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Payment Systems
West Virginia University School of Law
Chincheck, Julia A.

Payment Systems
Chincheck
Spring 2010
 
 
Definitions
·         ARTICLE 3: Negotiable Instruments
·         ARTICLE 4: Bank Deposit
·         “/” = OR
·         “-“ = AND
·         Note is a written promise to pay money §3-104(e)
o   Promise—written undertaking to pay money—signed by the person who is undertaking to pay
§  2 party instrument
·         Maker—promises to pay
·         Payee—to whom payment is made
§  Acknowledgment of debt is NOT a promise to pay and is not a note
o   Maker—the person who signs or is identified in note as the person obligated to pay 3-103(a)(7)
o   Certificate of deposit—banks note that certain money has been received and the bank will repay that amount 3-104(j)
·         Draft is a written ORDER to pay money § 3-104(j)
o   Not a promise (that’s a Note)
o   3 party instrument
§  Drawer
§  Drawee
§  Someone to whom payment is to be made—payee or bearer
o   Check—most common example
·         Order—a written instruction to pay money, signed by the person giving the instruction
·         Drawer—person giving the instruction (person who signs it)
o   Use pay or please pay….but not I wish you would.
o   Instruction may be addressed to any person—including person giving—or to persons jointly or alternatively—BUT NOT in succession 3-103(a)(8)
·         Drawee – a person ordered in a draft to make payment
·         Acceptor—a drawee who has accepted a draft 3-103(a)(1)
·         Holder—a person in possession of the instrument payable to bearer or, in the case of an instrument payable to an identified person, the identified person § 1-201(20)
o   Must be in actual physical possession
§  If bearer paper, this is all that is required
§  If order paper, then only the named person will be a holder if in possession
·         This can be presented to someone else
·         Checks—draft, but not a documentary draft (requires presentment of papers to be honored) payable on demand and drawn on a bank—may be a check even though it is given another name (i.e. money order) §3-104(f)
o   Do not need to have “to the order of” on the check 3-104(c)
·         Cashiers Checks—draft in which the drawer and the drawee are in the same bank
·         Tellers check—draft drawn by a bank on another bank payable at or through another bank 3-104(h)
·         Travelers check—instrument payable on demand drawn on or payable through a bank and requires as a condition the counter signature by the person whose signature already appears on the check
o   Always a draft
o   Not always a check
·         Remitter—a person who purchases an instrument from its issuer if its…3-103(a)(15)
·         Signed—See §1-201(39) or  §1R-201(b)(37)
·         Unauthorized—a signature made without actual, implied, or apparent authority—including forgery
o   §1-201(43) or § 1R-201(b)(41)
·         Claim for Recoupment—∆ may use to lessen, if not totally do away with, its obligation to pay what is due on the instrument
 
What is a Negotiable Instrument?
·         Must be in writing, must be signed, and must contain either a promise or order.
·         § 3-103(a):
·         “Promise” means a written undertaking to pay money signed by the party undertaking to pay
o   An acknowledgement of an obligation by the obligor is not to promise unless the obligor also undertakes to pay the obligation
·         “Order” means a written instruction to pay money signed by the person giving the instruction. . . . An authorization to pay is not an order unless the person authorized to pay is also instructed to pay
·         § 3-104: “Negotiable instrument” means an unconditional promise or order to pay a fixed amount
o   Must be payable to bearer or to order
o   Must be payable on demand or at a definite time
o   May not state any other undertaking or instruction by the person promising ordering payment to do any act in addition to the payment of money
§  Only narrow exceptions
o   NOTE: life cycle of instrument typically ends with presentment by party seeking to enforce the promise or order it contains back to party who in the normal course of events is expected to pay
§  Maker in case of a note
§  Drawer in case of a draft
·         § 3-106: Unconditional Promise or Order
o   (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,
§  (ii) that the promise or order is subject to or governed by another record, or
§  (iii) that rights or obligations with respect to the promise or order are stated in another record. 
§  Reference to another record does not of itself make the promise or order conditional
o   (b)  A promise or order is not made conditional
§  (i) by a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration, or
§  (ii) because payment is limited to resort to a particular fund or source.
o   (c)  If a promise or order requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the promise or order, the condition does not make the promise or order conditional for the purposes of Section 3-104(a).  If the person whose specimen signature appears on an instrument fails to countersign the instrument, the failure to countersign is a defense to the obligation of the issuer, but the failure does not prevent a transferee of the instrument from becoming a holder of the instrument.
o   (d)  If a promise or order at the time it is issued or first comes into possession of a holder contains a statement, required by applicable statutory or administrative law, to the effect that the rights of a holder or transferee are subject to claims or defenses that the issuer could assert against the original payee, the promise or order is not thereby made conditional for the purposes of § 3-104(a); but if the promise/order is an instrument, there cannot be a HDC of the instrument.
·         § 3-112: Interest
o   (a)  Unless otherwise provided in the instrument, (i) an instrument is not payable with interest, and (ii) interest on an interest-bearing instrument is payable from the date of the instrument.
o   (b)  Interest may be stated in an instrument as a fixed or variable amount of money or it may be expressed as a fixed or variable rate or rates.  The amount or rate of interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument.  If an instrument provides for interest, but the amount of interest payable cannot be ascertained from the description, interest is payable at the judgment rate in effect at the place of payment of the instrument and at the time interest first accrues.
·         § 3-115: Incomplete Instrument
o   (a)  “Incomplete instrument” means a signed writing, whether or not issued by the signer, the contents of which show at the time of signing that it is incomplete but that the signer intended it to be completed by the addition of words or numbers.
o   (b)  Subject to subsection (c), if an incomplete instrument is an instrument under Section 3-104, it may be enforced according to its terms if it is not completed, or according to its terms as augmented by completion.  If an incomplete instrument is not an instrument under Section 3-104, but, after completion, the requirements of Section 3-104 are met, the instrument may be enforced according to its terms as augmented by completion.
o   (c)  If words or numbers are added to an incomplete instrument without authority of the signer, there is an alteration of the incomplete instrument under Section 3-407.
o   (d)  The burden of establishing that words or numbers were added to an incomplete instrument without authority of the signer is on the person asserting the lack of authority.
 
Principles of Negotiation and Becoming a Holder
·         § 3-105(a): “Issue” means the first delivery of an instrument by the maker or the drawer whether to a holder or nonholder, for the purpose of giving rights on the instrument to any person
·         § 3-201(a): “Negotiation” is a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes a holder
·         § 3-201(b): “Negotiation—How” if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder
o   If an instrument is payable to bearer, it may be negotiated by transfer of possession alone
·         § 3-203(a): “Transfer” an instrument is transferred when It is delivered by a person other than its issuer for the purpose of giving the person receiving delivery the right to enforce the instrument
·         § 3-204(a): “Indorsement” requires signature of the indorser on the instrument itself and the signature must be made a set of purposes, most common to make the instrument negotiable
·         § 3-205(a): “Special Indorsement” identifies a person to whom it makes the instrument payable. When specially

on that cannot be found or is not amenable to service of process.
·         § 3-408: Drawee Not Liable on Unaccepted Draft
o   A check or other draft does not of 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.
·         § 3-409(a): Acceptance of Draft; Certified Check
o   “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.
·         § 3-412: Obligation of Issuer of Note or Cashier’s Check
o   Obliged to pay the instrument
§  (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or
§  (ii) if the issuer signed an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. 
§  The obligation is owed to a person entitled to enforce the instrument or to an indorser who paid the instrument under Section 3-415.
·         § 3-413: Obligation of Acceptor
o   (a)  The acceptor of a draft is obliged to pay the draft
§  (i) according to its terms at the time it was accepted, even though the acceptance states that the draft is payable “as originally drawn” or equivalent terms,
§  (ii) if the acceptance varies the terms of the draft, according to the terms of the draft as varied, or
§  (iii) if the acceptance is of a draft that is an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. 
§  The obligation is owed to a person entitled to enforce the draft or to the drawer or an indorser who paid the draft under Section 3-414 or 3-415.
o   (b)  If the certification of a check or other acceptance of a draft states the amount certified or accepted, the obligation of the acceptor is that amount.  If (i) the certification or acceptance does not state an amount, (ii) the amount of the instrument is subsequently raised, and (iii) the instrument is then negotiated to a holder in due course, the obligation of the acceptor is the amount of the instrument at the time it was taken by the holder in due course.
·         § 3-414: Obligation of Drawer
o   (a)  This section does not apply to cashier's checks or other drafts drawn on the drawer.
o   (b)  If an unaccepted draft is dishonored, the drawer is obliged to pay the draft
§  (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or
§  (ii) if the drawer signed an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. 
§  The obligation is owed to a person entitled to enforce the draft or to an indorser who paid the draft under Section 3-415.
o   (c)  If a draft is accepted by a bank, the drawer is discharged, regardless of when or by whom acceptance was obtained.
o   (d)  If a draft is accepted and the acceptor is not a bank, the obligation of the drawer to pay the draft if the draft is dishonored by the acceptor is the same as the obligation of an indorser under Section 3-415(a) and (c).
o   (e)  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 subsection (b) to pay the draft if the draft is not a check.