Pay System Checklist

7/28/2019 Pay System Checklist

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PAYMENT SYSTEMS CHECKLISTSPRING 2003

1) CHECKING SYSTEMa) Banks Obligation to the Customer UCC 4-401

i) Mandatory Payment of Check(1) Properly payable

(a) Authorized by the customer and in accordance with agreement UCC 4-401

(b) Authorized means signed by the customer on the account UCC 4-401(c) Agreement can vary Art. 4 but bank cannot contract away its duties of good faith

and ordinary care. Parties can determine their own standards of ordinary care UCC 4-103

(2) Sufficient Funds(a) Bank needs to check for sufficient funds only once UCC 4-402(b) If bank checks again, that determination controls UCC 4-402

(3) No valid stop payment order UCC 4-403(4) If bank does not pay, bank wrongfully dishonored the check UCC 4-402

ii) Discretionary Payment of Check UCC 4-401(1) Properly payable even if it creates an overdraft(2) Post-dated checks without notice from customer of delaying payment if the bank acts

in good faithUCC 4-401(a) Honesty in fact and(b) Observance of reasonable commercial standards of fair dealing UCC 4-104

iii) Prohibited Payment of Check(1) When not properly payable (forgeries) UCC 4-401(2) Valid stop payment order UCC 4-403

(a) Any customer on the account notifies the bank to stop payment(b) Written or oral notice

(i) Written = 6 month effectiveness(ii) Oral = 2 weeks effectiveness

(c) Describing the check with reasonable certainty(d) Given within a reasonable time so the bank can act

(e) Can be renewed(f) Once expired, bank can pay if it pays in good faith

iv) Wrongful Honor UCC 4-407(1) Bank wrongfully pays an item it should not have(2) General Rule: Bank is required to recredit the customer's account(3) Exception: If unjust enrichment results, bank is subrogated to the rights of the party

unjustly enriched(4) Effect: Bank need not recredit customer

b) Funds Availabilityi) General Rules

(1) UCC Rule: Bank need not make funds available until bank receives payment (settles)

UCC 4-215(2) Exception: Expedited Funds Availability Act and Regulation CC(3) Definitions Reg. CC 229

(a) Business Days: weekdays not including holidays(b) Banking day: business days that bank conducts banking business

ii) Basic Funds Availability Rules(1) There is no rule allowing for same day availability of funds(2) Noncash withdraw from local check

(a) Day 1: $100; Day 2: Balance(3) Noncash withdraw from nonlocal check


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(a) Day 1: $100; Day 5: Balance(4) Cash Withdraw from local check

(a) Day 1: $100; Day 2: $400; Day 3: Balance(5) Cash Withdraw from Nonlocal Check

(a) Day 1: $100; Day 5: $400; Day 6: Balance

iii) Next-Day Availability: No Risk Items Reg. CC 229(1) In-person cash deposit directly to teller in your own account

(2) Deposit of US government check (Treasury Check) in your name(3) Deposit of state or local government check in your name from the same state as bank(4) In-person deposit of cashier's, certified, or tellers' check in your name and in your

account(5) Deposit of "on-us" item(6) $100 of the aggregate amount of all checks (not counting next-day availability checks)

in any one banking day

iv) Second-Day Availability: Slightly Higher Risk Items Reg. CC 229(1) Local checks(2) Local third party cashier's check(3) U.S. Treasury check and state/local government checks signed over to 3rd person(4) ATM deposits at ATM owned or controlled by depositary bank

v) Five-Day Availability: High Risk Items Reg. CC 229(1) Funds from a deposit of a nonlocal check must be made available on the fifth business

day following the banking day of the deposit(2) Nonlocal third party cashier's check(3) ATM deposits at ATM notowned or controlled by depositary bank

vi) Exceptions: Extension of Availability Schedule for Highly Risky Items Reg. CC 229(1) New Account Deposits (open for 30 days or less)(2) Amounts over $5000 (UCC 4-215 applies for amounts over $5000)(3) Redeposited Checks(4) Deposits into "repeatedly overdrawn" account(5) Deposits where there is "reasonable cause to doubt collectibility" (case-by-case

determination)

c) Check Collection Systemi) Definitions UCC 4-105

(1) Payor Bank: bank that is the drawee of a draft(2) Depositary Bank: where check is depositedcan be payor bank as well(3) Collecting Bank: Any bank that handles an item for collection except the payor bank.(4) Intermediary Bank: transferring bank except the depository and payor bank(5) Presenting Bank: any bank presenting an item except a payor bank(6) Midnight deadline: midnight of the next banking day after a bank receives the check

UCC 4-104(7) End of Banking Day: 2 P.M. or later so the bank can (1) process (2) prove balances and

(3) make entries. If deposited after cutoff, treated as deposited the next banking day.UCC 4-108

(8) Branches: Each branch of a bank is separate bank for deadline purposes UCC 4-107

ii) Forward Collection(1) Depositary bank receives item and gives provisional credit for the deposit by midnight

of the banking day it receives the item (unless it's an "on-us" item)(2) Collecting banks must use "ordinary care" in collecting the item UCC 4-202

(a) Collecting banks are "agents" of the customer during the collection process(b) Agency relationship terminates when the item is finally paidthen, depositary

bank becomes debtor of the customer (because it owes the customer the amountof the check)

(3) "Ordinary care" means forwarding the check for collection before its midnight deadline


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UCC 4-202(4) If the check is dishonored, depositary bank can revoke settlement, chargeback the

amount of the item, orobtain a refund from the customer UCC 4-214(a) Must return the item by its midnight deadline or a reasonable time after it learns of

the facts or(b) Notifies the customer of the facts if the item cannot be returned(c) If the depositary bank is the payor bank also, it must meet its midnight deadline

(5) Liability for Depositary Bank's Failure to Meet Requirements

(a) Loses ability to revoke settlement(b) Loses chargeback right

iii) Return(1) Payor bank must settle by midnight of the banking day it receives the item for

payment(2) "Settle" means to give provisional credit or pay(3) Final Payment: UCC 4-215

(a) Payor bank pays item in cash or(b) Fails to revoke settlement before its midnight deadline

(4) Dishonor(a) Payor bank has ability to dishonor an item if

(i) It is a demand item

(ii) Not presented for immediate payment(iii) Returned before midnight deadline and before final payment(b) Payor Bank must "send" dishonored check before its midnight deadline UCC 1-

201; 4-104(c) Bank must comply with expeditious return requirements Reg. CC 229

(i) 2-day test for local checks(ii) 4-day test for nonlocal checks(iii) forward collection test: send the check the same way it was presented

(d) Bank must give notice of dishonor for return of checks exceeding $2500(5) Liability for Payor Bank's Failure to Meet Requirements

(a) Payor bank is "accountable" for the amount of the item if it does not meet thereturn process requirements UCC 4-302

(b) Payor bank loses ability to revoke settlement(c) Payor Bank breaches warranty of expeditious return Reg. CC 229

iv) Encoding Warranties UCC 4-209; Reg CC 229(1) Person who encodes information on an item warrants to (1) subsequent collecting

banks and (2) payor bank that encoded information is correct(2) If customer of bank is the encoder, than the customer's bank also makes the warranty(3) If information is incorrect, encoder is liable to the payor bank(4) NOTE: Reg CC only applies to banks and warrants that the MICR line is correct

d) General Risk of Loss Rules (Banks Usually Bear Risk)i) Nonpayment

(1) Risk of nonpayment is allocated according to indorser liabilityand drawer liability(2) Indorsers Liability: Any indorser is liable for the amount of the check UCC 3-415

(a) Indorser liable to person entitled to enforce the item and subsequent indorsers whopaid the instrument

(b) Applies when check is dishonored(i) Banks must give notice of dishonor to indorsers by midnight deadline(ii) Other parties must give notice of dishonor to indorsers within 30 days

(c) Indorser Liability can be disclaimed by stating "without recourse" after indorsement(3) Drawer Liability: Drawer of the check is liable if the bank dishonors the check UCC 3-

415

ii) Forgeries(1) Forged Drawer's Signature

(a) If the Payor Bank Pays


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(i) Payor bank should not have charged the customer's account(ii) Payor bank bears the risk of loss(iii) Bank deemed to know the signature of its customers Price v. Neal(iv)Payor bank almost always bears risk, but there are two very limited exceptions:

1. Payment by Mistake: UCC 3-418a. If payor bank pays under mistaken belief that drawer's signature was

authorized, payor bank can recover from the person who benefited fromthe payment

b. Exception: Person took in good faith and for value (fails here becausemost times everyone in the chain takes in good faith and for value)2. Presentment Warranties UCC 4-208

a. Banks that present checks to payor bank warrant that they do notactually know that the drawer's signature is forged

b. Fails here because everyone in the chain would have to "actually know"that the scoundrel forged the drawer's signaturemost times, theydon't actually know

(b) If the Payor Bank Dishonors(i) Presenting banks bear the risk of loss(ii) Loss can be passed to the earliest solvent party that dealt with the thief

(2) Forged Indorsements

(a) If the Payor Bank Pays(i) Payor bank should not have charged the customer's account(ii) Payor bank bears the risk of loss(iii) To shift the loss, Payor Bank can pursue Presentment WarrantyUCC 4-208

1. Banks that present checks for payment warrant thata. Transferor entitled to enforce the itemb. No alterationsc. Transferor does not actually know that the drawer's signature is forged

2. Once proven, loss shifts to the parties that breached presentmentwarranties

(b) If the Payor Bank Dishonors(i) Presenting bank bears the risk of loss(ii) To shift the loss, presenting bank can pursue Transfer WarrantyUCC 4-207;

UCC 3-4161. Customers and collecting banks that transfer items and receive settlement

or consideration warrant thata. Transferor is entitled to enforce the itemb. All signatures are authentic and authorizedc. There are no alterations

2. Once proven, loss shifts to the earliest solvent party that dealt most closelywith the thief

iii) Alterations(1) Incomplete Checks Later Completed UCC 3-407

(a) Payor bank can pay the full amount of the check as written(b) Payor bank can charge the drawer for the amount(c) Rationale: drawer should've done a better job completing the check

(2) Terms of the Check have been changed UCC 3-407; 4-401(a) Drawer can only be charged according to the check's original terms(b) Payor bank can sue under presentment warranty to recover the balance UCC 4-

208

e) Special Risk of Loss Rules (Risk can Shift Back to the Customer)i) Negligence UCC 3-406

(1) General Negligence (Bank's Burden of Proof)(a) Failure to exercise ordinary care(b) Substantially contributes to alteration or forgery(c) Effect: legitimizes any forgery


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(2) Comparative Negligence (Customer's Burden of Proof)(a) Bank must also exercise ordinary care in payment(b) Bank can share the loss if there was an obvious forgery(c) Plaintiff bears burden of proving comparative negligence

ii) Bank Statement Rule UCC 4-406(1) Banks are not required to issue statement but do so to avoid liability. Statement

includes

(a) Copies of the checks or(b) Sufficient information so the customer can identify the check(2) Customer must exercise reasonable promptness to examine and determine any

unauthorized activity(3) If customer does not act reasonably prompt, customer cannot assert against the bank

(a) Any unauthorized signatures or alterations(b) Subsequent forgeries by the same wrongdoer

(4) One Year Rule: If customer waits one year to report forgeries, customer is liable for allforgeries during that year

iii) Employee Fraud UCC 3-405(1) General Rule: Employers are not responsible for employee fraud if they exercise

ordinary care

(2) Ordinary care means safeguarding checks Comment(3) Exception: If the employee has check-writing authority, employer can be liable for theamount of the check

iv) Imposters UCC 3-404(1) If imposter induces drawer to issue an instrument, the forgery is deemed properly

payable(2) Risk of loss shifts to the drawer(3) Rationale: drawer dealing with the imposter is in the best position to prevent fraud

v) Conversion UCC 3-420(1) Instruments (checks) are personal property(2) At common law, conversion was aimed at scoundrel(3) Under Article 3, bank can be liable if

(a) Payor bank pays on the instrument(b) Payment made to a person not entitled to enforce the instrument

2) CREDIT CARDSa) Defined: any card or credit device existing for the purpose of obtaining something on credit

TILA 103i) Cannot be issued by bank unless requested by customer TILA 132ii) Bank must give clear and conspicuous disclosure of rules governing use Reg. Z 226

b) Billing Errors & Liability TILA 161i) Billing error: item that appears on a credit card statement that does not reflect an actual

transaction on the account. Examples:(1) Transaction that did not occur(2) Charged wrong amount (double swipe)(3) Statement does not reflect customer's payment(4) Computation error(5) Good/services never received

ii) Customer's Duty TILA 161(1) Notify the issuing bank in writing within 60 days(2) Indicate name and account number(3) Indicate the believed error and why it's an error(4) State the amount of the error(5) Send to the proper office for billing disputes


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(6) Remedy for Billing Error--Refund if already paid; If not already paid, withhold paymentTILA 170

iii) Bank's Duty TILA 161(1) Acknowledge in writing within 30 days after customer's notice(2) Correct the error within two complete billing cycles or(3) Send documentation and evidence that the bill is correct(4) Interest does not accrue until customer is required to pay(5) Bank cannot accuse customer of bad credit while dispute is pending. BelmontCase.

(6) Liability: Bank loses the first $50 of dispute if fails to comply with procedure

c) Unauthorized Use & Liabilityi) Authorized Use

(1) User has actual or apparent authorityto use the card(2) Bank has burden to prove the charge was authorized by the customer

ii) Unauthorized Use TILA 103(1) Use by a person who has no actual, implied, or apparent authority and(2) Customer receives no benefit

iii) Liability for Unauthorized Use TILA 161(1) Preconditions to liability

(a) Accepted card(i) Signed(ii) Cardholder requested or applied for and received or(iii) Used or authorized another to use the card

(b) Issuer gave customer notice of liability and a place to call for dispute(c) Card has signature line (so merchant can identify the cardholder)

(2) Liability(a) Cannot exceed $50 or(b) Value of goods or services obtained (if less than $50)(c) Rare Exception: Bank statement rule for egregious negligence Minskoff.

iv) Small Business Rules TILA 135(1) Generally, TILA does not apply(2) Exceptions

(a) Bank can't send unsolicited credit cards to businesses(b) Businesses can be liable for fraud

(3) Business Agreement(a) Bank issues cards to ten or more employees(b) Bank and business can agree that employer will eat the loss for unauthorized use(c) Liability for each unauthorized employee transaction cannot exceed $50

d) Customer's Right to Refuse Payment to Issuer for Merchant's Breach of CC Transaction TILA 170i) Cardholder can refuse payment of credit card bill for a purchase if

(1) Customer made a good faith effort to resolve the dispute with the merchant(2) The purchase is more the $50 and(3) The purchase was made within the same state as the address on the card or within

100 miles of that address if the purchase was made out of stateii) The amount of the claim or defense that the customer can assert against the issuing bank

cannot exceed the amount of outstanding credit

3) DEBIT CARDS (Electronic Funds Transfer)a) Defined

i) Transfer initiated by electronic terminal, phone, or computer to order a bank to pay EFTA 902

ii) Point of sale transfers (used at merchant's location)iii) ATM transfers (deposit or withdraw)


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iv) Bank must provide statement at the time of transfer (receipt) and periodic statementEFTA 906

b) Error & Liability EFTA 908i) Customer's Duty

(1) Customer must notify bank within 60 days of receiving "documentation" of error(2) Notification can be oral or written

ii) Bank's Duty

(1) Bank must investigate within 10 days and recredit customer's account on 11th if therewas an error or(2) Bank can provisionally credit customers account within 10 days and conduct

investigation within 45 days (time limit can be extended)(3) Liability: If there was error, bank must recredit(4) If there was no error, bank must send customer explanation within three days after

conclusion of the investigation

c) Unauthorized Use & Liability EFTA 909i) Unauthorized Use

(1) Transfer initiated by a person(2) Without actual authority to initiate the transfer and(3) Customer receives no benefit from the transfer

ii) Customer's Liability(1) Preconditions

(a) Accepted card (received and activated)(b) Issuer provided means to identify the customer (PIN or signature)(c) Issuer provided notice of liability to customer

(2) Liability of Customer(a) If customer notifies bank immediately, customer is liable for no more than $50(b) If customer waits more than (2) days after learning of the loss, customer can be

liable up to $500(c) Bank Statement Rule for EFTs: If customer waits more than (60) days after bank

sends the first bank statement indicating unauthorized transaction, liability isunlimited for all losses after the 60th day

(d) Limitation on liability applies whether or not the customer was negligent(i) Extenuating circumstances may be asserted to extend the time limits.

4) WIRE TRANSFERSa) Defined UCC 4A-103; 4A-104

i) Funds Transfer is a series of transactions from the originator's payment order to theacceptance by the beneficiary's bank

ii) Payment orderis an unconditional instruction of a sender to a receiving bank

b) Payment Order #1i) Originator (Sender) to Originator's Bank (Receiving Bank)ii) Originator's Bank can accept or rejectiii) To accept, originator's bank must execute the payment order (send payment order #2)

and debit originator's account UCC 4A-209iv) Once accepted, originator's obligation is discharged UCC 4A-406

c) Payment Order #2i) Originator's Bank (Sender) to Fund Transfer System (Fedwire or CHIPS) or directly to

Beneficiary's Bank (Receiving Bank)ii) Beneficiary's bank can accept or rejectiii) Acceptance occurs if

(1) Payment is made to beneficiary(2) Notice of credit is given to the beneficiary(3) Beneficiary bank receives entire amount of sender's order or(4) No rejection before the first hour of the next funds transfer day


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iv) Once beneficiary's bank accepts, it is obligated to pay the beneficiary

d) Rejection UCC 4A-210i) Does not discharge the originator's obligation to the beneficiaryii) Banks have discretion to reject payment ordersiii) Discretion to reject payment order is not absolute. Banco de la Provincia

e) Stopping Payment UCC 4A-211

i) Oral, written, or email notice of cancellation andii) Received before acceptance of payment order and within reasonable time so the bank canact

iii) Fedwire transactions cannot be stopped because they are instantaneous

f) Errorsi) General Rules

(1) Each party is liable for their own mistakes UCC 4A-205(2) Mistake by ISP or FTS is deemed mistake of the party using the ISP or FTS UCC 4A-

206(3) Later parties have no obligation to discover or correct earlier mistakes

ii) Misdescription

(1) Correct Beneficiary; Nonexistent Account UCC 4A-207(a) No person has rights of beneficiary and thus no acceptance can occur(b) Since no acceptance can occur, sender need not pay UCC 4A-402(c) Policy: Big players in the wire transfer system should not how to process orders

(2) Correct Beneficiary; Wrong Account(a) If beneficiarys bank does not actually know (UCC 1-201) the name and account

number refer to different people, beneficiarys bank can rely on the number(b) If beneficiary bank pays according to the account number and the holder of the

account is not the beneficiary, the payment order is deemed accepted(c) Because it is deemed accepted, sender must pay UCC 4A-402(d) If Beneficiarys bank knows the number and name do not match, sender need not

pay and beneficiary bank must pay(3) Originators Obligation for Wrong Account Number on Payment Order

(a) If the originator is a bank, originator must pay the order UCC 4A-407(b) If the originator is not a bank, originator must pay only if originator had notice

(knew or had reason to know UCC 1-201) that the beneficiary bank would rely onthe account number

iii) Errors in the System(1) Sending Excessive Funds

(a) Originator is only obligated for the amount on its payment order UCC 4A-402(b) If originator has already paid, bank must refund the amountwith interest UCC

4A-402(2) Sending Inadequate Funds or Untimely Payment

(a) Originator is only obligated for the amount on its payment order UCC 4A-402(b) Originator's bank sends a second order to fulfill the order(c) If payment order is untimely, originator's bank pays interest(d) If payment order never fulfilled, originator's bank must compensate originator for

interest losses and expenses(e) If inadequate or untimely transfer results in breach of originator's underlying

obligation with beneficiary, originator's bank pays consequential damages(3) Bank Statement Rule

(a) Ordinary Care: Originator must review wire transfer statements(b) Any challenge after 90 days is ineffective to recover interest(c) Any challenge after one year is ineffective to recover any amount paid

iv) Recovery from Unintended Recipient of Funds Transfer(1) Originator can seek restitution from the unintended recipient UCC 4A-207


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(2) When bank sends excessive funds, bank can pursue restitution from unintendedrecipient UCC 4A-303

g) Fraudi) Customer is only liable for the amount of the payment order that was authorizedii) Exception: Use of security procedure can make unauthorized payments authorized

(1) Customer is liable for fraud if security procedure is commercially reasonableand(2) Bank can show that it complied with the security procedure

(3) Loss from fraud can shift back to the bank if Customer must show that the fraudulentpayment order was not performed by someone under the customers control UCC 4A-203

5) PROMISSORY NOTESa) Defined

i) Agreement (usually written) describing time for payment and amount of compensation fordelay of payment (interest)

ii) No particular form for the transaction is requirediii) Contract law applies if non-negotiableiv) Article 3 applies if negotiable

b) Novation

i) Novation(1) Extinguishment of an obligation by the substitution of a new one.(2) Novation may not be presumed(3) Novation determined by the intent of the parties based on the facts and circumstances

ii) Promissory notes may contain a clause that it is the final agreement of the parties andmay not be altered

c) Ratesi) Fixed Rate Loans

(1) Parties agree to a specific interest rate at the time of borrowing(2) Rate does not fluctuate and interest accrues at that rate on the principal balance of

the noteii) Variable Rate Loans

(1) Parties agree to a fluctuating rate(2) Rate is based on an objectively determinable reference rate

iii) Interest rate swaps(1) Lender enters into an interest rate swap w/ a 3rd party (aka the swap partner).(2) Lender swaps the fixed rate payments of its borrower for variable rate payments the

swap partner pays.

d) Usuryi) General Rules

(1) Rate ceiling for various types of loans(2) Defense to payment on the loan (e.g., borrower defaults, bank sues, borrower says

usuryI don't have to pay).(a) Does not apply to home mortgage loans(b) Does not apply to credit cards(c) Corporations cannot assert usury defense unless guarantor of corporation uses

loan to pay personal obligation(3) If usury is raised, lender can assert good faith

ii) Elements(1) Express or implied loan(2) Understanding that money loan will be repaid(3) Interest rate is greater than maximum lawful rate(4) Intent

(a) Corrupt intent (Schnee v. Plemmons) or(b) General intent to charge more than the maximum lawful rate


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e) Late Payments on the Notei) Late payment is "default"ii) Acceleration by Lender: balance becomes due and payable immediatelyiii) Cure: Borrower pays late fees on the principal if loan is accelerated and can cure the late

paymentiv) Default Rate: Maximum non-usurious rate charged for defaultv) Late Charges: Are enforceable so long as they are not "penalties" or "liquidated damages"

(1) Test for Liquidated Damages(a) Susceptible of definite measure or(b) Grossly in excess of actual damages

(2) Burden is on the party asserting that the charge is a penalty

f) Prepayment on the Notei) Lenders can impose charges for prepayment because they might not want the borrower to

pay off the line before they make their money on the loanii) Fixed amount prepayment charge: borrower may prepay at any time but at a fixed chargeiii) Yield maintenance prepayment fee

(1) borrower may prepay but pays the difference in interest between the note's interestrate and the interest rate on a treasury note for the same year. Carlyle Apts.

(2) Lender attempts to approximate actual damages

6) NEGOTIABLE INSTRUMENTSa) Negotiability Requirements UCC 3-104

i) Unconditional promise or order in writing for a fixed amount of money payable to beareror to order on demand or at a definite time and does not state any other undertakings inaddition to the payment of money(1) Unconditional means no express conditions to the payment of money UCC 3-106(2) "Promise" is an undertaking to pay money (Promissory Notes) UCC 3-103(3) "Order" is an instruction to pay money (Drafts, Checks) UCC 3-103(4) "Fixed Amount" can include variable or fixed interest UCC 3-104; UCC 3-112(5) "Payable to bearer" is payable to an unspecified person UCC 3-109(6) "Payable to order" is payable to an identified person UCC 3-109(7) "Payable on Demand" means payable at the will of the holder UCC 3-108(8) "Payable at a definite time" means payable at the end of the term subject to rights of

(1) acceleration; (2) prepayment; (3) extension by the holder or (4) extension bymaker to a further definite time UCC 3-108

(9) "No other undertakings" means no other non-monetary undertakings (e.g., waivers ofliability would be non-monetary undertakings)

ii) If any element fails, Article 3 does not apply

b) Transfer of Negotiable Instrument UCC 3-201i) Negotiation: transfer of possession (voluntary or involuntary) by a person other than the

original issuer that causes the transferee to become a holder

ii) Holders UCC 1-201(1) Holders have are entitled to enforce the instrument UCC 3-301(2) Any person in possession of bearer paper is a holder (even a thief) UCC 1-201(3) The identified person in possession of order paper is a holder UCC 1-201(4) Banks UCC 4-205

(a) Banks automatically become holders as long as the customer was a holder(b) Banks need not indorse the check when it transfers to any other bank

iii) Indorsements(1) Special (Order Paper) UCC 3-205

(a) Identifies the person to whom the instrument is payable(b) Effect: Only the named party can be the holder

(2) Blank (Bearer Paper) UCC 3-205(a) Identifies no one(b) Effect: becomes bearer paper, and anyone in possession becomes the holder


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(3) Anomalous UCC 3-205(a) Indorsement by person who was not a holder when indorsed(b) Effect: indorser acts as a guarantor and can be liable

(4) Restrictive UCC 3-206(a) General Rule: restrictive indorsements have no effect(b) Exception: "For deposit only" or "For collection"

c) Enforcement of Negotiable Instrument

i) Right to Enforce(1) Holders(a) Have a right to enforce the instrument UCC 3-301(b) Holder has the legal right to call for payment from any party obligated to pay

(2) Transferees: Non-Holders UCC 3-203(a) Transferee acquires all rights of transferor(b) If transferor was a holder, transferee has rights of a holder

ii) Presentment and Dishonor(1) Presentment

(a) Demand for payment made by person entitled to enforce(b) Holders present the instrument for payment(c) If the instrument is a note, demand is made to the maker/issuer of the note

(d) If the instrument is a draft or check, presentment is made(2) Dishonor(a) Party to whom presentment is made can honor or dishonor(b) If the instrument is a note, system assumes that the party intends to dishonor if it

does not act immediately(c) If the instrument is a check, system assumes that the party intends to honor unless

it takes immediate steps to dishonor

iii) Defenses to Enforcement UCC 3-305(1) Party obligated to pay can raise defense of nonperformance of the underlying

obligation against a holder (not HDC) who presents the instrument for paymentd) Liability on Instrument

i) Indorser Liability: No party is liable unless the party signed the instrument UCC 3-401(1) Representative Signatures UCC 3-402

(a) If principal would be liable under agency law, principle is liable for indorsement(b) Representative will not be liable if

(i) Signature unambiguously indicates that he is signing as a representative and(ii) Instrument identifies the represented person

(2) Indorser liability is conditioned upon dishonor UCC 3-415(3) Liability is discharged if the bank accepts the instrument after indorsement UCC 3-

401(4) Liability can be limited by writing "without recourse" on the instrument UCC 3-414;

UCC 3-415

ii) Issuer of a Note UCC 3-412(1) Party who makes the note(2) No conditions to liability

iii) Drawee of a Draft UCC 3-408; UCC 3-413(1) Person ordered in a draft to make payment (e.g., payor bank)(2) No liability once the draft is issued(3) Liability conditioned on acceptance (signature = acceptance)

iv) Drawer of a Draft UCC 3-414(1) Person who signs or is identified in a draft as a person ordering payment (e.g., person

who writes the check payable to another)(2) Liability conditioned upon dishonor


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(3) Liability is discharged if the bank accepts the draft

e) Effect of the Instrument on Underlying Obligation UCC 3-310i) Near-Cash Instruments (cashier's checks, certified checks, teller's checks)

(1) Obligation is discharged once the obligee takes the instrument(2) Bank has incurred liability directly

ii) Ordinary Instruments (uncertified checks and notes)

(1) Obligation is suspended when the obligee takes the instrument(2) Suspension continues until dishonor or payment(3) If paid, obligation is discharged(4) If dishonored, suspension terminates and obligee can sue on the instrument or

underlying obligation

iii) Accord & Satisfaction UCC 3-311(1) Instrument is tendered as full satisfaction of a bona fide disputed claim(2) Payor conspicuously notifies the payee that it intends the instrument to constitute full

satisfaction of the claim (PAID IN FULL)(3) Payee successfully obtains payment(4) Exception for Businesses UCC 3-311(c)(1)

(a) Business can require disputed claim to be sent to a designated place (submit

disputes to claims department)(b) If payor does not send to this place, there can be no accord & satisfaction(c) If, within 90 days, the business sends money back, then there is no accord &

satisfaction

f) Holder in Due Course UCC 3-302i) Rule: Holder that takes instrument for value and in good faith without notice of certain

information(1) Holder: possession of bearer paper or possession by identified party to order paper(2) Value: promise of performance, security interest, or exchange of instruments UCC 3-

303(a) Banks give value to the extent that they have security interest or lien in an item

UCC 4-211(b) Bank has security interest if depositor has right to withdraw credit from bank

(3) Good faith: honesty in fact and observance of reasonable commercial standards UCC 3-103

(4) Cannot have notice that(a) Payment is overdue(b) Instrument is dishonored(c) Uncured default in payment(d) Instrument has unauthorized signature(e) Instrument has been altered(f) Claims or defenses to payment exist

(i) Obligor is discharged when paid or released from obligation UCC 3-602(ii) Discharge of obligation is not claim or defense for HDC status

(5) Instrument cannot appear forged or incomplete UCC 3-302

g) Effect of HDC Status UCC 3-305i) HDC takes free of personal defenses

(1) Article 3 Defenses(2) Contract Defenses(3) Claims in Recoupment

ii) HDC takes subject to real defenses(1) Infancy


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(2) Duress(3) Lack of capacity(4) Illegality(5) Fraud in the factum (signer has no reasonable opportunity to discover the true nature

of the notee.g., signer was blind etc. VERY RARE)(6) Discharge in Bankruptcy

iii) Shelter Principle: NO HDC STATUS UCC 3-203

(1) Transferee gets all the rights of the transferor(2) If HDC transfers to transferee, transferee has rights of HDC(3) Transferee can take free of personal defenses(4) NOTE: If transferee engages in fraud or illegality, cannot get rights of HDC

iv) Consumer Notes(1) No one can become a HDC of consumer credit contracts(2) FTC Legend must appear on the note: "Any holder is subject to all claims & defenses"

7) LETTERSOF CREDITa) Process

i) Buyer (Applicant) tells bank (Issuer) to issue a letter of credit to sellerii) Buyers bank presents that to the seller (Beneficiary) or sellers bank (Confirmer or

Advisor)iii) Seller or his bank turns over documents to buyers bankiv) If documents comply, bank paysv) Buyer reimburses buyers bank

b) Issuing Letters of Credit UCC 5-104i) Can be issued in any form that is a record and authenticated by signature or other meansii) Can be an email UCP art. 11(a)(i)

(1) If Email is the first LOC sent, email is the operative credit instrument and no mailconfirmation should be sent

(2) Any mail documentation has no effectiii) No consideration is needed to issue LOC UCC 5-105

c) Obligation of Issuer UCC 5-108; UCP art. 14(d)i) Issuer must honor a presentation that on its face strictly complies with the letter of creditii) Unless otherwise agreed, issuer must dishonor a presentation that does not strictly

complyiii) Issuer has reasonable time after presentation but no later than 7 business days to

(1) Honor the presentment or(2) Give notice to the presenter that there are discrepancies in the presentation UCP

arts. 39(a), 47(a)(a) "About" "approximately" "circa" or similar words used to describe the amount of

credit or quantity of goods are construed as 10% more or less than the amountstated

(b) The words "to" "until" "till" "from" and similar words incorporate the datementioned

(c) The terms "beginning" "middle" or "end" of a month shall be interpreted as 1st tothe 10th, (beginning) 11th to the 20th (middle), and the 21st to the last day ofsuch month (end) respectively, all dates inclusive.

iv) If Issuer does not comply with time limit, issuer cannot not raise discrepancies as adefense to honor

v) UCC Exception to time limit: Issuer suspects fraud or forgery

d) Obligation of Confirmer and Advisor UCC 5-107i) Confirmer is directly obligated on a the LOCii) Advisor merely advises the beneficiary and is not directly liable on the LOC

e) Problems with Letters of Credit


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i) Nonperformanceii) Wrongful Honor UCC 5-108; 5-111

(1) If issuer should not have honored, issuer has no right to reimbursement(2) Applicant (buyer) gets damages

iii) Fraud(1) Forgery(2) Fraud in the transaction

f) Rights of Subrogation UCC 5-117i) Issuer is subrogated to rights of beneficiary as if it was a secondary obligorii) Prevents unjust enrichment

Pay System Checklist

Documents

Transcript of Pay System Checklist