Commercial Transactions
Prof. J.J. White
Fall 2010
Payment Systems: Basic Liability
I. Basic Vocabulary
a. Promissory Note – 2 parties:This is an instrument in which one party, (1) the maker (person who issues it and promises to pay), promises to pay another party, (2) the payee (person to whom the note is made payable)
b. Drafts (checks) – 3 parties:This is an instrument whereby one party, (1) the drawer (person who creates the draft & orders the drawee to pay), orders a second party, (2) the drawee (person to whom the drawer addresses in order of payment) or payor bank, to pay a third party, (3) the payee (person entitled to payment)
II. Type of Commercial Paper: Checks and Notes
a. Drafts—UCC 3-104(e):a written order by one person (drawer) to another directing the latter (drawee) to pay money to a third person (the payee)
i. Checks—U CC 3-104(f): A check is a draft, other than a documentary draft, payable on demand and drawn on a bank or a cashiers check or teller’s check.
1. Types of Checks
a. Certified Check: (§3-409(d)) means a check accepted by the bank on which it is drawn. This allows “pre-acceptance” by the bank.
i. Bank is primarily liable because it puts credit behind it and the drawer is discharged.
b. Cashier’s Check: (§3-104(g)) This is a check drawn on the bank itself. Bank is both the drawer and the drawee. Bank is Still liable.
c. Teller’s Check: (§3-104(h)) This is also a check drawn on the bank itself. However, the draft is drawn by one bank (i) on another bank, or (ii) payable at or through a bank (i.e. the drawer & drawee banks are different).
d. Travelers Check (3-104(i)): An instrument that (i) is payable on demand, (ii) is drawn on or payable at or through a bank, (iii) is designated by the term “traveler’s check” or by a substantially similar term, and (iv) requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument.
i. Notes: Commonly treated as the equivalent to cash and should be covered by Art. 3.
1. This is a negotiable instrument because even though it requires a coutnersignature, that does not make it conditional for purpose of 3-104(a).
ii. Note: Signed by buyer but thief forges Signature= UCC § 3-106(c).
ii. Note
1. Money Orders: can be a chcek
a. If the person signs it, it can operate as a check (only if it is drawn on a check)
b. If the bank signs it, it might operate as a cashier’s check.
2. Trade Acceptance: Prof says it is a Draft and Buyer=Drawee, and gets an acceptors liability (UCC 3-409)
3. Share Draft: Written on a Credit Union and Payable Through a Bank (“Checks issued by credit unions”)
4. General Notes about DDs: Most of them have the characteristics of a note or a check, but not necessarily one.
b. Promissory Notes—UCC 3-104(e): A promissory note is a one which one party (the maker) makes a written promise to pay money to a designated party (“the payee”).
i. Promise is an undertaking to pay , therefore must be more than a mere acknowledgement of an obligation 3-103(a)(9) (i.e.An “IOU” isn’t a promise to pay but a mere recognition that the debt exists – so it can’t be promissory note)
III. Forms of Negotiable Instruments
a. Payable to Bearer or Order—UCC 3-104(c): To be negotiable, an instrument must be payable to bearer or order, unless it is check that satisfies all the other requirements of a negotiable instrument
i. Payable to Bearer:An instrument is payable to bearer if it (1) states that it is payable to bearer, (2) does not state a payee, (3) states it is payable to cash, or (4) otherwise states it is not payable to an indentified person
1. Note: if an instrument contains both bearer and order language, the bearer language controls.
ii. Payable to Order:An instrument is payable to order if it is payable to an identified person.
IV. Difference Between Checks and Notes
a. The maker (the primary obligor on a note) is said to be primarily liable because he must pay the sum due without the holder presenting it first to another party.
b. However, with a check, the drawer is said to only be “secondarily” liable because the draft typically must be presented to payor and dishonored before drawer liability arises.
Liability For Notes and Checks
I. Signature
a. By Person—UCC 3-401(a): A person isn’t liable on an instrument unless (ii) the person or his agent signed the instrument & if the agent signed it, the signature is binding on the agent under 3-402
b. By Agent—UCC 3-402
i. Signature by Agent, Principle Bound—UCC 3-402(a): When a representative or purported representative signs either her name or the name of the represented persons name, the represented person is liable on the instrument, and the signature is an “authorized signature of the represented person.”
ii. Signature by Agent, Agent May be Bound—UCC 3-402(b)(1): If the agent signs his name, instead of the represented person’s name, then the is liable unless (1) the form of the signature shows that is unambiguously on behalf of the represented person, and, (2) the represented person is identified in the instrument.
iii. Signature by Agent, Agent may be Bound to HDC—UCC 3-402(b)(2): If either of the above requirements aren’t met, the agent will be liable to a HIDC who took the instrument without notice that the agent wasn’t intended to be liable on the instrument. However, With respect to any other person (other than HIDC) the rep is liable on the instrument unless he proves that the parties didn’t intend for the rep to be liable on the instrument
iv. Exception for checks—UCC 3-402(c): If a rep signs his name as drawer w/o identifying his rep capacity & the check is payable from an account of the represented person , who is identified on the check the signer is not liable on the check if the signature is authorized.
a. Note: This states that if the check identifies the represented person (I.e. name is on the check), then the agent who signs it is not liable.
c. Unauthorized Signature—UCC 3-403:An unauthorized signature is ineffective against the person whose name is signed, however, it is effective to impose liability on the signer or to transfer any right that the signer may have in the instrument.
i. Note: This is limited to those who take or pay for the instrument in good faith (i.e. one who knows the instrument is unauthorized cannot recover from the signer.)
d. Incomplete Instrument that is Later Completed—UCC 3-115: An incomplete instrument that is later completed is enforceable if the signer gives that authority to complete it.
i. If the signer does not give the authority of someone to complete the instrument, then the signer has the burden of proof to prove that he did not give the authority and that an alteration was made.
II. Person Entitled to Enforce Entitled to Enforce Instrument “PETE”—UCC 3-301: A PETE means
a. The holder of the instrument
i. Holder—UCC 1-201(21)(A):”A holder is a person who is (1) in possession of (2) a negotiable instrument (3) that is payable to bearer or payable (indorsed or issued) to him (i.e transfer by negotiation—see below at HDC).
b. A non-holder in possession of the instrument who has the rights of a holder or
i. Non-Holder In Possession (Transferee)—UCC 3-203 (b): A Transfer of an instrument, whether or not by negotiation, vests any right of the transferor, including a Holder in Due Course, in the transferee. (But here, the PETE must pro
check to MC to pay cc. Check is lost for 3 yrs, once found its presented to drawee for payment. As long as J’s bank (drawee) is solvent , J remains liable on this drawers K.
II. Drawee’s Liability
a. Generally—UCC § 3-408: A drawee has no contractual liability (obligation to pay) merely by being named as the drawee by a drawer and There is no liability on a drawee (bank) to payee until it accepts (See 4-401(a)) and once it accepts, it is becomes liable as acceptor.
i. Liability to Drawer—UCC 4-402: The drawer’s liability, if any, for wrongfully dishonoring the check (refusing to pay when it should have) runs only to the drawer and must be based upon some contract between the drawer and the drawee
b. Acceptance—UCC 3-409: Acceptance is a promise by the drawee to pay the instrument when it becomes due and payment is demanded.
i. How to Accept—UCC 3-409(a): Acceptance May be written on the draft and consist only of the drawee signature AND may be made at anytime and is effective when notification pursuant to instructions is given (i.e delivered) .
ii. Draft—UCC 3-409(b): A draft may be accepted although it has not been signed by the drawer.
iii. Certification of Checks—UCC 3-409(d):The most common form of acceptance is certification. (note: certified check is a check accepted by the bank on which its drawn
1. Acceptance –UCC 3-409(a) &(d)drawee signed agreement to pay draft as presented or by writing on the check indicating that is certified AND The drawee of a check has no obligation to certify the check & refusal to certify it is not dishonor of the check
a. Note—UCC 3-409 cmt. 4: A check is a demand instrument calling for payment and not acceptance, thus, the bank has no obligation to certifiy, the bank, however, may be liable for a breach of a K with the drawer, holder, or any other person, but its liability is not on the instrument since there is no liability until it accepts.
c. Obligation of an Acceptor of a Draft—UCC § 3-413: The acceptor of a draft (i.e. drawee) is obligated to pay the draft . . . to a person entitled to enforce the instrument or to an indorser under 3-414 or 3-415. (i.e. the acceptor has the same liability as a maker of a note(primary)—He promises to pay the instrument according to its terms at the time of acceptance.)
Liability on Promissory Notes
I. Liability of Maker of Promissory Notes or Cashiers Check § 3-412: The issuer of a note, cashier’s check, or other draft drawn on the drawer is obliged to pay a person entitled to enforce the instrument or to an indorser who paid the instrument under UCC § 3-415
a. Primary Liability: The maker of the note must pay the amount promised when the instrument becomes due, unless the person has a defense.
i. Payable AT a Bank: If the note is made payable at a bank, then the note is the equivalent of a draft dawn on that bank. In other words, the “maker” becomes the “drawer” of the draft and his liability is that of drawers.
