
– Consequences
– Defenses
• Article 4 – Payment Systems
– Check Clearing
– Collection
– Bank Deposits
• Article 4A – Wire Transfers
Federal Law
• Expedited Funds Availability Act
• Check Clearing for the 21st Century Act
• Federal Reserve Bank Regulations
– Reg. J – Collection matters
– Reg. E – Electronic Fund Transfers
– Reg. CC – Availability of Funds
Article 3- Negotiable Instruments
• Examples- Barter transactions, Cash transactions
• The basic structure of Article 3 remains the same as in the late 1700s and early 1800s.
• 3-102: Article 3 applies to Negotiable Instruments and gives basic rules for dealing with them
• BUT, if not a NI, then Article 3 doesn’t apply
• AND, Articles 4, 8, 9, and Federal Law all override Article 3 if there is a conflict
§3-104 — Negotiable Instrument
Unconditional (3-106)
Promise or Order (3-103(a)(8) and (12))
• Written and signed
To pay fixed amount
Of Money (incl. foreign currency) (1-201(b)(24))
With or without specified interest (3-112)
Payable to Bearer or to Order (3-109) (“magic words”)
Payable on Demand or at specified time (3-108)
No instructions other than payment order
Does not disclaim negotiability
Types of Negotiable Instruments
o Note: 2 party transaction
§ JS (Maker) pays to order of CJ (Payee)
§ Payee can get money or negotiate instrument
§ The next holder can then present to maker or negotiate again
§ Maker – the person who makes the note
§ Payee – person to whom maker is going to pay
o Draft: 3 party transaction
§ JS (Drawer) orders Bank (Drawee) to pay to CJ (Payee)
§ Drawer actually creates the instrument
§ Drawee – can be any third party
o Holder: 1-201(b)(21)(A) = The possessor of an Instrument that is
§ Payable to that Person
· Requirements:
· (1) Possession of the instrument plus another requirement
· (2) Bearer instrument – possession is all you need
· (3) Order instrument – “payable to the order of” and must be the person (in possession) indicated on the instrument as the intended payee
· (4) Intended payee:
– i. First person written on the instrument when it was created (pay to the order of John)
– ii.Negotiation – transfer of instrument to another person
– iii. Must indorse (sign back or sign back and indicate to whom is to be paid)
– iv. Then it’s a new instrument, need possession to be a holder, then specify as particular holder (payable, indorsed, bearer instrument)
§ Indorsed to that person OR
§ A bearer Instrument
Merger Doctrine
• Instrument IS the DEBT ITSELF, and not just an evidence of the debt.
o assignment of right to collect debt is only accomplished by transfer/negotiation of Instrument
o Holder of Instrument is one entitled to collect on debt (3-301)
o Obligor is discharged if pays the holder of the Instrument (3-601)
Negotiation: 3-201 – Voluntary or Involuntary transfer of possession that results in the transferee becoming a holder.
• So, for bearer instruments, transfer of possession IS also a Negotiation since person in possession of a bearer instrument is a holder
• For Order instruments, need transfer of possession and indorsement by the holder since only the identified person can be the holder of an order instrument
• An instrument can be changed from bearer to order and vice versa based on subs
. 3-305(a)(3)
• But still SUBJECT to Real Defenses. 3-305(a)(1)
• 3-305(a)(1)(iii) is a narrow and rare fraud- fraud in the factum
• Often occurs where ppl speak different languages
• John tells his mother that he is taking a college course on handwriting analysis, and for his homework he needs her to read and sign a pretend deed. If Mom signs the deed believing what he told her, and John tries to enforce the deed, Mom can plead “fraud in the factum.”
Good Faith- (1-201(b)(20))
• Honesty in fact (subjective, NOT reasonable person std)
• Historically only “pure heart and empty head” standard
• Now also must meet objective test:
o Observance of reasonable commercial standards of fairness
“Notice” of Defenses (1-202)
• Actual knowledge
• Received notice
o Comes to attention or notice reasonably delivered to place of business
• Has “reason to know” based on all facts and circumstances known to the person
3-302(g) – Other law can take categories of holders out of HDC status.
• Forgotten Notice:
o In December CJ induces Joe to sign a $1,000 promissory note payable to the order of CJ.
o In January Joe realizes he was defrauded by CJ and Joe gives notice to every local bank about the Note and his fraud defense. At the Acme Bank Joe spoke with Ted Teller.
o However, Ted forgot about his conversation with Joe and in March Acme Bank, acting thru Ted Teller, purchased the Note from CJ.
o Is Acme Bank a HDC?
