Payment Systems
Prof. Walthall – Spring 2009
Overview of the Uniform Commercial Code
In the 19th century, federal courts sitting in diversity applied federal common law or “rules of decision.” This was important in commercial cases because it provided a uniform law, and big companies could draft instruments knowing what the federal common law was. Then, in 1938, the Supreme Court decided Erie Railroad v. Tompkins, holding that a federal court sitting in diversity must apply the law of the state in which the forum is located. This created anxiety for big business because when conducting business with a person/business in another state it would have to determine the law of that state and draft accordingly.
This created the need for commercial law that would be the same throughout the country. First, there was the Uniform Sales Act. Then, after WWII, The National Conference of Commission on Uniform State Laws and the American Law Institute got together, and by about 1952 there was the Uniform Commercial Code.
· Article I: General Provisions – Definitions
· Article II: Contracts/Sale of Goods
· Article III: Negotiable Instruments – Notes and Drafts (e.g., checks)
· Article IV: Bank Deposits and Collections
· Article IVA: Funds Transfers – Process by which banks, on a day to day basis, directly or through the Federal Reserve, transfer money pursuant to transactions
· Article V: Letters of Credit – Buyer purchases a Letter of Credit from a local bank payable to a seller, and the bank sends the letter of credit to an affiliate bank. The affiliate bank fill charge the account when it is shown documentation that the seller has shipped the goods. When transactions are domestic, generally checks are used instead. Letters of Credit are also used domestically to guarantee documents.
· Article VI: REPEALED
· Article VII: Documents of Title – Evidence of the right to the underlying good
· Article VIII: Investment Securities – Traditionally, investment securities were represented by stock or bond certificates. Now, an investor receives a monthly printout, and if the investor wants to sell he calls a broker. The account with the broker constitutes the investment security, but there are also other forms.
· Article IX: Secured Transactions – Security Interests in Personal Property; to allow merchants/sellers to finance transactions
Article 3 Negotiable Instruments
Chapter 1: The Formal Requisites of Negotiability
Negotiable instruments are governed by state law and the Uniform Commercial Code.
1. Negotiable Instruments are writings that have certain characteristics
2. Drafts and notes are the two big categories of negotiable instruments.
a. Drafts are orders to pay:
i. A check is a type of draft. Some examples:
b. Notes are promises to pay
Types of Negotiable Instruments
I. Promissory Notes
Note: (two-party instrument) A note is a promise by one party (called the maker) to pay another party (called the payee) a sum of money. The usually purpose of a note is to evidence a debt. The primary function is credit, rather than payment.
Lender Borrower
promise to pay
Note
Payee Maker
Once the note is delivered,
the Payee becomes the Holder
II. Drafts (e.g., Check)
Draft: A draft is a three-party instrument by which a person called a drawer (who typically signs the draft in the lower right-hand corner) orders a person called the drawee (the person named in the draft to whom the draft is directed) to pay the payee.
Checks: A check is a draft drawn on a bank, and is payable on demand. All checks are drafts.
Compass Bank (Drawee) Date
Pay to the Order of: ________(Payee)__________ $$$$
/s/ (Drawer)
Think: When the instrument is executed, what is happening.
A promissory note is a Push Instrument – Money is pushed from Maker to Payee
A draft is a Pull Instrument – When Drawer issues the check, he is ordering the bank to pull the money out of an account.
Negotiable Instruments are defined in §3-104.
UCC Article 3 applies to writings that are negotiable instruments. The statute governs nothing else. Therefore, nothing in Article 3 applies to any writing unless the writing is negotiable within the meaning of Article 3 itself. Negotiability is determined solely by reference to the four corners of the instrument.
§3-102. Subject Matter
(a) This Article applies to negotiable instruments. It does not apply to money, to payment orders governed by Article 4A, or to securities governed by Article 8.
However, the inapplicability of Article 3 would not mean that the writing is unenforceable. It would mean that the legal consequences of the writing are determined by other law, not Article 3
A. Formal Requisites of Negotiability
A negotiable instrument exists if the writing contains EVERY one of the following requirements:
§3-104 Negotiable Instruments
(a) Except as provided in subsection (c) and (d), “negotiable instrument” means 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, if it:
(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
(2) is payable on demand or at a definite time; and
(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.
If there is a negotiable instrument, a special statute of limitations applies.
Statute of Limitations – §3-118 – applies when the instrument is within the scope of Article 3.
(a) Except as provided in subsection (e), an action to enforce an obligation of a party to pay a note payable at a definite time must be commenced within six years after the due date or dates stated in the note or, if a due date is accelerated, with six years after the accelerated date.
ined
· Look for ambiguity for each requirement – analyze each separately!!!
1. Promise or Order 3-103(a) (8), (12)
Promise: is found in a NOTE: (two-party instrument)
§3-103(12): “Promise” means a written undertaking to pay money signed by the person undertaking to pay. An acknowledgement of an obligation by the obligor is not a promise unless the obligor also undertakes to pay the obligation.
Order: is found in a DRAFT(e.g., check) and is an instrument to someone to pay money
§3-103(8): “Order” means a written instruction to pay money signed by the person giving the instruction. The instruction may be addressed to any person, including the person giving the instruction, or to one or more persons jointly or in the alternative but not in succession. An authorization to pay is not an under unless the person authorized to pay is also instructed to pay.
a. Written: 1-201(b)(43) Includes printing, typewriting, or any other intentional reduction to tangible form. “Written” has a corresponding meaning.
b. Signed : 1-201(b)(37) Includes using any symbol executed or adopted with present intention to adopt or accept a writing.
2. Unconditional: § 3-106
§3-106. Unconditional Promise or Order
(a) Except as provided in this section, for the purposes of Section 3-104(a), a promise or order is unconditional unless it states:
i. An express condition to payment (see OC 2)
Express Condition: “I promise to pay $100,000 to the order of John Doe if the conveys title to Blackacre to me.” à Conditional, destroys negotiability
Implied Condition: “In consideration of John Doe’s promise to convey title to Blackacre I promise to pay $100,000 to the order of John Doe.”
à Unconditional
ii. That the promise or order is subject to or governed by another record, or
“Subject to” or “Governed by” = Conditional
This is trueeven if the other document doesn’t place conditions on the promise. If the “subject to” or “governed by” would make you look at the other writing, then that in itself constitutes conditionality and destroys
