Mastering Negotiable Instruments (UCC Articles 3 and 4)

and Other Payment Systems

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Carolina Academic Press Mastering SeriesRussell Weaver, Series Editor

Mastering Administrative Law

William R. Andersen

Mastering Adoption Law and Policy

Cynthia Hawkins DeBose

Mastering Alternative Dispute Resolution

Kelly M. Feeley, James A. Sheehan

Mastering American Indian Law

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Mastering Appellate Advocacy and Process, Revised Printing

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Mastering Art Law

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Mastering Elder Law, Second EditionRalph C. Brashier

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Mastering Legal Analysis and CommunicationDavid T. Ritchie

Mastering Legal Analysis and DraftingGeorge W. Kuney, Donna C. Looper

Mastering Negotiable Instruments (UCC Articles 3 and 4) and Other Payment Systems, Second Edition

Michael D. Floyd

Mastering NegotiationMichael R. Fowler

Mastering Partnership TaxationStuart Lazar

Mastering Professional Responsibility, Second EditionGrace M. Giesel

Mastering Property Law, Revised PrintingDarryl C. Wilson, Cynthia Hawkins DeBose

Mastering Secured Transactions: UCC Article 9, Second EditionRichard H. Nowka

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Mastering Negotiable Instruments (UCC Articles 3 and 4)

and Other Payment Systems

Second Edition

Michael D. FloydSamford University, Cumberland School of Law

Carolina Academic PressDurham, North Carolina

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Copyright © 2018Michael D. Floyd

All Rights Reserved.

Library of Congress Cataloging-in-Publication Data

Names: Floyd, Michael D., author.Title: Mastering negotiable instruments (UCC Articles 3 and 4) and other

payment systems / Michael D. Floyd.Description: Second edition | Durham, North Carolina : Carolina Academic

Press, LLC, 2017. | Series: Carolina Academic Press Mastering Series. |Includes bibliographical references and index.

Identifiers: LCCN 2016057934 | ISBN 9781611635195 (alk. paper)Subjects: LCSH: Negotiable instruments--United States. | Payment--United

States.Classification: LCC KF957 .F58 2017 | DDC 346.73/096--dc23LC record available at https://lccn.loc.gov/2016057934

eISBN 978-1-5310-0641-9

Carolina Academic Press, LLC700 Kent Street

Durham, NC 27701Telephone (919) 489-7486

Fax (919) 493-5668www.cap-press.com

Printed in the United States of America

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For my students, who teach me so much

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Contents

Series’ Editor Foreword xix

Acknowledgments xxi

Chapter 1 • Introduction 3Roadmap 3Checkpoints 5

Chapter 2 • The Law Governing Payment Systems: Uniform Law, Other State Law, Federal Law, Private Ordering Arrangements, and International Law 7

Roadmap 7A. The Uniform Commercial Code (UCC) and Other State Law 8B. Federal Statutes and Regulations 9C. Judicial Decisions 11D. Private Ordering Arrangements 12E. International Law 13F. Mastering the Statutes 14G. A Note on Citations 14Checkpoints 15

Part OneNegotiable Instruments(UCC Article 3)

Chapter 3 • Drafts and Notes 19Roadmap 19A. Drafts and Notes as Types of Payment Systems 20B. Note Terminology and Functions 22C. Draft Terminology and Functions 23Checkpoints 25

ix

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x CONTENTS

Chapter 4 • Specialized Negotiable Instruments 27Roadmap 27A. Cashier’s Checks 27B. Teller’s Checks 28C. Certified Checks 28D. Traveler’s Checks 30E. Certificates of Deposit 30F. Article 9 Instruments 31G. “Acceptance,” “Accepted,” “Accept,” etc. in Article 3 32

1. The Confusing UCC Definition of “Acceptance” 322. Appropriate Use of “Acceptance”: Certified Checks and

Bankers’ Acceptances 33Checkpoints 34

Chapter 5 • Characteristics of All Negotiable Instruments 35Roadmap 35A. Unconditional 37B. Promise or Order 38C. Fixed Amount of Money 38D. Payable to Bearer or to Order 41E. Payable on Demand or at a Definite Time 42F. Free of Any Non-Monetary Undertaking or Instruction 42G. No Opt-Out from UCC Article 3 43Checkpoints 44

Chapter 6 • Issue, Transfer, and Negotiation of Negotiable Instruments 45

Roadmap 45A. Issue 45B. Transfer and Negotiation 46C. Holders 47D. Persons Entitled to Enforce 47E. Indorsements 48

1. Blank Indorsements 482. Special Indorsements 493. Restrictive Indorsements 494. Anomalous Indorsements 49

F. Loss and Theft 50Checkpoints 51

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Chapter 7 • Holders, the Holder-In-Due-Course Doctrine, and the Shelter Rule 53

Roadmap 53A. Benefits of Being a Holder 54B. Requirements to Become a Holder 55

1. Possession 552. Payable to Bearer or to the Person in Possession 55

a. Instruments Payable to Bearer 55b. Instruments Payable to Order (i.e., to an Identified

Person) 56c. Effect of Indorsements 56

C. Benefits of Being a Holder in Due Course 571. Defenses 57

a. Real Defenses 58b. Personal Defenses 59c. Payment and Other Means of Discharge 59

2. Claims in Recoupment 603. Claims to a Negotiable Instrument 604. Other Special Rules Relating to Defenses, Claims, and

Holders in Due Course 61D. Requirements to Become a Holder in Due Course 62

1. Value 632. Good Faith 643. No Notice of Problems with the Instrument 65

a. Overdue, Dishonored, or Affected by Uncured Defaults 66

b. Unauthorized Signatures or Alterations 67c. Claims to the Instrument 67d. Defenses and Claims in Recoupment 68

E. Exercising Someone Else’s Rights as Holder or Holder in Due Course: The Shelter Rule 69

Checkpoints 70

Chapter 8 • Basic Liability Rules for Negotiable Instruments 71Roadmap 71A. Signatures on Negotiable Instruments 72

1. Signatures by Agents 722. Forged Signatures 743. Other Signature Rules 74

CONTENTS xi

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B. Types of Liability: Issuer (Maker or Drawer), Indorser, or Acceptor 741. Issuers (Makers and Drawers) in General 752. Issuers of Notes and Cashier’s Checks 753. Drawers of Drafts 764. Indorsers 775. Acceptors 77

C. Liability for Altered Instruments 781. Incomplete Instruments 782. Completed Instruments 79

Checkpoints 80

Chapter 9 • Payment and Other Means of Discharge 81Roadmap 81A. Who May Make Payment 82B. Who Must Receive Payment 82

1. Payment “to a Person Entitled to Enforce” 822. Conflicting Claims to the Instrument 84

C. Other Discharge Mechanisms 841. Cancellation, Renunciation, etc. 842. Drawers of Drafts 853. Indorsers 854. Other Discharge Rules for Secondary Obligors 86

Checkpoints 86

Chapter 10 • Secondary Obligors: Guarantors, Sureties, Accommodation Parties, and Other Secondary Sources of Repayment 87

Roadmap 87A. Distinguishing Primary and Secondary Sources of

Repayment 87B. Terminology 90C. Secondary Obligations on the Instrument Itself 91

1. Classifications of Signatures on the Instrument 91a. Joint and Several Liability 92b. Principal and Secondary Liability 92

2. Sorting Out the Ultimate Cost of the Debt 93a. Contribution 94b. Reimbursement 94

xii CONTENTS

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c. No Recovery by Principal Obligors against Secondary Obligors 95

3. Suretyship Defenses 96a. Impairment of Collateral 97b. “Other” Modifications 98c. Extension of Time 98d. Release 100e. Other Limits on Release, Modification, etc. 100

D. Secondary Obligations in a Separate Guaranty Agreement 1011. The Nature of the Transaction 1012. Waivers 1013. Governing Law 102

E. Letters of Credit 1021. Governing Law 1032. Basic Terminology and Mechanics 1033. Documentary Letters of Credit 1044. Standby Letters of Credit 105

Checkpoints 105

Chapter 11 • Underlying Obligations: Suspension and Discharge 109Roadmap 109A. The Simple Case with Specialized Instruments: Certified

Checks, Cashier’s Checks, and Teller’s Checks 110B. The Usual Case: Notes and Non-Specialized Checks 111C. Payment 112D. Presentment, Dishonor, Notice of Dishonor 112

1. Presentment 1132. Dishonor 1133. Notice of Dishonor 113

Checkpoints 114

Part TwoCheck Collection (UCC Article 4 and Related Federal Law)

Chapter 12 • Forward Collection, Presentment, and Final Payment 117Roadmap 117A. Parties and Terminology 118

CONTENTS xiii

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B. Applicable Law: The Complex Intersection of State and Federal Rules 118

C. The Normal Path of a Check 119D. Presentment 120E. Settlement and Payment 120

1. Provisional Settlement 1212. Final Payment 121

a. The Midnight Deadline Rule 121b. Other Ways the Payor Bank Might Make Final

Payment 123c. Basic Definitions 123d. Extension of Time for Afternoon Receipt 124e. Examples 124

3. Consequences of Making Final Payment 125a. Consequences to the Payor Bank 125b. Consequences to Collecting Banks 126

F. Is the Check “Properly Payable”? 1261. The Meaning of “Properly Payable” 1262. Overdrafts 1273. Forgeries 1274. Stop Payment Orders 1285. Postdated Checks 129

Checkpoints 130

Chapter 13 • Funds Availability to Depositors 131Roadmap 131A. UCC Rules 131B. Expedited Funds Availability Act/Regulation CC Rules 132

1. Subpart A of Reg. CC: Definitions 1332. Subpart B of Reg. CC: Availability Rules 134

a. The General Availability Schedule 135b. Adjustments for Risk Factors 135

3. Bank Liability for Noncompliance 137Checkpoints 137

Chapter 14 • Dishonor, Return Mechanisms, Deadlines, and Bank Liability 139

Roadmap 139A. UCC Rules 140

1. Dishonor 140

xiv CONTENTS

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2. Wrongful Dishonor 1413. UCC Return Mechanism 1424. Payor Bank Return Deadlines and Liability 1425. Collecting Bank Return Deadlines and Liability 143

B. EFAA/Reg. CC Rules 1441. Overview of Subpart C Expedited Collection and

Return Rules 1442. Expeditious Return 145

a. Two-Day/Four-Day Test 145b. Forward Collection Test 146

3. Notice of Nonpayment of $2,500.00+ Checks 1464. Special Rule Extending the UCC Deadlines 1475. Reg. CC Liability 147

C. Check 21 1481. Overview 1482. Definitions 1493. Substitute Checks 1494. Warranties and Indemnity 1505. Expedited Recredit 151

a. Consumer Claims for Recredit 151b. Bank Claims for Recredit 152

Checkpoints 152

Chapter 15 • Fundamental Loss Allocation under the UCC 153Roadmap 153A. Drawer and Indorser Liability 154B. Transfer and Presentment Warranties 154

1. Comparing the Article 3 and Article 4 Versions of the Warranties 155

2. Differences between the Transfer Warranties and the Presentment Warranties 155a. Who Gets Which Warranties 155b. Effect of a Forged Drawer’s Signature 156c. No Defense, Claim in Recoupment, or Insolvency

Proceeding 1573. Warranties Given for Both Transfer and Presentment 157

a. Person Entitled to Enforce 157b. No Alteration 158c. Special Warranty for Remotely Created Consumer

Items 159

CONTENTS xv

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4. General Effects of a Breach of Warranty 160C. Examples 161

1. Forged Drawer’s Signature 1612. Forged Indorsement 1633. Alteration 165

Checkpoints 167

Chapter 16 • Specialized UCC Loss Allocation Rules for Negotiable Instruments 169

Roadmap 169A. Section 3-407: Alterations 171B. Section 3-406: General Negligence 172C. Section 4-406: Failure to Examine Bank Statements 173D. Section 3-405: Fraudulent Indorsements by Employees 175

1. Checks Payable to the Employer 175a. Cashing the Check 176b. Depositing the Check in the Dishonest Employee’s

Account 176c. Comparative Negligence 177

2. Checks Issued by the Employer 177E. Section 3-404: Impostors and Fictitious Payees 178F. Conversion 179Checkpoints 180

Part ThreeOther Payment Systems

Chapter 17 • The Law of Credit Cards 183Roadmap 183A. Overview 183B. Issuance Restrictions 185C. Disclosure of Credit Card Terms 186

1. Initial Disclosure Requirements 1862. Periodic Statement Disclosures 1873. Other Disclosure Requirements 188

D. Cardholder Rights for Addressing Problems with Transactions 1881. Unauthorized Use 1882. Assertion of Claims and Defenses 190

xvi CONTENTS

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3. Billing Errors 190E. Other Cardholder Protections 191Checkpoints 192

Chapter 18 • The Law of Debit Cards and Other Consumer Electronic Fund Transfers 193

Roadmap 193A. Overview 193B. Issuance 195C. Disclosure 196

1. Initial Disclosure 1962. Post-Issuance Disclosure 196

D. Limits on Liability 197E. Error Resolution 198Checkpoints 199

Chapter 19 • Funds Transfers (UCC Article 4A) 201Roadmap 201A. Overview 201

1. United States Law 2012. International Law 203

B. Terminology and Parties 2031. Funds Transfer 2032. Payment Order 2043. Beneficiary and Beneficiary’s Bank 2044. Originator and Originator’s Bank 2055. Sender and Receiving Bank 2056. Intermediary Bank 2057. Payment Date and Payment 205

C. Acceptance or Rejection of Payment Orders 2061. Acceptance 2062. Rejection 2063. Other Liability Rules 207

Checkpoints 207

Epilogue 209

Master Checklist 213

Index 217

CONTENTS xvii

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xix

Series Editor’s ForewordThe Carolina Academic Press Mastering Series is designed to provide you

with a tool that will enable you to easily and efficiently “master” the sub-stance and content of law school courses. Throughout the series, the focusis on quality writing that makes legal concepts understandable. As a result,the series is designed to be easy to read and is not unduly cluttered with foot-notes or cites to secondary sources.

In order to facilitate student mastery of topics, the Mastering Series in-cludes a number of pedagogical features designed to improve learning andretention. At the beginning of each chapter, you will find a “Roadmap” thattells you about the chapter and provides you with a sense of the material thatyou will cover. A “Checkpoint” at the end of each chapter encourages you tostop and review the key concepts, reiterating what you have learned. Through-out the book, key terms are explained and emphasized. Finally, a “MasterChecklist” at the end of each book reinforces what you have learned andhelps you identify any areas that need review or further study.

We hope that you will enjoy studying with, and learning from, the Mas-tering Series.

Russell L. WeaverProfessor of Law & Distinguished University ScholarUniversity of Louisville, Louis D. Brandeis School of Law

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xxi

AcknowledgmentsI am grateful to the Cumberland School of Law and Samford University

for enabling me to teach and explore the topic of this book and other sub-jects that interest me. I particularly appreciate Dean Henry Strickland, for-mer Dean John Carroll, Associate Dean Brannon Denning, Assistant Deanfor Administration Ken England, and Vice Dean (retired) Jim Lewis for themany ways that they have supported my efforts. My years toiling in the com-mercial law vineyard have been educational and enjoyable thanks in largepart to Samford colleagues Howard Walthall, Paul Kuruk, and WoodrowHartzog; former Samford colleagues Larry Ahern, Steve Ware, and Tim Zin-necker; University of Alabama colleagues Bill Henning and Gene Marsh;University of Tennessee colleagues George Kuney, Bob Lloyd, and Tom Plank;and numerous others. I have gained much knowledge and many good friendsfrom participating in the Alabama Law Institute's law reform efforts; in thatwork I learned much that is relevant to this book from Douglas Arendall,Hamp Boles, Richard Carmody, David Carroll, Rob Couch, Penny Davis,Ed Dean, Bill Hairston, III, Palmer Hamilton, Othni Lathram, Wallace Mal-one III, Bob McCurley, Ron Sims, Hon. James Sledge, Joe Stewart, StephenTrimmier, Sam Upchurch, and Larry Vinson. Special thanks are due to LauraTaylor and Jennifer Lovelady, my Program Assistants, who have handled in-numerable details, arrangements, and problems with consistent skill, in-sight, dedication, grace, and good humor; and to Anna Scully (CumberlandClass of 2009) and Kayla Currie (Cumberland Class of 2017), Research As-sistants who did extensive, helpful work on this book. Thanks also to RussWeaver and the editors at Carolina Academic Press, who have been excep-tionally accommodating in this project.

I acknowledge my indebtedness to authors whose books I regularly turnto for insight and guidance: James J. White & Robert S. Summers, UniformCommercial Code (6th ed. 2010); Fred H. Miller & Alvin C. Harrell, TheLaw of Modern Payment Systems (2003 & Supp. 2006); Frederick M. Hartand William F. Willier, Negotiable Instruments Under the Uniform Com-

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mercial Code (2007). Similarly, I have great admiration and appreciation forthe authors of books I have used to teach this material: Ronald J. Mann, Pay-ment Systems and Other Financial Transactions: Cases, Materials, and Prob-lems (6th ed. 2016) (and previous editions); Robert L. Jordan & William D.Warren, Commercial Law (3rd ed. 1992); and David C. Epstein, James A.Martin, William H. Henning, & Steve H. Nickles, Basic Uniform Commer-cial Code: Teaching Materials (3rd ed. 1988).

Of course, if anything in this book is wrong, misguided, trivial, or bor-ing, that responsibility is entirely my own.

Last, but most important, I note my gratitude, love, affection, and ap-preciation for Annette and our children (all now adults) — John, Sarah, Ellen,and Russell — who bring tremendous joy and meaning to my world.

Michael D. FloydSamford UniversityCumberland School of Law Birmingham, AlabamaSeptember 2017

xxii ACKNOWLEDGMENTS

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