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Payment Systems
University of Nebraska School of Law
Wilson, Catherine Lee

Payment Systems

Cash & Credit Cards
A Currency
1 Money: 1-201(b)(24) provides that money means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries
2 Article I, Section 8 provides that the federal government has power to develop the currency for the nation
i Section 10 provides that the states are prohibited from coining money
3 Is US currency legal tender for all debts?
i According to the “Legal Tender Statute,” “United States coins and currency are legal tender for all debts, public charges, taxes, and dues”
© This means that all US money when tendered to a creditor legally satisfies a debt to the extent of the amount tendered3
© However, no federal law mandates that a person or an organization must accept currency or coins as payment for goods or services not yet provided
4 City of Portland v. Berry: Money Rule provides that a third party who takes stolen money in good faith and for valuable consideration obtains good title and prevails over the victim of the theft
i Policy: There is a necessity that money pass freely in commercial transactions
5 Cash – Primary Concerns
i Value is transferred by handing over money
ii An obligation to pay is incurred when there is a debt
iii The obligation may be enforced by whoever has the right to enforce the debt
iv The person who has the money bears the risk of theft/counterfeiting, etc.
B Credit Cards
1 Obligation to Pay
i Application of TILA and Reg Z
© Coverage: 226.1(c) provides that Reg Z applies to each individual or business that offers or extends credit when four conditions are met:
Þ (1) The credit is offered or extended to consumers
Þ (2) The offering or extension of credit is done regularly
Þ (3) The credit is subject to (a) a finance charge or (b) is payable by a written agreement in more than 4 installments
Þ (4) The credit is primarily for personal, family, or household purposes

à Exception – Credit Card: If a credit card is involved, however, certain provisions apply even if the credit is not subject to a finance charge, or is not payable by a written agreement in more than 4 installments, or if the credit card is to be used for business purposes
© Exempt Transactions: 104 and 226.3 provide that the TILA and Reg Z do not apply to the following: 

∞ Business, commercial, agricultural, or organizational credit
Þ An extension of credit primarily for a business, commercial or agricultural purpose
Þ An extension of credit to other than a natural person, including credit to government agencies or instrumentalities
∞ Credit over $25,000
© Summary: TILA and Reg Z only apply to consumer transactions for less than $25,000
ii Request Requirement
© TILA and Reg Z
∞ Request Required: 132 and 226.12(a) provide that no credit card shall be issued except in response to a request or application therefor
Þ Exceptions: Renewal or replacements
iii Disclosure Required: The card issuer must make written disclosures to the cardholder that summarizes applicable legal rules
2 Right to Refuse Payment: The cardholder can refuse to pay the card issuer and can assert any defense he has against the merchant against the card issuer if the following FOUR conditions are met
i 170 and 226.12(c) provide that if the merchant that took payment by charging the card has failed to perform in some manner, then the cardholder has the ability to assert rights against the card issuer if:
© (1) Good Faith Attempt: The cardholder has made a “good faith attempt” to resolve the situation with the merchant
© (2) Over $50: The amount in questions exceeds $50
© (3) State of Residence: The purchase occurred within the cardholder’s state of residence or within 100 miles of the cardholder’s state of residence
© (4) Not Paid Already: The cardholder has not already paid the card issuer
∞ General Process: The cardholder gets a bad product and the merchant refuses to fix it. The cardholder can assert his defense against the card issuer. The card issuer then passes the loss to the merchant’s bank. The merchant’s bank then passes the loss to the merchant and the merchant sues the cardholder
Þ Example: Tim lives in NYC and buys a bike with his CC for $500 from Brad. Brad’s bank credits Brad’s account and bills Tim’s bank. Tim’s bank pays Brad’s bank. Tim finds out the bike is broken. Tim’s bank issues Tim his bill and Tim tries in good faith to work things out with Brad but Brad does nothing. Tim then refuses to pay his bank. Tim’s bank removes funds from Brad’s bank and Brad’s bank removes funds from Brad and Brad then sues Tim
ii Exception to (2) and (3): 170(3)(E) provides the limitations set forth in (2) and (3) with respect to an obligor’s right to assert claims and defenses against a card issuer shall not be applicable to any transaction in which the person honoring the credit card has obtained the order for such transaction through a mail solicitation made by or participated in by the card issuer in which the cardholder is solicited to enter into such transaction by using the credit card issued by the card issuer
3 Errors and Wrongdoing
i Billing Errors
© 161(b) and 226.13(a) provide that a billing error means:
∞ (1) A reflection on or with a periodic statement of an extension of credit that is not made to the consumer or to a person who has actual, implied, or apparent authority to use the consumer’s credit card or open-end credit plan
Þ Billed for things not purchased
∞ (2) A reflection on or with a periodic statement of an extension of credit that is not identified in accordance with the requirement of 226.7(b) and 226.8
Þ Purchase not identified on periodic statement
∞ (3) A reflection on or with a periodic statement of an extension of credit for property or services not accepted by the consumer or the consumer’s designee, or not delivered to the consumer or the consumer’s designee as agreed
Þ Billed for things not received or not wanted
∞ (4) A reflection on a periodic statement of the creditor’s failure to credit properly a payment or other credit issued to the consumer’s account
Þ Failed to properly credit account
∞ (5) A reflection on a periodic statement of a computational or similar error of an accounting nature that is made by the creditor
Þ Computation error
∞ (6) A reflection on a periodic statement of an extension of credit for which the consumer requests additional clarification, including documentary evidence
∞ (7) The creditor’s failure to mail or deliver a periodic statement to the consumer’s last known address if that address was received by the creditor, in writing, at least 20 days before the end of the billing cycle for which the statement was required
© General Process: The cardholder has 60 days to notify the card issuer of a billing error and the card issuer must send written acknowledge of notice to the cardholder within 30 days and resolve error within two billing cycles
∞ Notice – 60 Days: 161(a) and 226.13(b)(1) provide that the cardholder must send written notice of a billing error to the card issuer within 60 days of when the card issuer sent the erroneous statement to the cardholder
∞ Acknowledgement – 30 Days: 161(a) and 226.13(c)(1) provide that the card issuer must send written acknowledgement of notice to the cardholder within 30 days of receipt of the cardholder’s notice
∞ Resolution – 90 Days: 161(a) and 226.13(c)(2) provide that the card issuer must resolve the claim within two billing cycles of receiving notice of the error (not more than 90 days)
Þ Deny Error: 161(a) and 226.13(c)(2) provide that if the card issuer denies error, then it must send written explanation within two billing cycles to the cardholder
Þ Reasonable Investigation: 161(a) and 226.13(f) provide that the card issuer must conduct a reasonable investigation before rejecting any claim
à Footnote 31 provides that if a consumer submits a billing error notice

address. What can Tim do?
© Billing Error: Clearly there is a billing error, but Tim has failed to give notice within 60 days. Tim is out of luck
∞ Unjust Enrichment: Tim can argue an unjust enrichment claim against the bank and the merchant that received the $40,000 instead of $40
Contract Liability
A Incurring the Obligation to Pay
1 Capacity
i Drawer – DRAFT: 3-103(a)(3) provides that drawer means a person who signs or is identified in a draft as a person ordering payment
© Contract Liability of a Drawer: 3-414(b) provides the drawer is obliged to pay the draft
∞ Exception – Without Recourse: 3-414(e) provides that if a draft states that it is drawn “without recourse” or otherwise disclaims liability of the drawer to pay the draft, the drawer is not liable under 3-414(b) to pay the draft if the draft is not a check. A disclaimer of the liability stated in 3-414(b) is not effective if the draft is a check
ii Maker – NOTE: 3-103(a)(5) provides that maker means a person who signs or is identified in a note as a person undertaking to pay
© 3-105 provides that a maker is an issuer of a note
© Contract Liability of a Maker: 3-412 provides that the issuer of a note or cashier’s check or other draft drawn on the drawer is obliged to pay the instrument
iii Acceptor: 3-103(a)(1) provides that an acceptor means a drawee who has accepted a draft
© Drawee: 3-103(a)(2) provides that drawee means a person ordered in a draft to make payment
© Acceptance of Draft: 3-409(a) provides that acceptance means the drawee’s signed agreement to pay a draft as presented. It must be written on the draft and may consist of the drawee’s signature alone. Acceptance may be made at any time and becomes effective when notification pursuant to instructions is given or the accepted draft is delivered for the purpose of giving rights on the acceptance to any person
© Unaccepted Draft: 3-408 provides that a check or other draft does not itself operate as an assignment of funds in the hands of the drawee available for its payment, and the drawee is not liable on the instrument until the drawee accepts it
© Contract Liability of an Acceptor: 3-413(a) provides that the acceptor of a draft is obliged to pay the draft
iv Indorser: 3-204(b) provides that indorser means a person who makes an indorsement
© Indorsement: 3-204(a) provides that indorsement means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of:
∞ (1) Negotiating the instrument
∞ (2) Restricting payment of the instrument, or
∞ (3) Incurring indorser’s liability on the instrument
∞ But regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement. For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument
© Contract Liability of an Indorser: 3-415(a) provides that an indorser is obliged to pay the amount due on the instrument