UCC 3 Flashcards
What does UCC3 establish in regard to Negotiable Instruments?
Establishes general duty standards for parties to:
- Act in Good Faith
- Exercise Ordinary Care
These two terms cannot be varied by agreement.
What are the two types of instruments?
Draft if it is an order to pay
Note if it is a promise to pay
What is a draft?
An order to pay. Payable on demand.
What is a note?
A promise to pay. Think of a loan.
What is a negotiable instrument?
A negotiable instrument is a draft, that is written instruction signed by the drawer.
An order to pay a fixed amount of money to a payee.
On demand or at a fixed time.
What is a check?
A check is a draft. Order to pay on demand.
Defined UCC 3-104(f)
What must a check include to be a check per UCC 3-104?
Must be a draft, an order to pay, and must be:
Written instruction - Must be in writing - a physical item. (REG CC allows for electronic check)
Signed by the Drawer - Drawer is person giving the instruction
To pay FIXED amount of money - which is the value
May be before on or after date of instrument.
What is a Drawer:
Signs or is identified in a draft as a person ordering the payment. Drawer signs a check. 3-103
What is a Maker:
Signs or is identified in a note as a person obligated to pay. Maker signs a note and promises to pay a future date.
What is a cashier’s check and teller’s check?
Cashier’s check: Draft where Drawer and Drawee (Paying Bank) are the same bank or branches of the same bank May be called an official check
Teller’s check
Teller’s check: Drawn by a bank on another bank or payable through a bank
What does issue mean?
First delivery of an instrument by drawer for purpose of giving rights on instrument to any person
What is an issuer:
Drawer or Maker of an instrument
What if a check is missing a date?
Date is assumed
to be:
Date the check is
issued; or
Date the check
first comes into
possession of a
holder
What does payable to bearer mean?
Does not state a Payee or otherwise not made payable to an identified person.
Example: payable to cash. Or no payee name.
Who is the payee?
Identifies who is intended to receive amount of check/value of the instrument
Pay to the Order or Pay to or Pay
What does it mean if there is an ambiguous payee?
Pay to order: Payee A Payee B
*
Without the “or”, “and” or other specific instructions?
*
Any Payee listed may indorse to negotiate
What if the payee’s name states “Or”
Pay to order: Payee A or Payee B
*
Names may also be separated by a slash (‘/’) or a comma (‘,’)
*
Either Payee may indorse to negotiate
What is the Intention of the signer?
Payable to the person intended by the drawer. Example: If payee is John Smith, the intended payee is one specific John Smith
What is Method of identification?
If instrument is payable to an
account identified by number and
by the name of a person, the
instrument is payable to the
named person, whether or not
that person is the owner of the
account identified by number
How does payee apply to Trusts, Estates or Agents?
If trust or estate, payable to the
trustee, representative,
whether or not the beneficiary
or estate is also named
What does UCC say about the amount ?
To inhibit unauthorized alteration, amount should appear twice on the check
Should include numbers and words. Courtesy and legal amount.
What if the courtesy and legal amount differ, what takes precedent?
Contradictory Terms of Instrument (UCC 3-114)
- If instrument contains contradictory terms (between words and the numbers):
- Typewritten terms prevail over printed terms
- Handwritten terms prevail over both
*Legal amount takes precedence over numeric amount
what does UCC say about an incomplete check? For example, signer intended it to be completed by the addition of words or number?
Words or numbers added to
incomplete instrument without
authority of signer
* Considered an unauthorized
alteration (UCC 3-407
Signatures must what?
Must coincide with the conditions of payment on the signature card (i.e., 2 signatures required
What does UCC 3-403 say regarding signatures?
Person is not liable on an
instrument unless he or
she signs it
person’s name is signed
without authority, the
signature is unauthorized
Multiple signatures:
- Account requires more than one
person to sign to constitute the
authorized signature
- Unauthorized if one of the required
signatures is lacking
Name all parts of the check required for negotiability.
Date - if blank, date is assumed to be date when issued, Amount - should appear in numbers and words, Payee - if blank is considered a bearer instrument, Drawers signature - authorization for paying bank the (Drawee) to disburse funds.
What is Negotiation?
Result of the transfer of possession of
an instrument, whether voluntary or
involuntary:
– By person other than the issuer
– To a person who becomes its holder
Example: Payee deposits check, depository bank now holder in due course as result of transfer.
What is a transfer?
From holder to person/bank who becomes entitled to enforce the instrument
* Transfer occurs when delivered by a
person other than issuer, with the intent of granting the right to enforce the instrument
Define holder.
Per UCC 1-201 - Person in possession of a negotiable instrument that is payable either to bearer or to the identified person in possession
Explain a Depositary Bank as Holder
Depositary Bank becomes
holder of item at time it
receives the item for
collection:
If the customer was holder
of the item at time of
delivery to the bank
Whether or NOT customer
indorses the item
Depositary Bank
Warranty
Depositary Bank warrants
AMOUNT of the item was paid
to the customer or deposited
to the customer’s account
When does Holder in Due Course Apply?
Holder who has
possession, that:
1 Took the item in good faith.
2 Took item for value
3 Without notice the item is overdue or has been dishonored
4 Without notice signature was unauthorized or altered.
5 Without knowledge of claims against it.
What is an overdue instrument?
UCC 3-302
Instrument that is a check and is payable on demand is considered overdue the later of:
- Day after the day demand for payment is made; or
- 90 days after its dat
What are benefits of a holder in due course?
Can enforce item against Drawer
- Can make a claim to the person who signed the check and ordered payment (Drawer)
- Even if that check was returned unpaid by the Drawer’s bank (Paying Bank)
- Financial intermediary, such as Depositary Bank (BOFD) or Collecting Bank should not be affected by disputes between the Drawer and Payee of check regarding the underlying transaction
What is a third party receives a check that is returned stop payment due to a fraudulent sale?
a holder in due course can be an example such as person a sells widget, person b buys it and gives person a check. Person a gives the check to their friend.
person b realizes widet is fraudulent and places a stop payment. friend is holder in due course and can sue…
Provide some examples of Holder In Duce claims.
RDC issues: customer deposits check both via RDC and at a third party check cashing facility. The checking cashing facility has HDC rights.
Duplicate issues: Cause by outside banking system by customer not a depository fi.
Warranty for no double debit: Cover HDC duplicate warranty claims:
what is an indorsement?
Signature alone or accompanied by other words for purpose of negotiating the instrument (cashing or depositing a check)
Blank indorsement?
Signature
of the Payee
John D Doe
(check payable to john doe)
Special Indorsement
signs check and names party to
whom rights are transferred
Pay to the order of Jane Doe, John D Doe
(check payable to john doe)
Restrictive Indorsement
Payee signs check and imposes
limitations on transfer
For deposit only John D Doe (check payable to john doe)
Anomalous Indorsement
made
by a person who is not the holder
of the instrument
John doe sr
(check payable to John Doe Jr. )
What does UCC 3 say about employer’s responsibility regarding indorsements?
UCC 3-405
Two categories of fraudulent
indorsements made by employees
Indorsement made in name of employer on an instrument (check) that is payable to the
employer;
Indorsement made in name of Payee on instrument (check) that was issued by employer
What does UCC 3 say about employer’s responsibility regarding indorsements?
Employee of company (or one acting in concert with the employee) makes a fraudulent indorsement
Checks written, stamped or deposited
fraudulently using the company’s account
oEmployee was entrusted with responsibility
for checks by that employer
* Bank was not negligent
* Employer is liable – not the Paying Bank
Who has liability for forged drawer signature?
Paying Bank
Rule of Price v. Neal case.
UCC 3-417
Define presentment and explain process.
UCC 3-501
Demand for payment made to Drawee
– Made by/on behalf of person entitled to enforce instrument
Location of presentment: presentment made at a place of payment by any commercially reasonable means: oral, written, or electronic communication
Effective when: Deman for payment is received by drawee
Provide instrument to drawee: Unless otherwise agreed by the parties such as electronic presentment
Drawee may return or refuse without dishonoring: Return for lack of necessary indorsement or Refuse payment for failure to presentment to comply with terms of instrument, agreement of parties, or other applicable laws
Timing of presentment:
Drawee may establish cut-off hour
*
Presentment may be considered as next business day after day of presentment if items presented after cut-off hour
What requirements does the paying bank have upon presentment?
Return or pay timing
(UCC and Reg CC timing)
- May pay a properly payable item
(authorized by customer under
agreement with bank)
What is the timeframe for returning a check by the paying bank?
UCC midnight deadline; and
- Reg CC expeditious return
requirement
What constitutes payment?
Item is finally paid when Paying Bank has:
- Paid item in cash
- Settled for item without a right to revoke settlement
- Made provisional settlement but didn’t revoke in time
Define settlement.
Timing/manner of settlement by statute and as agreed upon
based on clearing-house rule or agreement
- Once item is considered presented, bank may also charge the
customer’s account
- In accordance with the terms of their agreement and in
compliance with laws
