Statutes and Regulations 1
CHAPTER 1．INTRODUCTION(TO THE SUBJECT AND THE LAW) 1
Section 1
1．Meaning And Importance Of Commercial Paper 1
2．Early Law Of Commercial Paper 5
3．Uniform Negotiable Instruments Law 7
4．Uniform Commercial Code 7
A．The Scope Of U．C．C．Article 3 10
1．Negotiable Instruments 10
2．Exclusions 11
B．Functional Overlap Among Articles Of The Code 13
5．Supplemental Role Of Federal Law 15
6．International Law 16
CHAPTER 2．OVERVIEW OF INSTRUMENTS 17
Section 17
1．Nature Of Instruments 17
A．Instrument As A Kind Of Contract 17
B．Instrument AsA Form Of Property 19
2．Forms And Parties To Instruments 22
A．Promissory Note 22
B．Certificate Of Deposit 23
C．Draft 24
D．Check 25
3．Uses OfInstruments 27
A．Promissory Notes 27
1．Means Of Borrowing Money 27
2．Means Of Buying On Credit 30
3．Means Of Evidencing Pre-Existing Debt 31
B．Certificates Of Deposit 31
C．Drafts 31
1．Means Of Collecting Accounts 32
2．Means Of Financing The Movement Of Goods 33
D．Checks 36
CHAPTER 3．THE MEANING OF INSTRUMENT:ARTICLE 3's REQUISITES OF NEGOTIABILITY 39
Section 39
1．Instrument Defined InTems Of Negotiability 39
2．The Nine Requisites Of Negotiability 39
A．Writing 42
B．Signed By Maker Or Drawer 43
C．Promise Or Order 44
1．Promise 45
2．Order 46
a．Drawer Named as Drawee 47
b．Multiple Drawees 48
D．Unconditional 48
1．Terms Of Instrument Determine Presence Of Condition 49
2．Effect Of Another Agreement 50
3．Referring To Another Agreement 52
4．Implied Conditions Not Recognized,Only Express 53
5．Express Conditions That Are Permitted 55
6．Reference To Account Or Fund 56
E．Money 57
F．Fixed Amount 57
G．Payable On Demand Or At A Definite Time 60
1．On Demand 60
2．At A Definite Time 61
a．Acceleration Clauses 62
b．Extension Clauses 63
3．At A Definite Time And On Demand 64
H．Payable To Order Or To Bearer (Words Of Negotiability) 64
1．Payable To Order 66
2．Payable To Bearer 69
3．When The Instrument Must Be So Payable 71
1．No Other Undertaking Or Instruction 72
3．Negotiability(Or Not)By Declaration 74
4．Instrument Lacking Words Of Negotiability 76
5．Incomplete Instruments 76
6．DatesAnd Places 78
A．Date Of Instrument 78
B．Place Of Payment 80
CHAPTER4．CONTRACT LIABILITY ON INSTRUMENTS 81
Section 81
1．Signature Creates Liability 81
A．Mechanics Of Signature 81
B．Means Of Signature:By An Agent Or Representative 82
1．Principal's Liability 82
2．Agent's Liability 83
a．Authorized Agent 83
b．Unauthorized Agent 84
C．Forgeries 85
1．Ratification 86
2．Culpability Or Fault 86
2．Nature Or Conditions Of Liability As Determined By Capacity Of Signer 90
A．Determining Capacity In Which Person Signed 90
B．Capacity And Contract Of Liability 93
1．Maker 94
2．Drawer 95
3．Drawee 97
4．Acceptor 99
5．Indorser 103
3．Liability On Special Instruments 105
A．Drafts Drawn On The Drawer 105
B．Cashier's,Teller's And Certified Checks 105
C．Money Orders 109
D．Travelers Checks 111
4．Liability Of Joint Obligors 112
A．Liability To Others 112
B．Liability Between Themselves 113
5．How Taking An Instrument Affects The Underlying Obligation 113
A．Underlying Obligation Usually Suspended 113
1．Typical Case 113
2．When Person Entitled ToEnforce The Instrument Is Not The Original Obligee 116
B．When Taking An Instrument Discharges The Obligation 120
1．Agreement 120
2．Bank Instruments 121
C．Accord And Satisfaction 122
CHAPTER 5．CONDITIONS OF SECONDARY LIABILITY 125
Section 126
1．Effect Of Failing To Satisfy The Conditions 126
A．Indorsers 126
B．Drawers 129
C．Drawees 132
D．Makers And Acceptors 133
2．Defining The Conditions And The Mechanics Of Satisfying Them 133
A．Dishonor 133
1．How Dishonor Occurs 134
a．Notes 134
b．Drafts 135
c．Checks 137
2．Payor's Response That Is Dishonor 141
3．Evidence Of Dishonor 143
B．Presentment 144
1．The Substance Or Nature Of The Presentment Must Be Appropriate 144
2．The Appropriate Procedures Must Be Followed 145
a．By and To Whom 145
b．How and Where 146
c．Time of Presentment 148
3．Notice Of Dishonor 149
a．Method of Giving Notice 149
b．Content of Notice 150
c．Persons Giving Notice 150
d．Sequence in Which Notice May Be Given 151
e．Time Allowed For Giving Notice 152
3．Excuse Of Conditions Or Delay 153
CHAPTER 6．DISCHARGE OF LIABILITY ON INSTRUMENTS 157
Section 157
1．Meaning And Modes Of Discharge 157
2．Payment Of The Instrument 158
A．Requirements Of The Discharge 158
B．Third-Party Claims 160
C．Distinguishing Payment Of The Underlying Obligation 162
3．Tender Of Payment 164
4．Fraudulent Alteration 165
A．Meaning Of Alteration 165
B．Rule Of Discharge 165
C．Effect On Holder In Due Course 165
5．Cancellation Or Renunciation 166
6．Discharge By Agreement Or Other Act 166
7．Article 3 Discharge As A Defense Against Holder In Due Course 167
CHAPTER7．INSTRUM ENTS AS PROPERTY:ENFORCEMENT,TRANSFER AND NEGOTIATION 169
Section 169
1．Main Property Aspects Of Instruments 169
2．The Relationship Of Title And The Right To Enforce An Instrument:Overview Of Transfer,Negotiation,And Holder Status 171
3．Enforcement 176
A．Persons Entitled To Enforce 176
1．Holder 177
2．Nonholder In Possession With Holder's Rights 177
3．Nonholder Without Possession In Exceptional Cases 179
a．Lost,Destroyed or Stolen Instruments 180
b．Instruments Paid by Mistake 181
4．Indorsers 182
B．Procedures Of Enforcement 188
1．Plaintiff's Prima Facie Case 188
2．Establishing That Signature Binds Defendant 188
3．Proving Plaintiff's Entitlement To Enforce 190
4．Producing The Instrument 190
5．Defenses 191
6．Using Extrinsic Evidence To Vary Liability From The Terms Of An Instrument 191
a．Interpretation:The Rule That Reads Writings Together 191
b．Scope:The ParoI Evidence Rule 192
ⅰ．Limitations on Operation of the Rule 194
ⅱ．Conditional Delivery and the Rule:Conditions Precedent and Conditions Subsequent 196
ⅲ．Understanding Signer Is Not To Be Bound 199
C．Liability Over 201
D．Statutes Of Limitations 202
4．Issuance—The Usual Way The First Holder Becomes Such 203
5．Negotiation—Becoming A Holder Other Than By Issuance 207
A．Introduction And Basic Rules:Possession Always And Indorsement Sometimes 207
B．The Common Requirement:"Transfer Of Possession" 209
C．Indorsements 210
1．How An Instrument Becomes Payable To An Identified Person Or Bearer And How It Is Negotiated 210
a．Originally—Drawn or Made Payable To Order or To Bearer 210
b．Thereafter—Blank or Special Indorsement 211
c．The Grand Importance Of No Missing Indorsements 213
2．Determining Who Is The Identified Person—Who Can Properly Indorse 216
3．Place Of Indorsement On The Instrument 217
4．Exceptional Cases In Which Missing Indorsement Is Excused 217
a．Reacquisition 217
b．Checks Deposited For Collection 218
c．Impostors and Fictitious Payees,3-404 219
d．Employee Fraud,3-405 230
ⅰ．Preface,History,and Relation to 3-404 230
ⅱ．How 3-405 Works 231
ⅲ．Key Terms 233
5．Incomplete Negotiation:The Effect Of A Missing I ndorsement When The Transferee Is Entitled To The Indorsement 236
6．Negotiation By Multiple Payees 237
7．Negotiation When Name Is Misspelled Or Misstated 238
8．Effect Of Attempt To Negotiate Less Than Balance Due 239
9．Effect Of Negotiation That May Be Rescinded 239
6．Restrictive Indorsements 240
A．Collection Indorsements 241
B．Trust Indorsements 249
C．Indorsements With Ineffective Restrictions 249
1．Indorsements Purporting To Prohibit Further Transfer 249
2．Conditional Indorsements 250
CHAPTER 8．WARRANTY AND RESTITUTION:INSURING ENFORCEABILITY FOR TRANSFEREE AND PAYEE 253
Section 255
1．Sources Of Law For Warranties 255
2．Transfer Warranties 256
A．Warranty Of Entitlement To Enforce 259
B．Warranty Of Authentic Signatures 261
C．Warranty Against Material Alteration 261
D．Warranty Against Defenses 262
E．Warranty Against Knowledge Of Insolvency Proceedings 263
F．Article 4's Additional Warranty Of Absolute Liability 264
G．Holder In Due Course As Transferee Or Transferor 266
3．Payment,Finality,And The Limits Of Restitution Law—The Need For Presentment Warranties 267
4．Presentment Warranties 270
A．How And Why The Presentment Warranties Vary 273
B．Presentment Warranties In The Case Of A Drawee Of An Unaccepted Draft 275
C．All Other Cases 278
D．Restitution Refrain 279
E．Shifting Liability Farther Upstream—Connecting To The Transfer Warranties And Contract Liability 280
5．Remedying Breach Of Warranty 282
A．Measure Of Compensatory Damages 282
1．General Rule For All Cases 282
2．Special Rules In The Case Of A Drawee Who Pays An Unaccepted Draft 283
B．Incidental Damages 284
C．Some Procedural Concerns 285
6．Electronic Banking:Encoding And Retention Warranties 285
CHAPTER 9．CLAIMS AND DEFENSES TO INSTRUMENTS 289
Section 293
1．Real Defenses 293
A．Infancy 294
B．Duress 294
C．Lack Of Legal Capacity(Incapacity) 295
D．Illegality 295
E．Fraud 296
F．Discharge In Insolvency Proceedings 298
G．Other Defenses Good Against Everybody 299
1．Forgery 299
2．Alteration 299
3．Discharge Of Which There Is Notice 299
4．Subsequent Claims And Defenses 300
5．Claims And Defenses Chargeable To The Holder 301
2．Ordinary Or Personal Defenses 301
A．Article 3 Defenses 302
B．Discharge—The Not-A-Defense Defense 303
C．Accommodation Parties,Indorsers,And Their"Suretyship Defenses" 304
1．Role And Liability Of Accommodation Party 304
2．Rights Of Accommodation Party Against Principal Debtor 307
3．Derivative Defenses Available To Accommodation Party 309
4．Discharge Based On Status As Accommodation Party Or Ordinary Indorser—"Suretyship Defenses" 311
a．The Nature ofthe Defenses 311
b．Notice of the Accommodation Required 317
c．Holder in Due Course Protected 318
5．The Reality Of Defenses For Accommodation Parties And Other Sureties—"Hell Or High Water" Guaranties 318
D．Defenses Of Contract Law 319
1．Range Of Defenses,Especially Including Problems Of Consideration 320
2．Caveat:Defense Must Be Chargeable To Plaintiff 322
3．Recoupment(Defensive Counterclaims) 324
4．Claims(Property Interests) 327
CHAPTER 10．HOLDER IN DUE COURSE 331
Section 331
1．Requirements Of Due-Course Status 331
A．For Value 333
1．Executory Promise Normally Not Value 334
2．Taking Instrument As Payment Or Security For Debt(Including Antecedent Debt) 337
3．Bank Credit As Value 339
B．Without Notice 343
1．Overdue,Dishonored,Or Uncured Default 345
2．Unauthorized Signature Or Alteration 349
3．Claim To The Instrument 350
4．Defense Or Claim In Recoupment 354
C．Authenticity Of The Instrument 356
D．Good Faith 358
E．Apart From Certain Unusual Circumstances 361
2．Payee As Holder In Due Course 363
3．Equivalent Rights To Holder In Due Course 366
A．Taking Through Holder In Due Course—The Shelter Principle 366
B．Estoppel 367
C．Contractual Waiver Of Claims And Defenses 368
D．Direct Financing 370
E．Federal Immunity 371
4．Restrictions On Status And Rights In Consumer Transactions 376
A．The Courts 377
1．Lack Of Good Faith 378
2．Unity Of Dealer And Financial Institution 379
3．Supporting Arguments 380
B．The Legislatures:Uniform Consumer Credit Code 381
C．Federal Trade Commission 384
CHAPTER 11．THE CHECK COLLECTION PROCESS:FINAL PAYMENT AND"RIGHTFUL DISHONOR" 387
Section 387
1．The Form And Function Of Checks 387
A．Introduction;Sources Of Law 387
1．Sources Of Law 387
2．Power To Vary Law By Agreement 388
3．The Hierarchy Of Law 389
B．What Is A Check? 389
1．Article 3 389
2．Regulation CC 391
C．Function Of A Check 391
D．Effect Of Issue 393
1．Between The Parties 393
2．Obligations Of Payor Bank;Rights Of Payee 394
E．Banks 395
1．Uniform Commercial Code 395
2．Regulation CC 397
2．Presenting The Check For Payment:Payor BankAs SoleBank 398
A．Presentment Over The Counter 398
1．Payor Bank Must Pay Or Dishonor 398
a．Time 399
b．Verification of Payee 400
c．Availability of Funds in Drawer's Account 400
2．Dishonor Or Payment? 401
a．Dishonor 401
b．Payment 401
B．"On Us"Checks:Payor Bank As Depositary Bank 403
1．When Payor Bank Must Pay Or Dishonor 403
a．Accounts in Same Branch of Payor Bank 403
b．Accounts in Different Branches 404
2．Funds Availability Under Regulation CC 406
3．Presenting The Check For Payment:Multiple Banks 406
A．Forward Collection In General 406
B．Depositing The Check For Collection 409
1．Collecting Bank As Holder And Agent For Collection 409
a．Restrictive Indorsements 409
b．Collecting Bank as Agent for Collection 410
2．Depositary Bank As Holder In Due Course 410
3．Crediting The Customer's Account 411
a．Provisional Settlement Under Article 4 411
b．Final Settlement Under Regulation CC 412
c．Effect of EFAA 413
C．Duties Of Collecting Banks 414
1．Who Is A Collecting Bank? 414
2．Responsibility For Collection 414
3．Methods Of Sending And Presenting 415
a．MICR Encoding 415
b．Methods of Sending and Presenting in General 416
c．Direct Presentment 417
4．Settlements 418
5．Transfe r,Presentment And Encoding Warranties 420
a．Transfer and Presentment Warranties 420
b．Encoding Warranties 421
4．Final Payment By Payor Bank 422
A．What Is Final Payment? 423
1．Payment In Cash 423
2．Irrevocable Or Final Settlement 424
3．Failure To Revoke Provisional Settlement 425
a．The Ground Rules 425
b．Intemal Decision to Pay Irrelevant 426
4．Accountability For Checks Not Finally Paid 427
a．Relationship Between Accountability and Final Payment 427
b．Timely Settlement Must Become Final 429
c．One Last Example 429
5．Extension Of Midnight Deadline 430
a．Under Article 4 430
b．Under Regulation CC 431
B．Effect Of And Exceptions To Final Payment 432
1．Effect Of Final Payment 432
a．Provisional Settlements Become Final 432
b．Insolvency and Preference 433
c．Priority of Claims Against Item:The Four Legals 434
2．Restitution For Mistaken Payments:3-418 436
5．Funds Availability 438
A．Article 4 439
1．Depositary Bank Is Also Payor Bank 440
2．Depositary Bank Is Not Payor Bank 440
3．Deposits Of Money 441
B．Expedited Funds Availability Act And Regulation CC 441
1．Check Deposits 442
a．Next DayAvailability:229.10 442
b．Permanent Availability Schedule and Exceptions 444
c．Civil Liability 447
6．Dishonored Checks:Notice And Expeditious Return 449
A．Responsibility Of Payor Bank 449
1．Article 4 449
a．Dishonor in General 449
b．Dishonor by Return of Check 450
c．Notice of Dishonor 451
2．Regulation CC 451
a．Return of Checks 451
b．Notice of Dishonor 454
B．Responsibility Of Collecting/Returning Banks 455
1．Article 4 455
a．Collecting Bank's Duty of Ordinary Care 455
b．Time to Revoke Provisional Settlement 456
2．Regulation CC 457
C．Responsibility And Rights Of Depositary Banks 458
1．Upon Receipt Of Returned Check 458
2．Paying For Returned Check 458
3．Notification To Customer 459
4．Charging Back Customer's Account 459
D．Risk Allocation And Liability 460
1．Article 4 461
a．Risk of Dishonor 461
b．Mishandling or Delay 462
2．Regulation CC 463
a．Risk of Dishonor 463
b．Mishandling or Delay 464
c．Inconsistencies Between Regulation CC and the U.C.C 465
d．A Final Caveat 466
CHAPTER 12．RELATIONSHIP BETWEEN CUSTOMER AND PAYOR BANK:LOSS ALLOCATION IN THE ABSENCE OF FRAUD AND FORGERY 467
Section 468
1．The Deposit Account Between Customer And Bank 468
A．Content And Form 468
B．When Is An Item Properly Payable? 469
2．Wrongful Dishonor In General 470
A．When Is A Dishonor Wrongful? 470
1．Overdrafts 470
2．Time For Determination Of Funds Sufficiency 471
B．Remedies For Wrongful Dishonor 472
1．Liability For Consequential Damages 472
2．Consequential Damages Under Article 4A 473
3．Wrongful Honor In The Absence Of Fraud Or Forgery 474
A．In General 474
B．Stop Payment Orders:4-403 475
1．Elements And Duration 475
a．Who May Stop Payment 476
b．Form and Content of Order 476
c．Time and Manner of Order:Priority Under 4-303(a) 476
d．Duration 478
2．Purchased lnstruments And Certified Checks 479
3．Damages;Payor Bank's Subrogation Rights 480
a．Damages:4-403(c) 480
b．Subrogation:4-407 481
C．Order Closing Account 482
D．Post-Dated And"Stale"Checks 483
1．Post-Dated Checks 483
2．Stale Checks 484
E．Death Or Incompetence Of Customer 484
4．Lost,Destroyed Or Stolen Checks:3-309 485
A．Requirements For Enforcement 486
B．Proof And Adequate Protection 486
5．Payor Bank's Remedies Upon Wrongful Honor 487
A．Warranties 487
1．Encoding Warranties 487
2．Presentment Warranties 488
B．Restitution For Mistaken Payments:3-418 488
CHAPTER 13．RISK ALLOCATION:FRAUD AND FORGERY 491
Section 491
1．Introduction 491
2．Payor Bank's Strlct Liability 492
3．Nature And Effect Of Fraud And Forgery 493
A．Alteration Of The Check 493
1．Form And Effect 493
2．Warranty Liability Of Collecting Banks 494
B．Forged Indorsements 495
1．The Paradigm Case 495
a．Indorsement Not Effective 495
b．Warranty Liability of Collecting Banks 496
2．Indorsement Effective Despite Fraud 496
C．Forged Checks 496
1．In General 496
2．Warranty Liability Of Collecting Banks 497
3．Restitution:3-418 498
D．Double Forgeries:A Famous Case 499
1．False Double Forgeries:The Perini Case 499
2．True Double Forgeries 501
4．Customer vs.Payor Bank:Payor Bank Defenses 501
A．In General 501
B．Subrogation Defense 502
C．General Negligence Defenses 504
1．Negligence Contributing To Fraud Or Forgery:3-406 504
a．Customer's Standard of Care 504
b．Effect of Payor Bank's Bad Faith Or Negligence 506
2．Failure Of Customer To Examine Bank Statement Or To Notify Payor Bank:4-406 508
a．Content of Bank Statement 509
b．Drawer's Duty to Examine Account Statement:Effect of Prompt Notice 509
c．Effect of Failure to Notify 510
d．Comparative Negligence 511
e．One Year Tolling Period 511
D．Per Se Negligence Defenses:3-404,3-405 512
1．Employer's Responsibility For Fraudulent Indorsement By Employee:3-405 513
a．Who Is a Responsible Employee? 513
b．Fraudulent Indorsements:3-405(a)(2) 514
c．Comparative Negligence 515
2．Impostors:3-404(a) 516
a．When Indorsement Effective 516
b．Comparative Negligence 517
3．Fictitious Payees:3-404(b) 518
a．Application of 3-404(b) 518
b．Comparative Negligence 520
c．Forged Check Principles Not Altered 520
5．Conversion:3-420 521
A．The Problem 521
B．Elements Of Statutory Conversion 522
6．Unauthorized Use Of Other Payment Instruments 523
A．Cash 523
B．Credit Cards 524
C．Consumer Electronic Fund Transfers 525
D．Funds Transfers UnderArticle 4A 527
INDEX TO KEY TERMS 531