Payment systems 1) Introduction to payment systems:

a)

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The functions of money: i) Medium of exchange (1) it keeps us from doing barter system. (a) The barter system creates a double coincidence of wants (i) I must want what you have and you vice versa. (b) This is time consuming and costly. (c) Items that are to be exchanged could depreciate or lose value while I am trying to find someone to exchange it with. A medium of exchange solves this. (2) This is the biggest concept in this class. ii) Store of value (1) allows people to hoard things as valuable and to be able to keep their value. (2) Money is durable, easily retained and recognized as valuable. (3) Money is not the only store of value; land, etc. iii) Unit of account (1) Tool by which accounting can take place iv) Standard of deferred payment (1) allows payment for long-term transactions. (2) Measure of what must be paid when the pmt becomes due. b) Money in general: i) Any form of money can serve as a medium of exchange. ii) Anything that a number of people will use as their medium of exchange can be money (1) people can agree that seashells will be money iii) UCC definition of money: 1-201(24) (1) means a medium of exchange (2) currently authorized or adopted (3) by a domestic or foreign government. (4) includes a monetary unit of account established by (a) an intergovernmental organization (b) or by agreement between two or more countries (5) There are money substitutes, like negotiable instruments like notes and such. c) Definitions and terms from Problem set 1: i) Negotiable instrument: 3-104 (1) "Negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order. (a) PROMISE note (i) promise 1. written undertaking 2. to pay money 3. signed by the person undertaking to pay (ii) Examples of promises: 1. Note a. two-party instrument consisting of: i. maker (person who signs or is identified in a note as a person undertaking to pay) ii. to the order of a second party (the payee). b. Substitution for money c. It is there to document a loan transaction. 2. Obligations under note: 3-412 a. Issuer is supposed to i. If issued, pay note according to its terms at the time it was issued ii. OR, if not issued, at the time it first came into possession of a holder 3. Certificate of deposit a. instrument b. Containing an acknowledgment by a bank that a sum of money has been received by the bank and a promise by the bank to repay the sum of money. c. Think, note of the bank

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(b)

d. Can be used as a medium of exchange. e. you could go to the store and buy that much stuff and then endorse it to them. That never happens. ORDER draft (i) Order: 3-103a8 1. "Order" means a written instruction to pay money 2. signed by the person giving the instruction. (ii) Draft: 1. three-party instrument consisting of an a. order by one person (the drawer) i. "Drawer: a person who signs or is identified in a draft as ordering payment. b. directed at a second party (the drawee) i. "Drawee: a person ordered in a draft to make payment c. directing the drawee to pay a third party (the payee). i. The payee is always named after pay to the order of. (iii) Check: 3-104f 1. draft that is payable on demand a. payable on demand b. or at sight, c. or otherwise indicates that it is payable at the will of the holder, d. or does not state any time of payment 2. and drawn on a bank 3. drawer signs in bottom right corner by convention (not required) (iv) Bill of exchange 1. The drawer and the payee are the seller. The drawee is the buyer. 2. used in documenting sales. 3. There is a simultaneous exchange of goods and money but this is hard to do when the buyer and seller are not in the same place. 4. Simultaneous exchanges are ideal because if you do your end of the deal but the other party doesn't or does defectively, then their only recourse is to one of them. (v) Cashiers Check 3-104g 1. drawer and drawee are: a. same bank b. OR branch of same bank 2. used if the seller is a bit worried about the buyer's financial situation. a. By requiring the bank to pay, we know that this check will not bounce 3. renutter: a. person who has purchased instrument from the bank. (vi) Tellers Check 3-104f 1. means a draft drawn by a bank a. on another bank, b. OR payable at or through a bank 2. Different from a cashiers check because drawer and drawee are not the same bank 3. different from a cashiers check, gives more float and allows for investments 4. preferred by bank to give out. 5. Fed Check: tellers check where bank draws a check on its account with the federal reserve. (vii) "Certified check" 3-409 1. a check accepted by the bank on which it is drawn. 2. Acceptance may be made as stated in a. subsection (a) i. "Acceptance" means the drawee's signed agreement to pay a draft as presented. ii. must be written on the draft iii. may consist of the drawee's signature alone.

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2)

iv. May be made at any time and becomes effective when notification pursuant to instructions is given or the accepted draft is delivered for the purpose of giving rights on the acceptance to any person b. or by a writing on the check which indicates that the check is certified. 3. Drawee incurs liability on the check once it accepts it. a. Acceptance is telling the payee that they are going to get paid. b. Once you make out your check, then the bank is not liable, you are liable. But once the bank accepts it, then they are liable c. 3-414(c): if a draft is accepted by a bank, the drawer is discharged. (viii) Payable through draft: 4-106 1. Item that states that it is "payable through" a bank identified in the item is a. Drawer and drawee are the same. b. Designating the bank as a collecting bank and does not by itself authorize the bank to pay the item c. AND the item may be presented for payment only by or through the bank. 2. Reasons for using a payable through draft: a. That the person who is supposed to get it is the one who gets it. b. They used a payable through draft in order to get interest from their draft. c. Suspends obligation similar to a check or similar money. Principles of negotiability: a) Doctrine of derivative title: i) A person who steals something can't have a property right in it. ii) EXCEPTION: money rule: (1) you can recover cash back from thieves, but once someone takes it for value and in good faith, there can't be recovery even from the true owner b) Acceptance of Legal Tender: Legal tender is not required to be accepted in all situations and under all circumstances. Merchants are permitted to adopt reasonable time and place conditions pertaining to when they will accept legal tender. i) Reasonablenessrequires you to look at whether the burden on the merchant to accept cash is a greater burden than that on the customer to pay w/ an alternative form of payment. ii) ALSO LOOK TO: 3rd Partieslook at the burden placed on 3rd parties. iii) Ex: If motorist were allowed to pay a $1.25 toll w/ pennies, the processing time would take much longer and, as a result, the 3rd parties required to wait in line to pay the toll would incur an increased delay. Therefore, you can argue it is not reasonable to accept pennies at roadway tolls. c) Persons entitled to enforce: 3-301 i) the holder of the instrument, (1) Reasons why it is important to be a holder: (a) PETE (b) Discharge, 3-602: (i) to be discharged of your obligation, you need to pay a person who is a holder. (c) HDC, 3-305Holder in Due Course: (i) in order to be a HDC, you must first be a Holder. (2) Holdership status: (a) In order to be a holder, must trace holdership status (b) Through uninterrupted chain of previous holders (3) Holder by definition (a) holder of bearer paper: must have possession (i) payable to bearer 3-109a: 1. states that it is payable to a. bearer b. OR to the order of bearer c. OR otherwise indicates that person in possession of the promise or order is entitled to payment; d. OR does not state a payee; or e. Pay to order to cash f. Does not say: payable to an identified person. (b) holder of order paper: must be the identified person and also have possession

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(i) Payable to order: 2-109 1. NOT PAYABLE TO BEARER and 2. to the order of an identified person or 3. to an identified person or order. (4) Holder by negotiation (a) Definition of negotiation: (i) transfer of possession, 1. Transfer: a. An instrument is transferred when b. it is delivered by a person c. other than its issuer d. for the purpose of giving to the person receiving delivery e. the right to enforce the instrument (ii) whether voluntary or involuntary, (iii) of an instrument by a person other than the issuer (iv) to a person who thereby becomes its holder. (b) Negotiation and different types of paper (i) Negotiation of bearer paper 1. Transfer of possession (ii) Negotiation of order paper 1. transfer of possession 2. indorsement of the holder (c) Indorsement: 3-204 (i) Elements of indorsement 1. signature, 2. can be either a. alone b. OR accompanied by other words is made on an instrument i. Indorsement MUST be made on instrument ii. OR accompanying documents FIRMLY attached to instrument 3. is for the purpose of a. negotiating the instrument b. restricting payment of the instrument, c. or incurring indorser's liability on the instrument, i. ken gets a check for cash. He takes it to the bank. Teller asks ken to indorse the check. Ken indorses the check. Check bounces. Ken is liable. (ii) evidence to the contrary: 1. signature and accompanying words are indorsement unless a. accompanying words, b. terms of the instrument, c. place of the signature, d. or other circumstances 2. unambiguously indicate that the signature was made 3. for a purpose other than indorsement. (5) Other types of indorsements: UCC 3-205 (a) Special Indorsement: (i) made by the holder, 1. whether instrument payable to an identified person or payable to bearer, (ii) and identifies a PERSON to whom it makes the instrument payable. (iii) Becomes payable to the identified person (iv) and may be negotiated only by the indorsement of that person. (b) Blank indorsement (i) Elements: 1. made by the holder of an instrument 2. NOT a special indorsement 3. becomes payable to BEARER 4. and may be negotiated by transfer of possession alone until specially indorsed.

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ii)

iii)

(ii) Conversion to special indorsement 1. A holder may convert, if 2. writes above the signature of the indorser, 3. words identifying the person to whom the instrument is made payable. a. EX: check is signed on back. Does not identify who it is payable to. It is payable to bearer. Someone comes by and steals the check. They write payable to thief on it. Now it is specially indorsed (c) Anomalous indorsement (i) Indorsement made by a person who is not the holder. (ii) Does not affect the manner in which the instrument may be negotiated. (d) Payable to holder under name that is not of the holder (i) If instrument is payable to a holder under a name that is not the name of the holder, indorsement may be made by the holder in the name stated in the instrument or in the holder's name or both, but signature in both names may be required by a person paying or taking the instrument for value or collection (e) Restrictive indorsement (i) indorsement limiting payment to a particular person or otherwise prohibiting further transfer or negotiation of the instrument is not effective for that. (ii) An indorsement stating a condition to the right of the indorsee to receive payment does not affect the right of the indorsee to enforce the instrument. (6) Signature: (a) Elements of signature (i) includes using any symbol executed or adopted (ii) with present intention to adopt or accept a writing (iii) signatures must be in the instruments that they are intending to adopt. (b) No liability unless signed: person is not liable on an instrument unless (i) the person signed the instrument, (ii) or the person is represented by 1. an agent 2. or representative who signed the instrument and the signature is binding on the represented person. (c) Unauthorized signatures and their effect (i) means a signature made without actual, implied, or apparent authority. The term includes a forgery (ii) 3-408: only good for signature of unauthorized person (d) Multiple signatures 2-304 (i) If an instrument is payable to a holder under a name that is not the name of the holder, indorsement may be made by the holder in the name stated in the instrument or in the holder's name or both, but signature in both names may be required by a person paying or taking the instrument for value or collection a nonholder in possession of the instrument who has the rights of a holder, (1) the transfer shelter rule: 3-203 (a) transfer of instrument happens when: (i) it is delivered by a person (ii) other than its issuer (iii) for the purpose of making receiver PETE (b) Effect of transfer: (i) Confers on xferee whatever rights xferor had (including HDC) (ii) Regardless of whether it was indorsed or not (iii) Xferee cant acquire rights of HDC by transfer if transferee engaged in 1. fraud 2. or illegality affecting the instrument. (c) Does not make transferee a holder but gives them the rights of a holder. (d) Transferor can still be held liable under certain circumstances (dishonor) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 3-309 or 3-418(d).

Payment systems (1) Enforcement of lost or stolen instruments: 3-309

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3)

(a) A person not in possession of an instrument is entitled to enforce the instrument if: (i) the person seeking to enforce the instrument: 1. as entitled to enforce the instrument when loss of possession occurred; or a. acquired ownership of instrument from a person who was entitled to enforce the instrument when loss of possession occurred; i. acquired either directly or indirectly b. loss of possession not the result of a i. transfer by the person ii. or a lawful seizure; c. and the person cannot reasonably obtain possession of the instrument because i. the instrument was destroyed, ii. its whereabouts cannot be determined, iii. or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. (b) Proof necessary to prove ownership of instrument: (i) must prove the terms of the instrument 1. Terms means price. Usually the bank has copies of everything (ii) and person's right to enforce the instrument. (iii) person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. (iv) Adequate protection may be provided by any reasonable means. 1. usually, adequate protection can be provided by an indemnification agreement. iv) A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument Consequences of holdership and negotiability a) Discharge/Suspension: UCC 3-310 i) Discharge of obligations: (1) pay with a certified check, cashier's check, or teller's check, (2) obligation DISCHARGED to the same extent that it would if money were used. (a) Paying with those three is just like paying with cash ii) Suspension of obligations: (1) Note/Uncertified check SUSPENDS the obligation to pay (a) Person owes $300. writes check for $300. the obligation for all 300 is suspended while the check is being honored. (2) Suspension is to the same extent as the amount of the check (a) Person owes $300. pays $100 with check. Obligation is suspended for $100 while the check clears, but the obligation on the other $200 is still owed. (3) Suspended until check is either dishonored, paid or certified (4) Subsequent PAYMENT DISCHARGES obligation (5) Subsequent DISHONOR REVIVES obligation, now must pay iii) Liability of parties upon of dishonor (1) Obligee can enforce either instrument or underlying K if: (a) Dishonor of Check/note (b) AND the obligee is PETE (2) Obligee may NOT enforce the underlying K (and thus can only enforce on the instrument) (a) IF PETE is a person other than the obligee. (b) OR if the obligee is PETE but no longer has possession of it because it was lost, stolen, or destroyed. (3) So what? (a) Suing on K or instrument affects what you can receive. (b) EX: Assume that K has attorneys fees and instrument has interest (i) If can only sue on the instrument, interest can be awarded but no attorneys fees. (ii) If can only sue on K, attorneys fees can be awarded but no interest (iii) If can sue on K or instrument, then attorneys fees and interest can be awarded (c) If you have the choice, sue on the instrument

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(i) Evidence necessary when suing under note: 1. Only have to produce the note, get presumption of signature 2. Nothing else to prove (ii) Evidence necessary when suing under K: 1. other partys performance insufficient. b) Payment: 3-602 i) Elements of payment: (1) Instrument is paid to the extent (a) Payment is made by the party obliged to pay (b) And by a PETE ii) Payment to person FORMERLY entitled to enforce: effective when (1) No adequate notification AT TIME OF PAYMENT (a) Adequate notification: (i) signed by the transferor or the transferee (ii) reasonably identifies the transferred note (iii) provides an address at which payments subsequently are to be made (2) AND that payment is to be made to the transferee. (3) This is a special exception for notes, it is for real estate. 4) Elements of negotiability a) Negotiable instruments: 3-104 i) Unconditional under 3-106: (1) promise/order is unconditional UNLESS states: (a) express condition to payment (b) subject to/governed by another record (c) rights/obligations with respect to promise/order are stated in another record (d) reference to another record DOES NOT make order conditional (2) Unconditional and checks: checks will meet this because: (a) checks are orders (b) made for any sum (c) made out to someone (d) is payable on demand if no payment is stated (3) Unconditional and NOTES: (a) notes have a lot of terms (b) look at the terms of the note carefully to determine whether it is unconditional (4) In accordance does not make conditional ii) Promise or order to pay iii) Fixed amount of money (1) Variable rates allowed: 3-112b (a) Variable rates allowed (b) Even from extrinsic info AS LONG AS (i) Readily available by consulting generally available sources (ii) Recognized by foreign government (iii) Is money (2) Money from other countries allowed 1-201(24) (a) I offer to pay you 1 million pesos this is allowed because it is money under the definition. iv) Payable to bearer or order v) On demand or at a definite time (1) On demand: (a) Promise or order is on demand if it is: (i) payable on demand (ii) OR at sight, (iii) OR at the will of the holder, (iv) OR does not state any time of payment (2) at a definite time (a) promise or order is payable at a definite time if it is (i) payable at end of definite period of time after sight or acceptance (ii) or at

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1. a fixed date or dates 2. or at a time or times 3. readily ascertainable at the time the promise or order is issued, (iii) subject to rights of 1. prepayment, 2. acceleration, 3. extension at the option of the holder, 4. OR extension to a further definite time at the option of the a. maker b. or acceptor c. or automatically upon or after a specified act or event (3) fixed dates: (a) instrument payable on fixed also payable upon demand made before the fixed date, (b) payable on demand until the fixed date and, (c) if no fixed date, becomes payable at a definite time on the fixed date (4) on or after (a) this is not negotiable vi) No other promise or order (1) Collateral exception: (a) but promise/order may (b) contain an undertaking/power to (i) give (ii) maintain (iii) OR protect collateral (c) to secure payment. (2) Disposal exception (a) an authorization/power to the holder (b) to confess judgment/realize on/dispose of collateral (3) Waiver exception (a) a waiver of the benefit (b) of any law (c) intended for the advantage/protection of an obligor. vii) Signed (1) No liability unless signed (2) Signature: any mark made with the present intent to authenticate a writing. (a) Thumbprint, placing X on it, personal letterhead, (3) Signatures by representatives: UCC 3-402 (a) Unambiguous (i) Representative is not liable if signature show UNAMBIGUOUSLY that signature is on behalf of repd person 1. No one could be misled (b) Ambiguous (i) If signature 1. does not unambiguously show that the signature is made in a representative capacity 2. or the represented person is not identified in the instrument, (ii) the representative is liable on the instrument a. To a HDC that took the instrument without notice that the representative was not intended to be liable on the instrument. i. Under this, parole evidence is not allowed. b. Or, to any other person, the representative is liable on the instrument unless the representative proves that the original parties did not intend the representative to be liable on the instrument. i. Parole evidence is allowed (c) If a holder in due course had notice above, then they fall down to the category of any other person, thus giving a HDC 2 chances instead of one. Form of Signature w/ respect Liability of Agent Parol E to agents capacity

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1. Unambiguously Signed by Agent 2. Ambiguous as to agency Not Liable Liable

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Not allowed It depends: - HDC+ = Parol E not admitted - Others = can introduce Parol E.

(4) Agents and principals (a) Agent can bind principals to Ks like in agency law (b) Test for principal is liable for signature of agents: (i) Was signature authorized by principal? (c) Restatement of agency: (i) 164: agent for partially disclosed/partially disclosed principal does NOT bind principal when exceeds powers 1. If the only difference between authorized K and unauthorized K is to price, Principal is liable as it is authorized (ii) Ratification: action not originally approved and is later approved. (iii) 165: P is liable upon a K purported to be made 1. on his account by an A authorized to make it for the Ps benefit 2. unless the other party has notice that the A is not acting for the Ps benefit. (d) Plain view rule (i) If representative signs name on check (ii) Without indicating official capacity (iii) And check states that it is payable from an account owned by the represented person (iv) And represented persons name is on the check, (v) Agent is not liable. b) Express disclaim: i) Instrument OTHER THAN CHECK can be non-negotiable by writing non negotiable on it c) Express claim i) Instrument can specifically say this is negotiable, and be negotiable ii) even if it doesnt meet all the elements. 5) Primary liability: Makers and Drawers a) obligation of issuers and makers: 3-412: i) maker: liable for whatever the note says. ii) Issuer: must pay the note according to its terms at the time it was issued. (1) automatic liabilities, nothing else has to happen for them to activate. iii) Liability of cashiers check (1) Same as that of an acceptor (see below) b) Obligation of acceptors 3-413: i) Acceptor: must pay a draft according to the terms on which it was accepted. (1) an automatic liability, nothing else has to happen for this to be activated c) Acceptance: 3-409a i) Means MORE than just taking possession ii) means drawees signed agreement to pay a draft as presented. iii) no obligation to certify check, refusal to certify is NOT dishonor iv) Principles of acceptance: (1) draft must be signed (signature must be on the draft) no oral acceptance (a) But if bank officer tells person on the phone well pay it person may have claim for promissory estoppel and detrimental reliance. Must prove: (i) Promise (ii) Reliance (iii) Reasonable v) Acceptance upon issuance: (1) This is not true. There is not such thing as this. d) Certification: i) Certification/Certified Check, 3-409(d): (1) check accepted by the bank on which it is drawn.

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6)

(2) Bank can accept by (a) Drawee making signed agreement (i) Must be on face of draft (ii) May contain drawees signature (3) Acceptance may be made anytime, effective on delivery (4) May be accepted although (a) Not signed (b) Incomplete, (c) Overdue (d) Dishonored (5) Drawer is DISCHARGED upon acceptance by bank. (a) Bank is liable as acceptor and liable on terms on which accepted e) Refusal to pay Cashiers Checks, Tellers Checks and Certified Checks (3-411) i) If obligated bank (acceptor of certified check or issuer of cashiers/teller check) wrongfully: (1) Refuses to pay cashiers check/certified check (2) Stops payment of tellers check (3) Or refuses to pay a dishonored tellers check, ii) Then person asserting right to enforce the check is entitled to: (1) Face value (2) Expenses (3) interest (4) consequential damages if bank is put on notice iii) Safe Harbor Provisions (3-411c) expenses or consequential damages not recoverable if refusal of bank to pay is because: (1) Bank suspends payments (insolvent) (2) Asserts claim or defense it believes is reasonably available (3) Bank has reasonable doubt person demanding payment is PETE (4) Payment prohibited by law (injunction) f) Discharge of obligations of drawers: i) Payment of obligation w/ cashiers check or certified check discharges obligation (3-310a) (1) But not of indorsers: (a) UCC 3-310: Discharge of the obligation does not affect any liability that the obligor may have as an indorser of the instrument ii) Certification discharges drawers liability (3-414) (see above) iii) Uncertified check means underlying obligation is suspended until paid or certified or dishonored (3310b). Secondary liability: drawers and indorsers. a) Primary v Secondary Liability i) Primary makers of notes, issuers of cashiers checks, acceptors of drafts (1) No preconditions must be met for these actors to incur liability ii) Secondary drawers and indorsers (1) Secondary b/c some condition exists that needs to be met b/f incurring liability b) Obligation of indorser (3-415) i) Statutory obligation (1) Indorser liable upon dishonor to: (a) PETE (b) And subsequent indorser who paid the instrument (c) A, b, c, d. a gives check to b, who indorses it to c, who indorses it to d. d deposits it in the bank. Dishonor. D has a claim against A immediately and against B and C after timely notice of presentment and dishonor. If D sues C and wins, c can sue b because b was a subsequent indorser and can sue A because of the drawers K. (2) Liable for full amount of interest at the time of indorsement ii) Without Recourse (1) Indorser is not liable if they indorse without recousrse (2) DOES NOT APPLY if you are drawer of a check (3-414). c) Dishonor (3-502): i) Dishonor happens when:

Payment systems (1) If check duly presented 3-501a

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(a) Is a demand made by or on behalf of a PETE on instrument (2) and bank properly refuses to pay (a) timely return of check (b) OR sends timely notice of (i) dishonor 1. Must have NOTICE of dishonor 3-503 2. Notice can be given by any person, a. by any commercially reasonable means (oral, written or electronic communications) b. sufficient if it i. reasonably identifies the instrument ii. and indicates that the instrument has not been iii. paid iv. or accepted v. or dishonored. (ii) or non payment (3-502b1) (c) OR if presentment for payment duly made to drawee and draft not paid on day of indorsement (3-502b2) d) Timeliness bank must timely refuse payment (3-414f) i) Drawer (1) Presentment is timely 30 days from date (a) Payment suspended after 30 days (2) Drawer not liable until dishonor ii) Indorser (1) Must be presented for payment or collection (2) 30 days from when indorsement was made (3) indorser discharged if presentment not made (4) Return of an instrument given to a bank for collection is sufficient notice of dishonor (3-503b). (5) Notice must be given (3-503c): (a) By banks b/f midnight of next banking day (see below) iii) Any other person w/in 30 days following day on when person gets notice (1) Types of notice: (a) actual knowledge (b) notification (c) Inferred: From facts and circumstances known, he has reason to know (2) Late notice (a) Late notice excused if (i) delay caused by circumstances beyond control of person giving notice (ii) and person giving notice exercised reasonable diligence after cause of delay ceased to operate (3-504c). 7) Accommodation Parties (APs) a) Surety individual who agrees to be liable for the obligation of another i) Includes guarantors, accommodation parties, and insurance companies. b) 3 classes of APs i) AP has rights against the principal ii) W/ multiple APs they have rights with respect to one another iii) APs have special unique defenses to assert against a PETE c) Definition of AP Instruments signed for accommodation (3-419a): i) If an instrument is issued for value given for the benefit of a party to the instrument (accommodated party) and (1) Another party to the instrument signs the instrument (2) For the purpose of incurring liability on the instrument (3) Without being a direct beneficiary of the value given for the instrument (4) THEN the instrument is signed by the accommodation party for accommodation. ii) Direct benefit test (1) An accommodation party does not receive a direct benefit for signing the loan.

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(2) Factors determining if one received a direct benefit: (a) Party didnt participate in negotiations for credit or subsequent modifications of credit agreements. (b) Creditor aware that AP was not the one seeking credit (c) Party is not the one to whom proceeds were credited (d) Party has no interest in purpose for which proceeds are used (3) Corps and APs (a) A business and accommodation party must be separate entities (b) If business part of community estate, it directly benefits both parties so one cannot be an AP. (c) Person can be AP to corp even if (i) Shareholder (ii) Sole shareholder (iii) Employee iii) Anomalous indorsements (1) Definition (3-205d) (a) indorsement made by a person who isnt the holder of the instrument (3-205d). (b) Doesnt affect manner in which instrument may be negotiated (2) Effects of anomalous indorsement: (a) presumed to be an AP (b) notice that the instrument is signed for accommodation if: (i) the signature is anomalous indorsement (ii) or is accompanied by words indicating that the signer is acting as surety or guarantor with respect to obligation of another party to the instrument (3-419c). iv) Ways that AP can sign instrument (1) Maker (2) Drawer (3) Acceptor (4) or indorser v) AP is obliged to pay instrument in capacity in which it. (1) Obligation can be enforced notwithstanding any statute of frauds violations or whether it received consideration. (2) Consideration need not flow to the promisor this is still bargained for exchange d) Methods of protecting the AP i) A surety can require the lender to sue on the k (all parties who signed k) so the AP is not on hook for entire amount of note (Tx. Bus. And Com 34.02). (1) Must be written notice to oblige they must sue on the k. (2) Surety who gives this notice is discharged of all liability if obligee: (a) Not under legal disability and EITHER (i) fails to sue on k during first term of court after receiving notice or during second term showing good cause for delay; OR (ii) Fails to prosecute the suit to judgment and execution (3) Judgment cant be rendered against a party not primarily liable unless judgment also rendered against principal obligor (Tex. Civ. Prac. & Remedies 17.001). e) Collection guaranteed: i) If signature of party to an instrument is accompanied by words indicating unambiguously that the party is guaranteeing collection rather than payment of obligation of another party to instrument, signer is obliged to pay amount due on instrument to a PETE ONLY IF (3-419d): (1) Execution of judgment against other party has been returned unsatisfied (2) Other party is insolvent or in insolvency proceeding (3) Other party cant be served w/ process (4) Otherwise apparent payment cant be obtained from other party f) Accommodation parties and indemnification: i) AP who pays the instrument is entitled to (1) reimbursement from accommodated party (2) and entitled to enforce instrument against accommodated party. (a) Accommodated party who pays instrument has no right of recourse against, and not entitled to contribution from AP.

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ii)

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If several AP sign, one who pays is entitled to reimbursement from the other APs who signed ( 51 restatement of sureties). g) If not an AP, and you sign, youre a principal or co-principal. i) Party having joint and several liability is entitled to pro rata contribution from the other co-principals (3-116b). h) Defenses commonly relied on by Accommodation Parties: i) Discharge of principal (1) Discharge of principal does not release AP ii) Extensions of time modifications of the terms of agreement (3-605c) (1) If PETE instrument agrees, w/ or w/o consideration, to an extension of the due date of the obligation of a party to pay the instrument, extension discharges indorser or AP to the extent that party proves that the extension caused them harm or prejudiced its right to recover (a) (right to recourse is what must be harmed). (b) AP must prove that he was harmed (i) Look at what happened since the grant of extension and what would have happened if no grant (c) Presumption is extension of time benefits AP (d) Modification of obligation (amount of principal and interest rate) is unreasonable (2) Exception: notice to AP and no objection 3-605i iii) Partial Release (3-605b) discharge of obligation of party to pay payment does not discharge the AP. (1) No discharge even though there was no consultation or permission from guarantor. iv) Defenses AP not allowed to assert are: (1) discharge in insolvency proceedings, (2) infancy, (3) and lack of legal capacity (3-305d) v) Other modifications change in terms of substantive liability of principal would increase APs exposure so AP not liable for changed terms. (1) Did the change in the primarily liable partys obligation have an adverse effect on his right of recourse against primarily liable party? (2) AP has to prove it is worse off (party went into bankruptcy b/c changed terms made him pay higher interest rate in exchange for extension of time to pay). vi) Impairment of Collateral Defense (3-605e) (1) Impairment of collateral operates as a discharge only to the extent of the impairment of collateral itself. (a) See examples on page 98 (2) METHOD: (a) How much is owed? (b) How much would they have gotten if they hadnt screwed up? (i) (that much is the amount that is discharged) (c) A-b=how much is left to pay (3) If impairment is above obligation, then you can argue total impairment. See example on 98 (a) Applies where parties would have been oversecured or where the secured creditor would have been undersecured. (4) Key compare what happens if the bank screws up and if they dont screw up 8) Holder in Due Course a) The liability test: i) Basis of liability (1) How are they liable? (a) (drawer/indorser/maker/accomadation party) (2) To whom are they liable to? ii) Do they have a defense? (1) ordinary contractual defenses: (a) fraud, misrepresentation, lack of consideration. (b) HDC takes free of these defenses (2) REAL defenses (a) Fraud in the factum, etc (b) HDC takes subject to these defenses iii) Is the person entitled to enforce also a holder in due course?

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(1) A HDC takes an instrument free of ownership claims of true owner and free of the most common defenses that an obligor is able to assert. b) The note hypo: i) Maker gives a 10K note to Payee in exchange for 10K in goods from Payee. P then transfers the 10K note to H, which H agrees to pay 9K for w/n 90 days. This promise was made on day 1. the following events take place: (1) On day 1, H promises to pay the 9K note in 90 days. (2) On day 60, M contacts H and tells H that P committed fraud against him. (3) On day 90, H goes ahead and pays the 9K he agreed to pay even though he knew about the fraud c) Statutory Definition i) Holder (1) Remember: holders are discussed in 2c2c (a) Holder by definition (i) holder of bearer paper: must have possession (ii) holder of order paper: must be the identified person and also have possession (b) Holder by negotiation ii) Instrument (1) Remember, an instrument means a negotiable instrument iii) No facial irregularities (1) Nothing eerie about it that would call into question its authenticity iv) For value (3-303) (1) An instrument is issued or transferred for value if: (a) Executed promise: (i) the instrument is issued/transferred for a promise of performance, to the extent the promise has been performed; 1. executory promise (i.e. a promise to do s/t) does not constitute value a. Note hypo: Is there value on day 1? No, because there was no performance of that promise, there was just an executory promise b. Note hypo: if payments are made on day 10 and 30, are those for value? Yes, because they are executed i. Executed Promise (not executory) = Value ( 3-303(a)(2)) (b) Security interest (i) the transferee acquires a security interest or other lien in the instrument other than a lien obtained by judicial proceeding; 1. provisional credit is not value (c) Antecedent debt: (i) taking an instrument in payment of a preexisting obligation OR as collateral for a preexisting obligation 1. Holder acquires from payee maker's 10k. Holder pays payee for it by executing a note of his own in the amount of 9k. this is for value (d) Exchange 4 NI (i) the instrument is issued or transferred in exchange for a negotiable instrument 1. Note hypo: H agrees to purchase Ms note from P by giving P its own note for 9K. Value? Yes, because transferred in exchange for another NI (e) Irrevocable obligation: (i) the instrument is issued or transferred in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument. (2) "Consideration": (a) any consideration sufficient to support a simple contract. (b) The drawer or maker of an instrument has a defense if the instrument is issued without consideration. (c) If an instrument is issued for a promise of performance, the issuer has a defense to the extent performance of the promise is due and the promise has not been performed. (d) If an instrument is issued for value as stated in subsection (a), the instrument is also issued for consideration. (3) Bank value 4-211 (a) A bank gives HDC value to the extent that it has a security interest in an item.

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(i) Collecting bank has security interest in item and accompanying documents or proceeds of either: 1. if item has been deposited in an account, to the extent that the credit has been withdrawn or applied 2. if credit has been available for withdrawal, to the extent of the credit given, whether or not the credit is drawn upon or there is a right of charge-back; or 3. if it makes an advance on or against the item. (ii) If credit is given for multiple items at a time or is withdrawn in part, a security interest remains on the items and credit is given on a FIFO basis. v) Good faith (1) Honesty in fact (2) reasonable commercial standards with fair dealing vi) Without notice that: (1) instrument is past due, (a) installments 3-304(b) (i) installment notes become overdue by non-payment of a single installment (ii) regardless of reason (2) that the instrument has been dishonored, (a) A, B, and C. (b) high discount rate alone is not enough (c) ABC apartment company. They build apartment complexes. ABC sells partnership interests to doctors and dentists. ABC sells to P. P reads in the papers that doctors and dentists who have other p-ship interests are suing ABC, however, there is no sign of shady business with ABC. Is this notice? This is easier to prove. (d) Note hypo: on day 90, when he pays the money even though he knows the fraud exists, is he an HDC then? No, because he has notice of the fraud. (3) uncured default, (4) unauthorized instrument or changed terms, (5) that someone has an ownership (6) Claim of recoupment (a) Claim arising from same transaction that gave rise to the incident d) Exceptions to HDC i) Bulk sale: 3-302ciii (1) If you take the instrument in a bulk transfer transaction then you are not a holder in due course (2) Exception: taken in ordinary course of business e) Partial HDC: 3-302d i) If the promise of performance that is the consideration for an instrument has been partially performed, the holder may assert rights as a holder in due course of the instrument only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance. (1) FORMULA: (Amount due) X [(value of partial performance) / (value of promised performance)] ii) Problem, page 214 (1) Note for 10K. Note payable in 3 installments of $2500. The day before the 4th payment, payee gets notice of fraud, thus no HDC status. The 1st 3 installments were at a time that there was no notice, so they can be paid. How much? (7500/10000)*(10000)=7,500. She is a HDC to the point of 7.5k, that means that if there is an applicable personal defense, it will get disregarded up to 7.5k. If that defense is not proved, then she can get it al, but she will be at least HDC for 7.5k. What about if the price was discounted and cost 9k? (7500/9000)*(10000)=$8333.33. f) HDC shelter: i) Transferee gets all rights that transferor has g) Real and personal defenses i) Real defenses: 3-305a1 (1) HDCs are still subject to these real defenses (2) Protecting victims from these offenses more important than promoting the neg of instruments. (a) All defenses are bad, but these are really bad. (3) The action that spurs the real defense must be so bad that it makes the obligation void from the beginning.

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(a) Minority (i) Depends on law of jurisdiction (b) Duress (i) has to be so bad to make the obligation void from the beginning (c) lack of capacity (d) illegality (i) such that under other law nullifies the K. (ii) look at policy under the defense (e) Fraud in the factum (i) Voids transaction (ii) Elements: 1. fraud 2. induced the obligor to sign the instrument with neither a. knowledge b. nor reasonable opportunity 3. to learn of its a. character b. or its essential terms (iii) misrepresentation about the actual document being signed (iv) you couldnt know what the document is and you (v) couldn't have had a reasonable opportunity to know what it was. 1. What is a Reasonable opportunity? a. Courts look at factors like education or literacy. ii) Personal defenses: 3-305a2 (1) HDCs are NOT subject to these defenses, so they dont matter (2) They are the traditional K defenses (a) Breach of warranty (b) Failure of consideration (c) Lack of consideration (d) Failure of condition precedent (e) Non delivery (f) Delivery fo special purpose (g) Fraud in the inducement (h) Accord and satisfaction (i) Payment/discharge (j) Ordinary duress (k) Ordinary illegality (l) Release (m) Waiver (n) Estoppel (o) Unconscionability h) FTC and the HDC doctrine i) Intro (1) Exceptions to negotiability doctrine for consumers (2) Is a substantive term and abrogation of HDC ii) Text (1) In connection with any sale or lease of goods or services to consumers, in or affecting commerce as "commerce" is defined in the Federal Trade Commission Act, it is an unfair or deceptive act or practice within the meaning of section 5 of that Act for a seller, directly or indirectly, to: (a) Take or receive a consumer credit contract which fails to contain the following provision in at least ten point, bold face, type: NOTICE ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER. or,

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9)

(b) Accept, as full or partial payment for such sale or lease, the proceeds of any purchase money loan (as purchase money loan is defined herein), unless any consumer credit contract made in connection with such purchase money loan contains the following provision in at least ten point, bold face, type: NOTICE ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER. iii) The FTC rule says that instruments in covered transactions must contain notices (1) See the notice on page 2169 iv) Consumer credit K: any instrument that evidences or embodies a debt arising from a "purchase money loan" or a "financed sale." (1) Purchase money loan: (a) cash advance received by the consumer (b) applied to the purchase by the seller (c) if the creditor refers the customer to the loan business. (d) must be a (i) financer to whom the merchant refers the consumer (ii) OR w/ whom the merchant is affiliated by agreement or K. v) Only applies to goods and services, real estate (including houses) doesnt apply. vi) Recourse under FTC rule: (1) Consumer has no recourse against seller or merchant who violates this rule. (2) Customer must file complaint with FTC i) Consumers and credit card transactions: 1666i: i) Card issuer that gives credit card to a cardholder for an open ended consumer credit plan is subject to claims (NOT TORT CLAIMS) and defenses from transactions where credit cards are used for payment if: (1) good faith attempt to resolve problem (2) amount of initial transaction exceeds $ 50 (a) to distinguish b/w CC used as cash transactions versus financing transactions. (b) The statute is only intended to protect financing transactions. (3) transaction occurred (a) same State as cardholders mailing address (b) or within 100 miles from such address, (i) look at the mileage b/w where the transaction took place and the cardholders mailing address ii) exceptions to this rule: this rule cant be used when the person honoring the credit card (1) same person as the card issuer, (2) controlled by the card issuer, (3) under direct or indirect common control with the card issuer, (4) franchised dealer in the card issuer's products or services, or (5) obtained the order for such transaction through a mail solicitation made by or participated in by the card issuer in which the cardholder is solicited to enter into such transaction by using the credit card issued by the card issuer. Forgeries: a) Intro: i) This is a method of recovery that can be used whenever contract theories (makers and indorsers) cant ii) Determine what signature is forged (drawer or indorser) (1) There is a difference between drawers and indorsers forgeries. iii) Determine what warranties apply: Presentment/transfer (1) Who is giving the warranty? (2) Who are they giving it to? (3) What does the warranty cover? b) Forged indorsements

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i)

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Transfer warranties (4-207) and presentment warranties (4-208) (1) Transfer warranties 4-207 (a) Warranties are made by (i) Customers 1. Customer:" a person having an account with a bank or for whom a bank has agreed to collect items. 2. NOTE: when a signature is forged and then deposited, the forging party is the customer. (ii) OR Collecting banks 1. "Collecting bank" means a bank handling an item for collection except the payor bank a. "Payor bank" means a bank that is the drawee of a draft (b) Who is the warranty made out to? (i) Transferee 1. instrument transferred when by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument (ii) OR Subsequent collecting banks (c) Content? What does the warranty cover? (i) the warrantor is a person entitled to enforce the item; (ii) all signatures on the item are authentic and authorized; (iii) item has not been altered; 1. unauthorized modification or addition of words or numbers to the instrument. (iv) item not subject to a defense or claim in recoupment (Section 3-305(a)) of any party that can be asserted against the warrantor; (v) warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker/acceptor/drawer; and (vi) with respect to any remotely-created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn. (2) Presentment warranties 4-208a: (a) Presentment warranties are made by: (i) Person obtaining pmt (ii) or previous xferor (b) Presentment warranties are made: (i) To the drawee (c) Content of the transfer warranty: (i) the warrantor is/was, at the time the warrantor transferred the draft, a PETE the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; (ii) no alterations; and (iii) no knowledge that the signature of the purported drawer of the draft is unauthorized; and (iv) with respect to any remotely-created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn. (d) Pointers about presentment warranties (i) payor bank never has a transfer warranty claim because is not transferee or subsequent collecting bank. ii) Properly Payable Rule 4-401(a),: (1) bank may charge against the acct of a customer an item that is properly payable from the account. An item is properly payable if authorized by the customer and in accordance w/ any agreement b/w the customer and the bank. (2) Properly Payable Test (a) Consistent w/ agreement b/w the bank (b) Authorized by the customer. (3) Properly payable is another way to protect the customer who writes the check iii) Conversion Liability (1) Conversion liability under the UCC 3-420 (a) Applicable state law applies to conversion (b) Also if taken by xfer OTHER THAN NEGOTIATION, from:

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c)

(i) a non-PETE enforce the instrument (ii) or a bank makes/obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. (c) Converter will be liable to the payee. (d) Conversion action cant be brought by (i) Issuer/acceptor of the instrument (ii) OR a payee/indorsee who did not receive delivery of the instrument either 1. directly 2. or through delivery to an agent or a co-payee iv) Ultimately, the person who first deals with the instrument is the person who bears the loss of a forged indorsement. Forged checks: i) Properly payable rule applies (see above). ii) Right of restitution under 3-418. (1) Section 418a (a) Mistakes covered under 3-418 a (i) No stop order had been made under 4-403 (ii) Signature was authorized (when it in fact wasnt authorized), like a forgery (b) Remedies allowable under 418a (i) Drawee may recover amount of draft from 1. Person whom payment was made 2. person for whose benefit payment was made (ii) drawee may revoke acceptance (iii) Rights under 418a are not affected by failure of drawee to use ordinary care in paying/accepting the draft. (2) Finality of payment: under 418c (a) 418a-b cant be used against person (i) who took instrument in 1. good faith a. honesty in fact b. reasonable commercial standards with fair dealing (ii) AND for value (remember from 4-211) 1. Normal Value a. Executed promise b. Security interest c. Antecedent debt d. Exchange 4 NI e. Irrevocable obligation 2. Bank value a. A bank gives HDC value to the extent that it has a security interest in an item. i. Collecting bank has security interest in item and accompanying documents or proceeds of either: ii. if item has been deposited in an account, to the extent that the credit has been withdrawn or applied iii. if credit has been available for withdrawal, to the extent of the credit given, whether or not the credit is drawn upon or there is a right of charge-back; or iv. if it makes an advance on or against the item. v. If credit is given for multiple items at a time or is withdrawn in part, a security interest remains on the items and credit is given on a FIFO basis. (iii) OR who in good faith changed position in reliance on the payment or acceptance. 1. person who takes instrument in good faith and on reliance 2. see larry Lawrence (3) Shield provision 3-420c (a) Elements (i) representative BUT NOT other than a depositary bank, (ii) good faith dealings with

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1. instrument 2. or its proceeds (iii) on behalf of one who was not PETE (iv) is liable in conversion to that person (v) beyond the amount of any proceeds that it has not paid out (b) all intermediary banks considered agents to the drawer bank in terms of the checks collection (c) intermediary banks are going to get shielded absent extreme circumstances iii) Ultimately the payor bank bears the loss with a forged check. 10) Customer responsibility a) Negligence 3-406 i) Serves as a fallback for other provisions and defenses. ii) negligence precludes customer from asserting not properly payable because of forgery/alteration iii) Elements of customer negligence 406a (1) Customer fails to exercise ordinary care (a) Use learned hands formula: (b) (Probability of loss)*(seriousness of the loss)>(cost to fix the problem). (c) Examples: (i) authority over the account receivable and the receivership (2) Failure substantially contributes to alteration or forgery (3) Customer is precluded from claiming forgery or alteration against (4) Another person who pays instrument/takes for value/collection/good faith (5) Burden on precluder iv) Contributory negligence under subsection B (1) person asserting the preclusion fails to exercise ordinary care (a) failure to ID, etc (2) in paying or taking the instrument (3) and failure substantially contributes to loss (4) loss is allocated between the person precludee and precluder preclusion (5) according to the extent to which the failure of each to exercise ordinary care contributed to the loss. (6) Burden on precludee b) Bank statement rule 4-406 i) Applies to forged checks ii) Bank not required to send statements to customers, that is between bank and customer iii) 4-406 provides an incentive to do so. (1) If the bank sends statement, the customer has duty to inspect the statement (2) and if the customer doesnt, the banks liability will be drastically reduced. iv) 406a: statement must include (1) the item number, (2) amount and (3) date of payment. v) Requirements under 4-406(c): (1) If the bank does send a statement of the account, the customer must (a) promptly examine it and (b) attempt to detect alterations or forgeries of the drawers signature, (c) and promptly report anything found vi) Preculsions for failures: (1) The One Year Rule 4-406(f): (a) customer who doesnt discover an unauthorized signature or alteration w/n one year prohibited from asserting claim against bank. (b) This does not look to negligence, it merely looks to the dates to see if it has been more then one year. (2) Actual Loss Rule 4-406(d)(1) (a) customer must (i) examine the stmt (ii) report irregularities. (b) If the customer fails to do this, then the bank is not rsp for any loss which (i) could have been prevented

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(iii) the notice necessary for the bank to protect against the loss. (c) Bank must prove that (i) With timely notice, then it (ii) would have been able to 1. find the forger 2. and make the forger pay the bank back. (d) The Same Wrongdoer rule 4-406(d)(2): (i) For subsequent item forged or altered by the same party who committed the initial forgery/alteration. (ii) This is directed towards subsequent items forged or altered by the same party who committed the initial forgery or alteration. The theory is that if the customer had promptly provided notice to the bank of the forgery/alteration, then the bank could have taken appropriate steps to prevent any subsequent forgeries/alterations (e.g. close the account and open a new one; put a hold on checks cashed on the account, etc). (iii) IMPORTANT: (d)(2) can never be applied to the first check in a sequence of forged/altered checks. It only applies to checks which are received after the bank receives notice No actual loss is necessary under this rule. (iv) cannot apply to the first check in the sequence of forgered/altered checks vii) Banks Negligence (1) 4-406(e)comparative offset (a) look to banking practices in the service area c) Fictitious payee 3-404bii i) Elements: (1) If person IDd as payee of an instrument is a fictitious person, (a) Any person in possession of the instrument is its holder (b) indorsement by person in the name of the payee stated is effective as the indorsement of the payee in favor of a person who, in good faith, (i) pays the instrument (ii) or takes it for value or for collection (c) until the instrument is negotiated by special indorsement: ii) Creates second defense to properly payable iii) When applied, deems that the PB paid in accordance w/ the customers instruction. (1) This means that the employer can't recover the money, employer is in best position to prevent loss. iv) Presumption of negligence, bank does not have to prove negligence. v) Comparative negligence applies d) Employee Responsibility 3-405b i) often applies where the applies in cases where either 3-404 defenses apply. ii) Has same effect as fictitious payee, negates properly payable iii) Must prove: (1) Employee under 404a1 (a) includes an independent contractor and employee of an independent contractor retained by the employer Entrusted /w responsibility w/ respect to the instrument (2) 404(a)(3)authority to: (a) sign or indorse (b) process instruments received (c) process instruments for issue (d) supply names and addresses for payees (3) Fraudulent indorsement by employee or person acting in concert with employee under 404(a)(2): (a) instrument payable to the employer: a forged indorsement purporting to be that of the employer, (b) OR if instrument where employer is issuer: forged indorsement purporting to be that of the person identified as payee. (4) indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person iv) Intent DOES NOT APPLY

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v) Comparative negligence applies e) Padded payroll 304b1 i) Person does not intend the person identified as payee to have any interest in the instrument ii) Must find out whose intent controls identity of the payee, go to 3-110 (1) intent of person signing as issuer (whether authorized or not), payable to person IDs by signer (2) If automated means: intent of the person who supplied the name/ID of payee f) Impostor, 3-404a i) Elements: (1) Impostor (2) Use of the mails or otherwise (3) induces the issuer to issue the instrument to (a) impostor (b) OR to person acting in concert w/impostor, (4) by impersonating the payee/person authorized to act for the payee (5) indorsement is effective as the indorsement of the payee in favor of a person who, (a) in good faith, (b) pays the instrument (c) or takes it (i) for value (ii) or for collection. ii) The imposter rule makes the indorsement of the imposter valid for the purposes of negating the Properly payable rule iii) Drawee bank can charge the customers account b/c the indorsement is deemed to be effective. iv) There are no breaches of presentment warranties, b/c the indorser is treated as if they are a PETE. 11) Unauthorized use of credit and debit cards a) Intro: i) analysis is similar to that of a forged check b) Credit cards i) Truth in lending act, 15 U.S.C. 1643 (1) Cardholder liable for first $50 if: (a) Card is valid (b) Use must be unauthorized (no authority to use card) (i) the charge was not initiated by the card holder; (ii) the person did not have authority and 1. Actual authority a. express authorization for use b. you can use the card, sir. 2. Implied authority 3. Apparent authority a. created by principal, not just agent 4. Exceeded authority a. if card holder gives authority for purchase and that authority is exceeded, then liable for whole amount b. card holders friend asks to borrow CC to purchase a $100 item. the holder agrees. friend takes CC, buys $1000 worth of stuff. holder is liable for $1000. (iii) the card holder did not receive a benefit. (iv) Cardholder gives adequate notice to cardholder AFTER THEFT 1. before use is not liable. (v) Cardholder must give description by which card issuer can be notified of loss. (vi) use must happen before the card issuer is notified (vii) the card issuer has method whereby the user of such card can be identified as the person authorized to use it. ii) Burden of proof: (1) On card issuer c) debit cards: truth in lending act i) INTRO: (1) Were stilling looking at unauthorized uses, but now its of an ATM/Debit card, not a CC.

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(2) look to the Electronic Fund Transfer Act (not the Truth in Lending Act). ii) 205.6b Liability of consumer for unauthorized [ATM] transfers (1) Limitations on amount of liability. A consumers liability for an unauthorized (no authorization and consumer does not receive a benefit) electronic fund transfer . . . shall be determined as follows: (a) Timely notice given. If the consumer notifies the financial institution w/n two business days after learning of the loss or theft, the consumers liability shall not exceed the lesser of: (i) $50; or (ii) the amount of unauthorized transfers that occur b/f notice to the financial institution. (b) Timely notice not given. If the consumer fails to notify the financial institution w/n two business days after learning of the loss or theft, the consumers liability shall not exceed the lesser of: (i) $500; or (ii) the sum of: 1. $50 or the amount of unauthorized transfers that occur w/n two business days, whichever is less; plus 2. (the lesser of the amount of transactions which took place w/n 2 days, or $50, which ever is less) + (whatever occurred after the close of the 2 days of business up until the notice). (c) Periodic statement; timely notice not given. A consumer must report an unauthorized electronic fund transfer that appears on a periodic statement w/n 60 days of the financial institutions transmittal of the statement to avoid liability for subsequent transfers. If the consumer fails to do so, the consumer [is fully liable for all of the unauthorized transactions]. 1. This is analogous to the Bank Statement Rule from 4-406. Liability is unlimited when the loss is reflected in the bank statement and notice is not given w/n 60 days (2) 3 tiers of liability: (a) (b)(1): Timely notice given $50 cap. (b) (b)(2): Timely notice not given $500 cap. (c) (b)(3): Periodic statement provided + timely notice not given unlimited liability. (3) Negligence not applicable. 12) Check collection: a) Intro: i) payor bank must decide to honor or dishonor check. ii) Bank may ONLY charge for items that are payable. iii) The bank is obliged to pay items that are properly payable. iv) If they fail, they can be charged for the wrong that they caused. b) 3-402a: responsibility for late payment i) the bank is accountable for the amount of: ii) 4-302a bank is accountable for (1) items after midnight on the next banking day (2) that they don't pay or dishonor. (3) Liable whether the person is properly payable or not (4) If they pay for something that is not properly payable it is on the bank themselves. c) When 4-215a: when is payment made? i) When it is paid in cash (1) Drawer makes check to payee, $200. P wants it cashed. Teller checks account to see if there is enough cash in account. If there is, teller gives cash to P. final payment. (2) Same as 1, but asks for cashiers check. Final payment, is just about as good as cash. ii) Made provisional settlement and then failed to revoke in time and manner permitted (1) These things happen all the time. d) Rationale for this requirement: i) Makes disincentive to comply with the customer's request to delay decisions to pay. ii) For the majority of checks, the payor bank doesn't have to anything in order to pay the check 13) RELATIONSHIP BETWEEN BANK AND CUSTOMER a) Customers Right to Stop Payment (4-403): i) Only customer or person authorized to draw on account is allowed/entitled to stop payment (1) If payee loses check, drawer isnt obliged to stop payment or issue new check (a) Anyone whose signature is on the account can issue stop order.

Payment systems Page 24 of 25 (b) Texas says only written stop orders effective so bank in Texas doesnt have to oblige to
oral stop order (but probably will). (i) Oral stop orders in other states are effective but if stop payment not confirmed in writing w/in 14 days, order lapses. ii) Requirements of stop order: (1) Item must be able to identified w/ reasonable certainty (Texas requires writing signed and dated and says with certainty but Worley says this looks more like absolute certainty and court probably not going to enforce that). (2) Reasonable certainty that which is sufficient to provide the bank w/ enough information to locate the check in order to dishonor it. (a) In absence of contrary agreement, must meet standard of what information allows bank under technology then existing to identify item w/ reasonable certainty (Comment 5). So in addition to the number on the account, customer must give (needs to know more than just name of payee): (i) Exact amount of check (ii) Exact check number (iii) OR BOTH. 1. Transposition of digits is a trivial mistake. (iv) Received at time and manner so bank is afforded a reasonable opportunity to act on the order 1. Stop Order not sent w/in a reasonable amount if time if received after bank: a. accepts/certifies the item b. pays item in cash c. settles for item w/o having right to revoke settlement d. becomes accountable for the item 2. Customer doesnt need valid basis for issuing stop order. Bank must stop payment or it violates properly payable rule a. Stop order constitutes revocation of instruction embodied on the check so its not properly payable. b. Bank should not be making inquiry into whats happening in the underlying transaction. c. Seller who had check doesnt have claim against bank but against drawer on drawers k or breach of underlying k. iii) If bank fails to honor stop payment order, bank is liable. (1) No need for customer to prove negligence of bank. Strict Liability. (a) Customer however, has burden of proving loss incurred as result of failing to pay stop order. So if drawer has no defense or valid reason to issue stop order, it has no loss and cant recover from bank. (i) Look at what would have happened had bank complied w/ stop order (if drawer would have lost breach of k suit against payee, then bank not liable for anything). (ii) Court forces bank to get ball rolling by proving customer wasnt hurt. iv) Subrogation of Rights and succeeding to rights of other party (4-407). (1) If bank pays an item over a stop payment order, in order to avoid unjust enrichment, payor bank is subrogated to rights of certain people. (2) If PB pays item over order of drawer the PB is subrogated to rights: (a) Of any HIDC on the item against drawer or maker (b) Of payee or any other holder of item against drawer or maker either on the item or under the transaction out of which the item arose (c) Of the drawer or maker against payee or any other holder of item w/ respect to the transaction out of which item arose. (3) 4-407 replicates result that would have occurred had bank complied w/ the initial stop order. v) Stop Payment Orders Certified, Cashiers and Teller Checks (1) Certified Check - When bank certifies item, it has accepted the item so a stop order after certification is too late. Stop payment order is not valid on check that has been certified by the bank. So drawer has no right to issue stop order on a check thats been certified.

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(a) When it comes to certifying, the bank discharges drawers liability so bank has now incurred the liability. (2) Cashiers Check is accepted at issuance. (a) A stop order can only be placed by person authorized to draw on account and purchaser of cashiers check doesnt qualify as person to draw on account b/c there is no account. (b) Cashiers check is drawn by the bank on itself and person getting check is the purchaser and purchaser cant issue stop orders. (3) Tellers Check these are checks drawn on the banks account at the Fed Reserve. (a) Customer cant issue stop order b/c they are not able to draw on the account at the Fed! Only the bank is! (i) Tx. rules the customer had right to stop payment on teller checks but is probably no longer good law. (b) Disallowing stop orders on the above 3 vindicates parties expectations b/c whole reason you get these types of payment is so people cant issue stop orders. (4) Different from when banks refuse to pay a check when presented to it. A bank can refuse to pay but question will be whether it eventually avoids liability depending on whether PETE qualifies as a HIDC. vi) Wrongful Dishonor Checks and Credit Cards (1) ANALYSIS (a) Was the dishonor wrongful? (b) If so, who is the proper plaintiff? (c) If plaintiff can recover, what damages are comprehensible? (2) Bank has no obligation to honor an item drawn on an account that has a balance of less than the amount of the item. (a) Bank may dishonor an item that may create overdraft so it is entitled to dishonor (4-402a). (3) Decision to dishonor may be made at any time and no more than one time determination may be made (4-402c). (4) Items may be accepted, paid or charged to customers account in any order (4-303b). Theres no priority rule and bank would never know which check was more important. (5) Stale Checks Bank is under no obligation to pay a check that is more than 6 months old (4404). (a) Bank can either dishonor it or pay it and charge its customers account so long as it is paying it in good faith. (b) Neither death or incompetence of customer revokes authority of bank to pay, collect, accept or account until bank knows of death or incompetence and has reasonable opportunity to act on it (4-405a). (i) Even w/ knowledge of death, a bank for 10 days after date of death pay or certify checks unless ordered to stop payment by person claiming interest in the account. (ii) Purpose to permit holders who received checks shortly b/f death ability to cash them w/o having to file probate claim. (6) A PB is liable to its customer for damages proximately caused by the wrongful dishonor of an item (4-402b). (a) A major shareholder or president of a corp. probably doesnt qualify b/c theyre not the banks customer. (b) Some courts allow person not the customer to sue the bank and others do not. For those that do not, they can bring common law cause of action in negligence for hurting their goodwill or reputation, especially if it is a closely held business. (i) If wrongful dishonor is the proximate cause (fact question) of subsequent damages, bank liable. (7) Trader rule (defamation per se so if bank wrongfully dishonors, its per se injuring business) is now repudiated. Now injury to reputation recoverable if there are actual damages proved.