UCC 4 Flashcards
What does UCC4 cover?
Covers check collection, payment, liabilities, time frames and responsibilities
What’s the difference between a warranty and an indemnity, and a warrantor vs warrantee?
Warranty = Promise
Indemnity = Protection
Party making the warranty is the Warrantor.
Party receiving the warranty is the warrantee.
Indemnification is the protection provided to the warrantee by the warrantor if the warrantor breaches the warranty (breaks the promise).
Both UCC 3 and 4 contain transfer and presentment warranties. What UCC codes detail them:
UCC 3-416 and UCC 3-417 and UCC 4-207 and UCC 4-208.
UCC 3-416
UCC 3 Transfer Warranties (Remember E-SAFE-I)
Enforceable - The warrantor is entitled to enforce the instrument.
Signatures - All signatures on the instrument are authentic and authorized.
Alteration - The instrument has not been altered.
Free of claims - No defenses or claims can be asserted against the warrantor
Insolvency - No knowledge of insolvency proceeds for the maker, acceptor, or drawer.
Electronic authorization - for remotely created consumer items, the account holder authorized the item.
UCC 3-417
Enforceable - The warrantor is entitled to enforce the draft or authorized to obtain payment
Alteration - The draft has not been altered.
Unauthorized signature - The warrantor has no knowledge that the drawer’s signature is unauthorized.
Account authorization - for RCC consumer items, the account holder authorized the item.
UCC 4-207
Enforceable - The warrantor is entitled to enforce the item.
Signatures - All signatures on the item are authentic and authorized.
Alteration - The item has not been altered.
Free of claims - No defenses or claims can be asserted against the warrantor
Insolvency - No knowledge of insolvency proceeds for the maker, acceptor, or drawer.
Electronic authorization - for remotely created consumer items, the account holder authorized the item.
UCC 4-208
Enforceable - The warrantor is entitled to enforce the draft or authorized to obtain payment
Alteration - The draft has not been altered.
Unauthorized signature - The warrantor has no knowledge that the drawer’s signature is unauthorized.
Account authorization - for RCC consumer items, the account holder authorized the item.
Bank of First Deposit warrants what?
BOFD is warrantor and paying bank is warrantee: Instrument as UCC 3 calls it an instrument and UCC 4 calls it an item.
How does UCC 3-416 transfer warranties differ from UCC 4-207 transfer warranties?
UCC 3-416 refers to an instrument, and UCC 4-207 refers to an item.
What is an instrument?
Defined under UCC Article 3, A negotiable instrument means an unconditional promise or order to pay a fixed amount of money
What is an item?
Defined under UCC Article 4, UCC 4-104 (9) Item “ means an instrument or a promise or order to pay money handled by a bank for collection or payment.
What happens if a Bank of first deposit transfers an altered check? Who warrants what? And what is warranted?
Bank of first deposit is the warrantor, and the paying bank is the warrantee. One of the warranties made by the BOFD is that the instrument, as UCC 3 calls it, and the item, as UCC 4 calls it, is not altered. If it is altered, the BOFD indemnifies the paying bank, whether it could tell or not that the item was altered. The paying bank can then file a breach of warranty claiming against the BOFD, and this is where the indemnification comes in. UCC 3 and 4 indemnify the face value, the amount of the check, plus expenses and interest.
UCC 4 can be varied by agreement, except for what?
Bank’s duty to act in
good faith and exercise ordinary care
Bank
Includes savings bank, savings and loan association, credit union or trust
company
Depositary Bank
First bank to take an item even though it’s also the Payor Bank, unless item is presented for immediate payment over the counter
Payor Bank
Bank that is the Drawee of a draft. Note: Payor/Drawer/Makor are the same.
Intermediary Bank
A bank to which an item is transferred in the course of collection except the Depositary or Payor Bank
Collecting Bank
Bank handling an item for collection except the Payor Bank
Presenting Bank
Bank presenting an item except a Payor Bank
4-202: A collecting bank must exercise ordinary care in?
Presenting an item or sending it for presentment
4-202: Collecting Bank exercises ordinary care
By taking proper action before its midnight deadline
following receipt of item, notice or settlement
UCC 4-205 – Depositary Bank Holder of Unindorsed Item
If customer delibers an item to a Depository bank for collection:
Depositary Bank becomes holder of the item at the time it receives the item for collection
- If customer at the time of delivery was holder of item
- Whether customer indorses the item or not NOTE: holder is the bearer of the item and some who is entitled to enforce the item.
- Depositary Bank warrants to collecting bank, payor bank and drawer:
- Amount of item was paid to customer or deposited into the customer’s account Note: This is the warranty that the bank of first deposit makes to paying bank and drawer. Even if there is no indorsement. So if the payee doesn’t receive funds, breach of warranty claim applies for missing or forged endorsement.
UCC 4-209 –
Encoding and
Retention
Warranties
Bank of first deposit is responsible for encoding the check correctly, even if the customer does the encoding.
Per UCC 4 - 401, what is considered a Properly Payable item?
Authorized by the customer, and in accordance with
agreement between the customer and bank (becasue UCC 4 can be varied by agreement may be altered by the parties)
Must consider when bank may charge that item to the
customer’s account
Charge creates an overdraft
* Charge is made before date of the check (postdated)
* Unless customer has given notice to bank of the
postdating describing the check with reasonable
certainty
Can a bank charge a customer’s account for postdated checks?
Bank may charge a customer’s account even though payment is made before date
on check (UCC 4-401)
* Unless the customer gives bank notice of
the postdating
Note: depends on agreement also. Agreement should always be written in a manner that staes “we may” or “we reserve the right to” rather than “ We will” or “Will not do”.
Can a bank charge a customer’s account for stale dated checks?
Bank may, but is not obligated to, pay a check presented more than six months after
its date
UCC- 4-404
Does a customer have a right to stop payment?
UCC 4-403
Stop payment of any item drawn on the account,
with the exception of cashier’s check In a manner that affords the bank reasonable
opportunity to act
How long as a stop payment in effect?
UCC 4-403
For 6 months, but lapses after 14 calendar days if
the original order was oral and not confirmed in a
record
Stop payment may be renewed for an additional 6-
month period by record given to bank within
effective period of current stop payment
NOTE: Not required to take it in writing, as UCC can vary by agreement, but if writing is required, must then follow the 14 day rule.
What is the customer’s duty to report?
UCC 4-406: Exercise reasonable promptness in examining the statement; and Promptly notify the bank of any unauthorized/altered item(s)
Timeframe for customer to report varies by agreement, but UCC creates a limit of 30 days.
If customer reports timely bank must make customer whole. Should consider filing a breach of warranty claim for alterations beyond return window. Must suffer loss for counterfeit/forged checks beyond return window. If ECCHO member, will have opportunity to file a Rule 9 claim.
What are some examples in which the bank can refuse making the customer whole after reporting fraud?
Untimely reporting based on agreement for when to report fraud.
If the bank can prove that the forged signature is not forged, but was authorized by the account holder for someone else to sign their name. Example: Mother allows daughter to sign name on checks, but then attempts to file fraud at a later time due to a falling out with the daughter.
What is Statute of Repose – UCC 4-406 (f)
Customer who does not within one year after the statement or items are made available, discover and report unauthorized signature or alteration:
*
That customer cannot claim the unauthorized signature or alteration
*
One year is the outside time limit for customer reporting of customer’s unauthorized signature or alteration of item under this section
What is the difference between transfer warranty and presentment warranty?
Transfer Warranties travel with the item (chain of warranties) from Drawer to Payee,
Payee to Depositary Bank and Depositary Bank to Intermediary/Collecting Bank
Presentment Warranties are made from the Depositary Bank to the Paying Bank
Only the paying bank can receive the presentment warranty.
Transfer Warranties
Person or Collecting Bank
transferring the items warrants
(UCC 4-207):
Entitled to enforce the item
* All signatures on the item are authentic and authorized;
* Item has not been altered;
* Item is not subject to a defense or claim
*Warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker
or acceptor or, in the case of an unaccepted draft, the drawer
* For remotely created consumer item, person on whose account the item is drawn authorized item
and amount for which the item is drawn
Presentment Warranties
Person obtaining payment and
previous transferor presenting
the item warrants (UCC 4-208):
Entitled to enforce draft, or authorized to obtain/acceptance of draft on behalf of a person
entitled to enforce the draft;
* Item has not been altered; and
*Warrantor has no knowledge that signature of the purported drawer of the draft is
unauthorized; and
* For remotely created consumer item, person on whose account the item is drawn authorized
item and amount for which it is drawn
What is the difference between REG CC and UCC RCC warranties?
UCC specifies a consumer item and REG CC does not.
What do transfer warranties warrant in regards to signatures?
All signatures on the item are authentic and authorized; NOTE: This refers to all signatures on the BACK OF THE CHECK. The depository bank does NOT warranty the drawer signature.
Do transfer warranties extend to the paying bank?
No. They stop with the last collecting bank.
Which entity receives the UCC Presentment Warranty when either a bofd, company/rdc customer, or consumer customer presents check directly with the paying bank?
Warranty made to Paying Bank (Drawee) when item is presented for payment
*
Each person, company, depositary or collecting bank, that presents the item would make the Presentment Warranties
Depositor deposits check to BOFD who transmits check to FRB, who then presents the check to paying bank. Where are the transfer and presentment warranties?
Occurs when one of these apply:
- Transfer Warranties made at time of transfer – by entity transferring the item
– Presentment Warranties made at time of presentment by presenting entity AND each prior transferor, at the time of transfer. (Depositary Bank makes presentment warranty to Paying Bank)
– Liability created at time of transfer pending presentment
When does final payment occur?
Item finally paid by Payor Bank when they have:
* Paid for the item in cash;
* Made a provisional settlement;
* Settled for the item withoutright to revoke settlement
* Item finally paid if Payor Bank fails to revoke the settlement in the time permitted by statute or clearinghouse rule, or agreement
Statute of Limitations
UCC 3 years, REG CC1 year:
To prevent fraudulent/stale
claims from arising after all
evidence is lost or after facts
have become obscure
through passage of time
Defense may be asserted by
defendant to defeat action brought
after appropriate time has elapsed
- Enacted by the legislature, which
may either extend or reduce time
limits, subject to certain restrictions
Considered the max time to make a
claim on an item
- To encourage making claims timely
before claim is stale and pertinent
evidence to prove/disprove may be
lost
