UCC 3, 4, and 4A Flashcards
1
Q
What is a negotiable instrument?
A
A negotiable instrument is a signed writing that orders or promises payment of money.
To be negotiable, an instrument must meet the following requirements:
- the instrument must be a promise or order, and therefore by in writing and signed;
- contain an unconditional promise or order;
- to pay a fixed amount of money with or without interest or other charges;
- be payable to order or to bearer at the time it either is issued or first comes into possession of a holder;
- be payable on demand or at a definite time; and
- contain no undertaking or instruction given by the maker or drawer except as authorized by the Code.
2
Q
What is Negotiability?
A
Negotiability determines the rights and obligations of the various parties involved with commercial paper.
3
Q
What is a Note?
A
A Note is a two-party instrument in which one party (the Maker) promises to pay a second party (the Payee) a sum of money.
4
Q
What is a draft?
A
A draft is a three-party instrument in which one party (the Drawer) orders a second party (the Drawee or Payor) to pay a sum of money to a third party (the Payee).
5
Q
What kind of negotiable instrument is a check?
A
A check is a draft drawn upon a bank and payable upon demand.
6
Q
What is an order?
A
An order is a written instruction to pay money signed by the person undertaking to pay.
7
Q
How is a promise defined in Article 3 of the UCC?
A
A promise is a written undertaking to pay money signed by the person undertaking to pay.
8
Q
What does it mean if an instrument is payable to bearer?
A
An instrument is payable to bearer if it states it is payable to bearer or order of bearer, does not state a payee, states it is payable to cash, or indicates it is not payable to an identified person.
9
Q
What does it mean if an instrument is payable to order?
A
An instrument is payable to order is it is payable to the order of an identified person or to an identified person or order.
10
Q
What does issue mean with regard to negotiable instruments?
A
Issue is the first delivery of an instrument by the maker or drawer for the purpose of giving rights on the instrument to any person, generally the payee.
11
Q
What is a Certificate of Deposit?
A
A Certificate of Deposit is an instrument in which a bank acknowledges that it has received a sum of money and promises to repay that sum.
12
Q
What does transfer mean with regard to negotiable instruments?
A
A transfer occurs when the instrument is delivered by a person other than its issuer for the purpose of giving the right to enforce the instrument to the person receiving delivery.
13
Q
Under South Carolina law, what is a holder in due course?
A
In South Carolina, a holder in due course is one who takes the instrument for value in good faith and without notice. If there is an instrument that is negotiated to a holder in due course, the holder takes free from personal defenses and is subject only to real defenses.
14
Q
Apply the mnemonic: Never Gonna Intentionally Heed Legal Drivel…
A
Never – Is this a Negotiable Instrument?
Gonna – Is this governed by UCC 3 & 4?
Intentionally – Was there an indorsement of the instrument?
Heed – Is the person in possession of the instrument a Holder? If not, is he a PETE? If so, is he a Holder in Due Course?
Legal – What is the liability of the party?
Drivel – Does this party have any defenses?
[Echo Legal Drivel for each party in the problem]
15
Q
How do you determine if you have a Negotiable Instrument?
A
Is this a Negotiable Instrument?
· If check, draft, promissory note, certificate of deposit, or other defined negotiable instrument, state this and move on.
· If it is unclear, apply MUST SOW:
- Money
- Unconditional
- Sum Certain
- Time definite
- Signed
- Order of
- Writing
Must meet all of the above in order to be a negotiable instrument.
16
Q
What is the scope of Articles 3, 4, and 4A of the UCC?
A
- Article 3 of the UCC covers negotiable instruments.
- A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand or at a set time.
- Article 4 of the UCC covers bank deposits and check collections.
- Article 4A of the UCC covers fund transfers.
17
Q
What is an indorsement?
A
An indorsement is a signature, other than that of a signer as maker, drawer, or acceptor, that is alone or accompanied by other words and is made on an instrument to negotiate the instrument, restrict payment of the instrument, or incur the indorser’s liability on the instrument.
18
Q
What is a blank indorsement?
A
A blank indorsement is simply the name of the transferor written on the back of the instrument. If the indorsement is blank, then the instrument becomes bearer paper and the transferee can further negotiate by delivery alone.
19
Q
What is a special indorsement?
A
A special indorsement names the transferee and directs payment to him. If the indorsement is special, then the instrument becomes order paper and the transferee’s indorsement is necessary for further negotiation.
20
Q
What is an anomalous indorsement?
A
An anomalous indorsement is one made by a person other than the holder. Such an indorsement is extraneous of the chain of title and has no effect on the manner in which the instrument may be negotiated. However, such indorsement may create liability on the instrument for the indorser.
21
Q
What is a qualified indorsement?
A
A qualified indorsement acts to disclaim the indorser’s liability on his indorsement. This is normally done by indorsing the instrument “without recourse”. The indorser, however, may remain liable of transfer warranties.
22
Q
What is a restrictive indorsement?
A
A restrictive indorsement purporting to limit payment to a particular person or otherwise prohibit further transfer or negotiation of the instrument will not prevent further transfer or negotiation. If the instrument bears the indorsement using the words “for deposit” or “for collection”, the person or bank who purchases the instrument or takes it for collection must apply it consistently with the indorsement, or else they will be deemed to have converted it.
23
Q
If an instrument contains both order and bearer languange, which language controls?
A
Bearer language controls.
24
Q
A demand for payment made to a maker of a note or a drawee of a draft is called _______________.
A
Presentment
25
When a party takes an intrument upon presentment, do they become a holder in due course? Is this a negotiation?
No and No.
## Footnote
A party paying an instrument upon presentment, such as a bank, does not take by negotiation and cannot become a HIDC. In addition, its rights against the presenting party are different from the rights of the transferee against his transferor after a negotiation.
26
What is the effect of a **forged indorsement** on an instrument?
A **forged *necessary* indorsement** prevents the possessor of the instrument from being a holder.
A **forged indorsement** by someone whose indorsement is ***not necessary*** will not prevent later possessors from being holders.
27
What is the ***fictitious payee rule***?
If the person identified as the payee is not intended to have any interest in the instrument, or is a fictitious person, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
28
What is the burden of proof in an action brought by a PETE?
**Validity of Signatures:**
* The authenticity of, and authority to make, each signature on an instrument is admitted unless specifically denied in the pleadings. S.C. Code § 36-3-308(a)
* If the validity of a signature is put into question, the burden of establishing its validity is upon the person claiming that it is valid.
* A signature is presumed to be valid unless the action is being brought to hold the signer liable and the signer is dead or incompetent at the time of trial.
**_Example:_**
Assume that a note is payable to P or order and signed by M. If a holder is suing M, and P’s name is on the reverse side in the place where indorsement would normally be, then if M does not specifically deny the authenticity of P’s signature, M admits it; if M does deny the signature’s authenticity, then the burden of proving its genuineness is on the π; but there is a presumption that it is valid.
**Plaintiff's Status:**
The plaintiff must not only show that all necessary signatures are valid, but also that he is entitled to enforce the instrument or is authorized to seek payment on behalf of another person who is entitled to enforce the instrument.
**_NOTE:_**
A person may be entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.
**Defenses or Claims in Recoupment:**
If the validity of signatures is admitted or proved, and if the plaintiff proves that he is entitled to seek enforcement of the instrument, the burden shifts to the defendant to prove a defense or claim in recoupment.
* A claim in recoupment, notice of which can prevent a transferee from becoming a HIDC, is a claim of the obligor against the original payee of the instrument if the claim arose from the transaction that gave rise to the instrument.
* EXAMPLE: A breach of warranty claim by a Buyer against a Seller.
* A HIDC is not subject to claims in recoupment against a person other than the holder.
**HIDC Status:**
If a defense or claim in recoupment to the obligation sued upon is proved, the party claiming to be HIDC has the burden of establishing HIDC status.
**Adverse Claims:**
A person taking an instrument is subject to claims of property or possessory rights in the instrument or its proceeds, including a claim to rescind the negotiation and to recover the instrument or its proceeds.
* For example, a person who was wrongfully deprived of possession by a thief might have a claim against the Maker of the instrument under this section [S.C. Code § 36-3-306]
A HIDC takes the instrument free from all claims to it by others.
* Thus, if the instrument is stolen while it is bearer paper, the rightful owner cannot recover it from a HIDC.
29
Who is not entitled to bring an action for conversion of an instrument?
An action for conversion of an instrument may ***_not_*** be brought by:
1. the issuer or acceptor of the instrument; or
2. a payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.
The measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiff's interest in the instrument.
30
At what point is an indorser discharged from a check if it is not presented?
An indorser of a check is discharged ***thirty (30) days*** after indorsement if the check is not presented for payment or given to a depository bank for collection within that time.
31
A person is not liable on an instrument UNLESS:
1. the person signed it;
2. the person is represented by an agent or representative who signed it in such a manner to bind the person; or
3. if the instrument is a payee-initiated demand draft, the person is the customer on whose account the instrument is drawn and has authorized its creation according to the terms on its face.
32
What is the liability of the ***Maker of a Note***?
The ***Maker*** or ***Issuer*** must pay the amount promised when the instrument becomes due, unless he has a defense.
The liability of the maker is generally called ***primary liability***, which means there a no conditions to his liability.
Suit may be instituted even when no demand for payment has been made.
However, where the ***Note*** is payable on a particular date, the payee's cause of action does not accrue until the day after the due date.
33
What is the liability of the ***Drawer of a Draft***?
Although the ***Drawer*** occupies somewhat the same position as the maker of a note, the ***Drawer*** does not make any express promise to do anything. He is merely ordering the ***Drawee*** to pay.
The ***Drawer*** does NOT have primary liability. However, the law does impose liabilty on the ***Drawer*** when the ***Drawee*** fails to pay.
The liability of the ***Drawer*** is ***Secondary Liability***, which means the ***Drawer*** *becomes liable **only** if there has been*:
1. Presentment to the Drawee;
2. Dishonor by the Drawee; AND
3. Notice of the Dishonor to the Drawer.
34
What is the liability of the ***Drawee*** or ***Acceptor*** of a ***Draft***?
Initially, the ***Drawee*** on a draft has no liability to the payee or a subsequent ***Holder.*** The instrument is simply an order to the drawee.
The ***Drawee***'s liability, if any, for wrongfully dishonoring the instrument (refusing to pay when it should pay) runs only to the ***Drawer*** and must be based upon some contract between the ***Drawer*** and the ***Drawee***.
If the ***Drawee*** accepts the draft, it becomes liable as an ***Acceptor***.
***Acceptance*** is a promise by the ***Drawee*** to pay the instrument when it becomes due and payment is demanded. It is made on the instrument and may be made simply by the ***Drawee***'s signature. The instrument becomes effective when it, with the ***acceptance***, is delivered. The most familiar type of ***acceptance*** is the certification of a check.
35
What are the ***Transfer Warranties*** that a ***Transferor*** makes to a ***Transferee***?
The ***transferor*** of a negotiable instrument who recieves consideration warrants to his immediate ***transferee*** that:
1. the ***transferor*** is entitled to enforce the instrument; [**PETE]**
2. all ***signatures*** are ***authentic*** and ***authorized***;
3. the instrument has ***not*** been ***altered***;
4. the instrument is ***not subject to*** a ***defense*** or claim in recoupment of any party against the ***transferor***; and
5. the ***transferor*** has ***no knowledge*** of any ***insolvency*** proceeding commenced with respect to the Maker, Acceptor, or Drawer of an unaccepted draft.
If the transferor does not indorse the instrument, then the warranties run only to the immediate transferee. If the transferor does indorse, then the warranties run to all subsequent Holders who take the instrument in good faith.
***Transfer Warranties*** may be disclaimed with respect to any instrument, except a check. Between the immediate parties, dislcaimer may be made by agreement. In the case of an Indorser, the disclaimer must appear in the indorsement with words such as "without warranties" or some other specific reference to warranties.
36
What is an ***Accommodation Party***?
An ***accommodation party*** or ***surety*** is one who signs commercial paper that is issued for value simply to lend his credit to some other party to the instrument, and who does not directly receive any of the value given. He is liable on the instrument in the capacity in which he signs (Maker, Drawer, Acceptor, or Indorser), even though the one taking the instrument knows that he is an accommodation party.
An ***Accommodation Indorser*** has ***NO LIABILITY*** on the ***TRANSFER WARRANTIES*** because:
1. the accommodation indorser does not transfer the instrument; and
2. the accommodation indorser does not usually receive consideration.
An indorsement, which shows that it is not in the chain of title (aka an ***Anomalous Indorsement***), serves as notice to all subsequent takers that the indorsement is for accommodation.
37
If two or more persons have the same liability on an instrument, how is liability distributed?
Except as otherwise provided in the instrument, two (2) or more persons who have the same liability on an instrument as Makers, Drawers, Acceptors, Indorsers who Indorse as Joint Payees, or Anomalous Indorsers are ***Jointly and Severally Liable*** in the capacity in which they sign.
**MAKER** = Primary - ***_No_*** Notice of Dishonor Required
**DRAWER** = Secondary - Notice of Dishonor Required
**DRAWEE w/o Acceptance** = Secondary - ***_No_*** Notice of Dishonor Required
**DRAWEE w/ Acceptance** = Primary - ***_No_*** Notice of Dishonor Required
**INDORSER** = Secondary - Notice of Dishonor Required
**ACCOMMODATION PARTY** - it depends upon that capacity in which they signed the instrument.
38
What is the condition precedent for liability to attach on a negotiable instrument?
Conditions precedent to a party’s liability on the instrument may include ***presentment*** and, for certain parties with secondary liability, ***dishonor*** of the instrument and ***notice of dishonor***.
The party who pays the instrument may have certain remedies against the party who presents the instrument for payment or against others.
39
What is ***presentment***?
***Presentment for Payment*** is a particular type of demand on the party who ought to pay the instrument – the Maker of a Note or the Drawee of a Draft. Presentment is effective if made to any one of two or more makers or drawers.
· *Timeliness:*
o Unless the demand for payment is made on time, it does ***_not_*** constitute presentment.
o Presentment must be made on or after the date stated in the instrument, if a date is stated.
o Presentment must be made within a reasonable time after the person to be charged becomes liable on the instrument.
§ A reasonable time is determined by the nature of the instrument, usage of trade, and the facts of a particular case.
o An indorser of a check is discharged ***thirty (30) days after indorsement*** if the check is ***_not_*** presented for payment or given to a depository bank for collection within that time.
· *Place and Means:*
o Presentment may be made at the place of payment of the instrument and must be at such place if the instrument is payable at a bank.
o Presentment can be made by any commercially reasonable means, including electronic communication.
40
When an instrument is presented, what does the party to whom presentment is made have the right to require of the presenting party?
When an instrument is presented, the party to whom presentment is made has the right to require:
1. That the instrument is exhibited;
2. Identification of the party presenting and, if presentment is made on behalf of another person, proof of authorization to do so; and
3. A signed receipt on the instrument or surrender of the instrument upon full payment.
If these demands are not met, there is no presentment.
41
In what cases is presentment for payment or acceptance excused?
Presentment for payment or acceptance is excused if:
1) The person entitled to present the instrument cannot, with reasonable diligence, make presentment;
2) The maker or acceptor has repudiated an obligation to pay the instrument, or is dead or in insolvency proceedings;
3) By the terms of the instrument, presentment is not required to enforce the obligation of indorsers or the drawer;
4) The drawer or indorser whose obligation is being enforced has waived presentment or otherwise has no reason to expect, or right to require, that the instrument be paid or accepted; or
5) The drawer instructed the drawee not to pay or accept the draft, or the drawee was not obligated to the drawer to pay the draft.
42
Once the ***drawee*** accepts or pays the draft, what are the ***warranties*** made to the ***drawee*** by the person who presented an obtained payment, as well as any previous transferor of the draft? [***Presentment Warranties***]
If an unaccepted draft is presented to the ***drawee*** for payment or acceptance and the ***drawee*** pays or accepts the draft, the person who presented and obtained payment, as well as any previous transferor of the draft, ***warrants*** ***to the drawee*** that:
1) The warrantor is, or was at the time of the transfer, a PETE (or authorized to act on behalf of a PETE);
2) The draft has not been altered; and
3) The warrantor has no knowledge that the signature of the drawer of the draft is unauthorized – i.e., that the drawer’s signature is forged.
43
What does it mean for an instrument to be ***dishonored***?
***Dishonor*** occurs when a proper presentment for payment is made and payment is refused. It also occurs when a required or optional presentment for acceptance is made and acceptance is refused. It is ***not*** a dishonor when payment is refused because the instrument lacks a necessary indorsement.
44
What does the payor bank do when a check is dishonored?
A check that is duly presented for payment to the payor bank for deposit (not for immediate payment over the counter) is dishonored if the payor bank:
1) Makes timely return of the check;
2) Sends timely notice of dishonor or nonpayment; or
3) Becomes accountable for the amount of the check.
The check must be returned before the bank has made final payment and before the ***midnight deadline*** (that is midnight of the *next banking day* following the day on which the instrument is received).
45
What are the rules with regard to ***Notice of Dishonor***?
· ***Notice of Dishonor*** *_may_* be given by any commercially reasonable means, such as a phone call, letter, or electronic communication.
· ***Notice of Dishonor*** ***_must_*** be given by a collecting bank before the ***midnight deadline*** (unless excused), and by any other person **within thirty (30) days** following the day on which the person receives notice of dishonor.
o Delay in giving ***notice of dishonor*** is ***_excused_*** IF:
§ the delay was caused by circumstances beyond the control of the person giving the notice; and
§ the person giving the notice exercised reasonable diligence after the cause of the delay ended.
46
What happens if a drawee mistakenly pays a check that isn't properly payable -- i.e., the check is forged or there had been a stop payment order issued on the check?
If the drawee mistakenly pays a forged check or one on which payment had been ordered stopped, the drawee may recover the funds paid or revoke acceptance regardless of its own negligence in paying. However, the drawee loses this remedy if the person receiving payment or acceptance:
1) Took the check in good faith and for value; OR
2) In good faith changed position in reliance on the payment or acceptance.
47
What governs when rules conflict between Articles 3 and 4?
Where a conflict occurs between Chapter 4 and Chapter 3, Chapter 4 controls.
48
Is a bank allowed to vary Article 4 provisions in agreements with their customers?
A bank may vary the effect of the provisions of Article 4 by an agreement with the customer, but the agreement may not disclaim the bank’s responsibility for its lack of good faith or failure to exercise ordinary care or limit its liability for damages. However, the agreement may also determine the standards by which the bank’s responsibility is to be measured as long as those standards are not manifestly unreasonable.
49
Under Article 4, what is an ***item***?
An ***item*** is a promise or order to pay money that is handled by a bank.
50
Under Article 4, what is a ***customer***?
A ***customer*** is a person having an account with a bank or for whom a bank has agreed to collect items.
51
Under Article 4, what is a ***payor bank***?
A ***payor bank*** is the bank that is the ***drawee*** of a ***draft***.
52
Under Article 4, what is a ***depository bank***?
The ***depository bank*** is the first (1st) bank to receive an item. This *may* be the same bank as the ***payor bank***, unless the item is presented for immediate payment over the counter.
53
Under Article 4, what is an ***intermediary bank***?
An ***intermediary bank*** is a bank to which an item is *transferred* in course of collection. The ***depository bank*** and the ***payor bank*** cannot function as an ***intermediary bank***.
54
Under Article 4, what is a ***presenting bank***?
A ***presenting bank*** is a bank, other than the ***payor bank***, presenting an item.
55
Under Article 4, what is a ***collecting bank***?
A ***collecting bank*** is a bank, other than the ***payor bank***, handling an item for collection.
A ***collecting bank*** is an agent of the item’s owner, and any settlement given for the item is provisional.
56
What are the duties and standard of care required of a ***collecting bank***?
A ***collecting bank*** must exercise ordinary care in:
1. Presenting an item or sending it for presentment;
2. Sending notice of dishonor or nonpayment or returning an item (other than a documentary draft) to the bank’s transferor after learning that the item has not been paid or accepted;
3. Settling for an item when the bank receives final settlement; and
4. Notifying its transferor of any loss or delay in transit within a reasonable time after discovery thereof.
57
What is the extent to which a ***collecting bank*** has a security interest in an item?
A ***collecting bank*** has a security interest in an item, any accompanying documents, or the proceeds of either, to the extent to which:
1. Credit given for an item has been withdrawn or applied, if the item was deposited in an account;
2. Credit was given, if the item is available for withdrawal as of right; or
3. The bank makes an advance on or against the item.
If a credit was given for several items received at one time, or pursuant to a single agreement, and it is withdrawn or applied in part, the security interest remains upon all the items, any accompanying documents, or the proceeds of either. Credits given first are withdrawn first (the ***first-in, first-out rule***). When a collecting bank receives a final settlement for an item, its security interest in the item and any accompanying documents and proceeds are realized.
58
For how long may a ***collecting bank*** continue to have a security interest in an item, and what are the rules regarding perfection and priority in that interest?
So long as the collecting bank does not receive final settlement for the item or give up possession for purposes other than collection, the security interest continues to that extent and is subject to Chapter 9, but note that:
1. No security agreement is necessary to make the security interest enforceable;
2. No filing is required to perfect the security interest; and
3. The security interest has priority over conflicting perfected security interests in the item, accompanying documents, or proceeds.
59
What is a ***banking day***?
A ***banking day*** is a day in which a bank is open to the public for carrying on substantially all of its banking functions. A bank may fix an afternoon hour 2 pm or later as the ***cutoff time*** for making entries on its books. Items presented after the cutoff time are treated as being received the next banking day.
60
What is a ***midnight deadline***?
A bank’s ***midnight deadline*** refers to midnight on the next banking day following the banking day on which it receives an item or notice.
61
Under Article 4, what does ***settle*** mean?
To ***settle*** means to pay in cash, by clearing-house settlement, in a charge or credit or by remittance, or otherwise as agreed; a settlement may be provisional or final.
62
Can a bank ever be a HIDC on an instrument?
A ***collecting bank*** qualifies as a HIDC if it meets the requirements for such a designation. A bank is determined to have taken the instrument “for value” to the extent that it has a security interest in the item. A customer’s signature on an item is not required for a depository bank to become a holder.
63
What are a bank’s rights with regard to ***charge-back*** under Article 4?
Typically, banks will make provisional settlement for items when they are first received, and then await subsequent determination of whether the item will be finally paid. A collecting bank that has made a provisional settlement with its customer but fails – due to dishonor, suspension of payments, or otherwise – to receive a final settlement for the item may:
1. Revoke the settlement;
2. Charge-back the amount of credit; or
3. Obtain a refund from its customer, whether or not it is able to return the item.
The bank’s right to charge-back or refund terminates if and when a settlement received by the bank is or becomes final. If the bank fails to receive a final settlement, the bank must exercise the right of charge-back or refund promptly after it learns the facts.
64
What is required for an item to be ***finally paid***?
An item is ***finally paid*** by a payor bank when the payor bank has done any of the following:
1. Paid the item in cash;
2. Settled for the item without having a right to revoke the settlement; or
3. Made a provisional settlement for the item and failed to revoke the settlement in the time and manner permitted.
If a provisional settlement for an item does not become final, the item is not finally paid.
65
At what point does any ***deposit*** or ***credit*** given by the bank for an item in a customer’s account become available to that customer?
A deposit of money becomes available for withdrawal by the customer as of right at the opening of the bank’s next banking day after receipt of the deposit.
Any credit given by a bank for an item in a customer’s account becomes available for withdrawal by the customer as of right at either of the following times:
1. If the bank has received a provisional settlement for the item, when the settlement becomes final, and the bank has not received a return of the item within a reasonable time; or
2. If the bank is both the depository bank and the payor bank, and the item is finally paid, at the opening of the bank’s second banking day following receipt of the item.
66
What can a collecting bank do if they experience unforeseen delays in order to prevent the discharge of drawers, indorsers, or the liability of others?
A collecting bank in a good-faith effort to secure payment of a specific item drawn on a payor other than a bank, and with or without the approval of any person involved, may waive, modify, or extend any time limits imposed or permitted by any chapter of SC’s UCC for up to two (2) additional banking days without discharge of drawers, indorsers, or liability to its transferor or a prior party.
Any delay by a collecting bank or payor bank beyond the time limits prescribed or permitted by any chapter of the UCC is excused if:
1. The delay is caused by interruption of communication of computer facilities, suspension of payments by another bank, or other circumstances beyond the control of the bank; and
2. The bank exercises whatever diligence the circumstances require.
67
What are the deadlines required of the payor bank with regard to acceptance / dishonor?
The payor bank must either pay or dishonor a note by midnight of the next banking day following the banking day of receipt by the depositary bank (i.e., its midnight deadline).
* If the payor bank is not also the depositary bank and it retains the item past the midnight deadline, it is accountable for the amount of the check.
* **EXCEPTION**: A payor bank will not be liable for failing to pay the amount of a documentary draft presented to it within the time allowed where the funds were not available to honor the draft, thus making the draft not properly payable. ***South Carolina Nat. Bank v. First Union Nat. Bank***, 310 S.C. 428 (1993).
* A payor bank may also become accountable for any other properly payable item unless, within the time allowed for acceptance or payment of the item, the bank either accepts or pays the item or returns it.
68
What ***transfer warranties***, if any, does a customer or a collecting bank give to a transferee (and any subsequent collecting bank taking the item in good faith) upon transfer of an item in exchange for settlement?
A customer or collecting bank that ***transfers*** an item and receives a settlement ***warrants*** to the transferee, and any subsequent collecting bank taking the item in good faith, that:
1. the warrantor is the PETE on the item;
2. the signatures on the item are authentic and authorized;
3. the item has not been altered;
4. the item is not subject to a defense or claim in recoupment that can be asserted against the warrantor;
5. the warrantor has no knowledge of any insolvency proceeding commenced against the maker or drawer; and
6. with respect to any remotely-created consumer item, the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.
69
In the event of a ***breach of transfer warranty***, the warrantor is liable for: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
In the event of a ***breach of transfer warranty***, the warrantor is liable for damages in an amount equal to the loss suffered as a result of the breach, but not more than the amount of the item plus expenses and loss of interest incurred as a result of the breach.
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In the event that a warrantor breaches his transfer warranty, the claimant must:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
The claimant must present his claim to the warrantor within thirty (30) days after he has reason to know of the breach and the identity of the warrantor.
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Upon presentment of an unaccepted draft, what ***presentment warranties***, if any, does the person obtaining payment or acceptance warrant to the drawee?
If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, the person obtaining payment or acceptance at the time of presentment (and any previous transferor of the draft at the time of transfer) warrant to the drawee that pays or accepts the draft in good faith that:
1. the warrantor is (or was at the time the warrantor transferred the draft) a PETE on the draft (or authorized to obtain payment or acceptance on behalf of such person);
2. the draft has not been altered;
3. the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized; and
4. with respect to any remotely-created consumer item, the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.
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In the event of a ***breach of presentment warranty***, a drawee making payment may recover from a warrantor: (a)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ and (b)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.
In the event of a ***breach of presentment warranty***, a drawee making payment may recover from a warrantor:
1. damages equal to the amount paid by the drawee, less any amount the drawee received or is entitled to receive from the drawer because of payment; and
2. compensation for expenses and loss of interest resulting from the breach.
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What is the ***properly payable rule***?
An item is ***properly payable*** if it is authorized by the customer and is in accordance with any agreement between the customer and the bank.
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Under the ***properly payable rule***, does the bank have to pay out the customer’s money if the customer’s order creates an overdraft to his account?
Yes. Per the agreement between the bank and the customer, the bank must pay out the customer’s money even if the customer’s order creates an overdraft. The customer is liable for the amount of the overdraft unless the customer neither signed the item nor benefited from its proceeds.
However, if a payor bank has not agreed to honor a customer’s item that would create an overdraft, the bank may dishonor such an item.
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Under the ***properly payable rule***, is a post-dated check properly payable, or does the bank have to hold a post-dated check until it becomes payable?
If a check is post-dated, it is ***properly payable*** from the account unless the customer has given notice to the bank of the post-dating. If the bank charges the customer’s account prior to the post-date after receiving notice from the customer to suspend payment until such date, the bank is liable for damages for the loss resulting from such act.
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Is a check still ***properly payable*** if it is more than six (6) months old?
A bank is not obligated to pay on a check that is more than six months old, but it may charge its customer’s account for a payment made thereafter in good faith.
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What does it mean for a payor bank to ***wrongfully dishonor*** an item?
A payor bank ***wrongfully dishonors*** an item if it dishonors an item that is ***properly payable***.
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Who is entitled to damages for a ***wrongful dishonor***?
* When a bank makes an improper payment from an account, the customer may recover actual damages resulting from the wrongful dishonor.
* *_Only_* the payor bank’s “customer”, the drawer of the check, can recover damages for wrongful dishonor.
* However, where the customer is a corporate entity with only one shareholder, and the bank had treated the corporation and the shareholder as a single entity, courts have treated the shareholder as the bank’s “customer”. ***Murdaugh Volkswagen, Inc. v. First Nat. Bank of South Carolina***, 801 F.2d 719 (4th Cir. 1986).
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What are a bank customer’s rights with regard to a ***stop payment***?
Any person authorized to draw on an account may stop payment of an item drawn on the customer’s account or close the account. While the payment can be stopped, the drawer remains liable on the instrument to a HIDC [***First American Bank of Virginia v. Litchfield Co. of South Carolina, Inc.***, 291 S.C. 240 (S.C. App. 1997).]
If the drawee proceeds to pay, he becomes subrogated to the rights of the HIDC against the drawer.
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What situations merit the remedy of subrogation for a payor bank?
If the payor bank has improperly paid on an item, in order to prevent unjust enrichment and only to the extent necessary to prevent loss to the bank by reason of its improper payment of the item, the payor bank is subrogated to the rights of:
1. any HIDC on the item against the drawer or maker; and
2. the payee or any other holder of the item against the drawer or maker either on the item or under the transaction out of which the item arose.
* The payor bank can likewise step into the shoes of the maker against a Holder or Payee of the item.
* Subrogation is highly favored by the courts and, thus, is liberally and expansively applied.
**_EXAMPLE:_** Even where a bank erroneously paid a draft contrary to the instructions of the drawer, it was entitled to maintain an action seeking a declaration that it was subrogated to the rights of either the drawer or the payee. ***Southern Bank and Trust Co. v. Harrison Sales Co., Inc.***, 285 S.C. 50 (1985).
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How long is a ***stop payment order*** effective?
A ***stop payment order*** is effective for six (6) months, and may be renewed for an additional six (6) months if a written order is given any time during the initial six-month period; if the order was given orally and not confirmed in writing within fourteen (14) days, the order lapses at the end of the 14-day period.
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What happens if a payor bank pays an order in violation of a customer’s stop payment order?
The payor bank is liable to the customer for any payment made in violation of a stop payment order or order to close the account.
1. The customer has the burden of establishing the fact of the order and the amount of any resulting loss.
2. Additional pecuniary losses suffered by the customer are recoverable provided they are more than mere debiting of his account. ***Grego v. South Carolina Nat. Bank***, 283 S.C. 546 (S.C. App. 1984).
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What is required of the bank upon the death or incompetence of its customer?
The death or incompetence of the drawer does not render the payor or collecting bank liable for the payment of an item until such bank receives notice of such death or adjudication of incompetence and has reasonable opportunity to act on it. After receiving such notice, the bank may still pay or certify checks for ten (10) days thereafter, unless a person claiming an interest in the account orders the bank to stop payment.
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What must be included in a customer’s bank statement?
A bank that sends a customer a statement *_must_* include in it ***sufficient information*** showing which items have been paid, or make the items available to the customer.
***Sufficient Information*** is that which describes the item by number, amount, and date of payment.
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How long must a bank retain an item?
If the bank does not return the items to the customer, it must either retain the items, or legible copies thereof, for seven (7) years, or provide such items or copies to the customer upon request.
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What is a customer’s duty with regard to his bank statements?
Upon receiving a bank statement or returned items, the customer has a duty to exercise reasonable promptness in examining such statement or items to determine whether any unauthorized payment or other errors have occurred.
* Upon such discovery, the customer must promptly notify the bank of the relevant facts.
* A customer who fails to exercise this duty is stopped from asserting a claim against the bank for damages resulting from unauthorized signatures or material alterations that could have been discovered.
* Regardless of whether the customer or the bank acted negligently, a customer is precluded from asserting such a claim against the bank if he does not act within one (1) year after the statement or items are made available to him.
* Despite the one (1) year limitation, a three (3) year statute of limitations allows a customer to seek to have the bank re-credit the account for any item bearing an unauthorized indorsement within that time.
**_EXAMPLE:_** In ***Read v. South Carolina Nat. Bank***, 286 S.C. 534 (1985), the court held that the bank was not liable for amounts paid on forged checks where the bank exercised ordinary care in examining the signatures, and the account holder was negligent in failing to maintain proper control over his signature stamp. A partner in a limited partnership was negligent in allowing his sales secretary, who had possession of the partnership checkbook, to reconcile statements without supervising her or verifying or examining the bank statements.
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If a depositary bank is found to be negligent in South Carolina, does an action proceed under a common law negligence tort action?
Not likely. Even if a depositary bank is found to be negligent in receiving a forged item, it is likely that South Carolina courts would hold that any common law negligence claim would be displaced by claims allowed under the UCC, such as a claim for conversion under § 36-3-419 [see **S.C. Code § 36-1-103**; and ***Equitable Life Assur. Soc. of U.S. v. Okey***, 812 F.2d 906 (4th Cir. 1987)].
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What about if both are negligent – the customer failed to promptly examine the statement *and* the bank failed to exercise ordinary care?
If the customer failed to promptly examine the statement *and* the bank failed to exercise ordinary care in paying the item, the loss is allocated between the customer and the bank.
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So how does the court determine whether to apply the 1 year rule or the 3 year statute of limitations when a customer asserts a negligence claim against the bank?
In determining whether to apply the one-year or the three-year statute of limitations, the dispositive issue is whether the unauthorized signature is that of the customer or that of some other party. If it is that of the customer, the one-year limitation period applies. ***Sabatino v. Atlantic Sav. Bank, F.S.B.***, 314 S.C. 402 (S.C. App. 1994).
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What is the scope of Article 4A?
S.C. Code of Laws, Title 36, Chapter 4A / UCC Article 4 A, governs a method of payment in which the person making payment (the ***originator***) directly transmits an instruction to a bank either to make payment to the person receiving payment (the ***beneficiary***) or to instruct some other bank to make payment to the beneficiary.
Note – except as otherwise provided, the rights and obligations of a party to a funds transfer may be varied by agreement of the affected party.
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What is a ***funds transfer***?
A ***funds transfer*** is a series of transactions, beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order. It includes any payment order issued by the originator’s bank or an intermediary bank intended to carry out the originator’s payment order.
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What is a ***payment order***?
A ***payment order*** means an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or cause another bank to pay, a fixed or determinable amount of money to a beneficiary ***_if_***:
1. the instruction does not state a condition to payment to the beneficiary other than time of payment;
2. the receiving bank is to be reimbursed by debiting an account of, or otherwise receiving payment from, the sender; and
3. the instruction is transmitted by the sender directly to the receiving bank or to an agent, funds-transfer system, or communication system for transmittal to the receiving bank.
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What is a ***funds-transfer system rule***?
A ***funds-transfer system rule*** means a rule of an association of banks that either:
1. governs transmission of payment orders by means of a funds-transfer system of the association or rights and obligations with respect to those orders; or
2. to the extent that it governs rights and obligations between banks that are parties to a funds transfer in which a Federal Reserve Bank, acting as an intermediary bank, sends a payment order to the beneficiary’s bank.
Except as otherwise provided, a ***funds-transfer system rule*** may be effective even if the rule conflicts with Article 4A, and indirectly affects another party to the funds transfer that does not consent to the rule. The rule may also govern rights and obligations of parties other than participating banks using the system.
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What indicates ***acceptance of a payment order*** by a ***receiving bank*** *[meaning a bank other than the beneficiary’s bank]*?
Acceptance of a payment order cannot occur before the order is received by the receiving bank.
A receiving bank (other than the beneficiary’s bank) accepts a payment order when it executes the order, unless it is a payment order issued to the originator’s bank. If it is issued to the originator’s bank, the payment order cannot be accepted until either:
1. the payment date, if the bank is the beneficiary’s bank; or
2. the execution date, if the bank is not the beneficiary’s bank.
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What are the rules pertaining to the acceptance by and duties of a ***receiving bank***?
* Generally, the duties and obligations of receiving banks that carry out a funds transfer arise only as a result of acceptance of payment orders or of agreement made by receiving banks. No receiving bank is an agent for any other party in the funds transfer.
* If a receiving bank (other than the beneficiary’s bank) fails to execute a payment order despite sufficient funds in the sender’s account to cover the order, and the sender does not receive notice of rejection of the order, then, if the sender’s account does not bear interest, the bank shall pay interest to the sender on the amount of the order for the number of days elapsing after the execution date to the earlier of the day the order is cancelled or the day the sender receives notice or learns that the order was not executed, counting the final day of the period as an elapsed day.
* If the receiving bank accepts a payment order, the bank has the following obligations in executing the order:
* It shall issue, on the execution date, a payment order complying with the sender’s order and follow the sender’s instructions to be used in carrying out the funds transfer; and
* If the sender’s instruction states that the funds transfer is to be carried out telephonically or by wire transfer, or indicates that it should be carried out by the most expeditious means, the receiving bank must transmit its payment order by the most expeditious available means and instruct any intermediary bank accordingly.
* Unless instructed by a sender, a receiving bank may not charge for its services and expenses in executing the sender’s order by issuing a payment order less the amount of the charges.
* Acceptance by the receiving bank of a payment order obliges the sender to pay the bank the amount of the order, due on the execution date. The sender’s obligation is excused if the funds transfer is not completed by acceptance by the beneficiary’s bank of the payment order.
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What indicates ***acceptance of a payment order*** by a ***beneficiary’s bank***?
A beneficiary’s bank accepts a payment order at the earliest of the following times:
1. when the bank pays the beneficiary, notifies the beneficiary of receipt of the order without rejecting it, or credits the account of the beneficiary with respect to the order;
2. when the bank receives payment of the entire amount of the sender’s order; or
3. the opening of the next funds-transfer business day of the bank following the payment date if, at that time, the amount of the sender’s order is fully covered by a withdrawable credit balance in an account of the sender or the bank has received full payment from the sender, unless
1. the order was rejected before that time; or
2. the order is rejected within:
i. one hour after that time; or
ii. one hour after the opening of the sender’s next business day following the payment date if that time is later.
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What indicates ***rejection of a payment order***?
Acceptance of a payment order precludes a later rejection of the order. Similarly, rejection of a payment order precludes a later acceptance of the order.
A payment order is rejected by the receiving bank by a ***notice of rejection*** transmitted to the sender orally, electronically, or in writing. A notice of rejection does not require the use of particular words and is effective if it indicates that the receiving bank is rejecting the order or will not execute or pay the order.
Rejection is effective when the notice is given if transmission is by a means that is reasonable in the circumstances. Otherwise, rejection is effective upon receipt.
If a receiving bank fails to accept a payment order that it is obliged by express agreement to accept, the bank is liable for breach of the agreement.
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What are the rules pertaining to the acceptance by and duties of a ***beneficiary’s bank***?
If a ***beneficiary’s bank*** accepts a payment order, the bank shall pay the amount of the order to the beneficiary, due on the payment date of the order.
If the bank refuses to pay after demand by the beneficiary and receipt of notice of particular circumstances that will give rise to consequential damages as a result of nonpayment, the beneficiary may recover damages to the extent the bank had notice of them, unless the bank refused payment due to a reasonable doubt concerning the beneficiary’s right to payment.
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