Payment Systems

Exoneration

Equitable right by which S, at maturity, can compel the P to perform instead of the S. By a bill of equity the S can prevent the need for a later suit for reimbursem. B/c of the implied duty that every P owes to the S to perform at earliest & exonerate the S liability.

Anomalous Indorsement 2

An indorsement made by a person who is not the holder of the instrument. 3-205(d). it is a surety indorsement

Transfer

An inst is T when it is delivered by person other than the issuer for the purpose of giving the person receiving delivery the right to enforce the inst. Every legally sig mvmnt of the paper btwn issuance and prsntment. 3-203. Gives rise to Tr Warr. B4 deposit 3-416 After deposit bank.4-207

Sub-Surety

At common law. Unless sureties agreed otherwise, those signing later in time could get complete reimbursement. Where parties make an anomalous indorsement 3-116 makes them co-sureties and hense share liability proportionately. 3-415 com. 5

Bank Statement Rule

Bank furnishes customer sufficient info-item #, amount, date of pmt,(safe harbor rule is the absolute min) to customer and customer must report w/in 30 days if something is wrong. 4-406

Debtor

Bank. Bank is an agent for payment of the principals drafts and other instructions. Opening the account creates a K, may be implied or detailed. Signature card is a K.

Qualified Indorsement

By writing the words without recourse above his signature, the indorsement operates to negotiate the instrument but does not create contractual liability. 3-145(b)

Collecting Bank

Can be any bank EXCEPT the payor bank (even the depository bank)

Trade Acceptance

Giving someone additional time to pay the sight draft.

Notice of Dishonor

Means the bank does not accept the check/pay the check. Unless it is waived you have to give notice. Who do you give notice to...anyone who's name is on the check. 3-503

Money

Medium of exchange authorized or adopted by a domestic foreign government as a part of its currency.

Security Interest

SI makes a bank a HDC (as long as they still meet 3-302) A collecting bank has a SI in an item or the proceeds of either ...credit is given...first in first out. 4-210

Sight Draft

Seller(drawer) agrees to ship buyer(drawee) product for $ payment against sight draft. Buyer must pay on site of goods. Discounts it to bank, (indorser-liable) it to collecting bank in buyers city, the collecting bank has control of goods and when buyer sees goods he pays the coll bank.

Secondary Obligor

surety

Depository Bank

1st bank to which an item is transferred for collection. Can also be payor bank if drawee and holder use the same bank.

Surety=cosignor

3 contracts involved. 1) K for underlying obligation between principal and creditor. 2) Promise the surety will back up the obligation. 3) Promise of the principal to reimburse the surety if the surety has to pay the creditor. (this one is implied)

Cashier's check

A check drawn by the bank on itself. The bank is the drawer and the Drawee. 3-104(g). when a bank issues a cashier's check it is assuming the liabilities of a maker of a prom. note. Can't stop payment

Jus tertii

A person who signs the instrument for the purpose of incurring liability w/o receiving benefit of the value given for the inst. Can sign as a maker (signs front), drawer, acceptor, or indorser(signs back) and is obliged to pay except under sec.d. 3-419 can guarantee for collection or payment.

Check

A draft written on a bank and payable on demand. 3-104(f) bank must be the Drawee to be a check.

Certificate of Deposit

A note created by a bank. 3-104(j) Matures: comes due

Drawee

A person ordered in a draft to make payment. 3-103(a)(4)

Drawer

A person who creates the draft and orders the drawee to pay.3-103(a)(5)

Maker

A person who issues the note and promises to pay. 3-103(7).

Remitter

A person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser. P paid the bank for a cashier's check with the car seller's name as the payee. She handed it over to the payee. She is a remitter.

Accomodation Party

A person who signs the instrument for the purpose of incurring liability w/o receiving benefit of the value given for the inst. Can sign as a maker (signs front), drawer, acceptor, or indorser(signs back) and is obliged to pay except under sec.d. 3-419 can guarantee for collection or payment.

Guarantor

A surety who adds words of guaranty to his or her signature ("I hereby guarantee"). These words add nothing to the S obligation unless the surety guarantees collection only.3-419(d). GT coll. C must go through steps. GT pmt no steps required. Intent of Parties does not matter, words rule.

Negotiation

A transfer of possession, voluntary or involuntary, of an inst by a person other than the issuer to a person who thereby becomes its holder. (the question "has the inst been negotiated?" Asks about legal validity of attempted transfer of the instrument.) 3-201

Order

A written instruction to pay money signed by the person giving the instruction. 3-103(a)(8)

Promissory Note

A written promise to pay money. 2 Parties: Maker (person who issues and promises to pay) & Payee (person to whom the note is made payable)

Promise

A written undertaking to pay money signed by the person undertaking to pay. 3-103(a) (12). Signed see 1-201(39)

Clearinghouse

An association of local banks that has drawn up regulations and procedures to effectuate the exchange of checks. CH rules are allowed to change the rules of the UCC.

Strictissimi Juris

Common Law Rule: The surety's obligation is to be construed strictly. In other words, if possible, the surety prevails. Thus, agreements between creditor and principal that change the contract in any detail operates to discharge and releast the non-consenting surety from further liability. (even if the change was beneficial to the surety) S are a favorite of the law. If the C release the Principal D from liability on the 1st K, or gives D a binding extension of time to pay, the S is discharged unless: S consents OR C informs P of the preservation of S's rights against the P. CL-if you materially change the agree S is discharged.

Stop Payment

Customer has an absolute to stop payment. Orally - only for 14 days. §4-403. customer only needs to describe the check with "reasonably accuracy." 10 cent different. If the bank chooses to look at one thing, the bank should bear the loss. Can't SP on cashier, teller or certified check.

Creditor

Customer/depositor. Checking account is a debtor/creditor relationship. Not an assignment of funds.

Float Period

During the time the check is traveling. For banks that are in different areas they will go to clearing house and pass through intermediary banks. Each presenting bank will give itself a provisional settlement for the amt of check. each bank has 2d to pass to next bank. 4-202(b)

Presentment

Final stage. The instruments surrender to the drawee for either acceptance or payment. 3-501(a)At that moment presentment war are made by the entity making physical presentment & all prior transferors (giving drawee a choice of Defendants) 4-208

Issuance

First delivery of an instrument by the maker or drawer, whether to a holder or non-holder, for the purpose of giving rights on the instrument to any person. 3-105 OR creation of instrument and its handing over to the 1st taker.

Fraud

Fraud in the factum requires excusable ignorance. If D cannot show this it would just be fraud and NOT a real defense.

Notice

Holder must be without notice that there are problems with the instrument.(ex. If at time value is given, a person has notice f a defense the maker of a note has against the payee, the holder cannot be said to take the note with good faith & without notice.

Good Faith

Honesty in fact and the observance of reasonable commercial standards of fair dealing. 3-103(a)(6); subjective and objective test. To become a HDC the owner of the inst must be a bona fide purchaser—the owner must have given value for the inst in good faith.

Subrogation

If S is forced to pay off creditor, the S is subrogated to the rights the C had. its important if the C has rights like a lien, a SI. Permits the S to become a party to the 1st K as if the surety were the creditor. Surety stands in the shoes of the creditor if they have to pay. 3-419(f)-reimbursement

Merger

If a note or check is taken for an obligation, there is merger and the obligation is suspended until dishonor. See 3-310. Once dishonored, sub (b)(3) divorces the underlying K from the instrument and separate causes of action then exist for both.

Charge Back

If after receiving the checks drawn on it, the payor bank decides to dishonor one or more, it simply returns the check, and the provisional settlement for that check is wiped out. 2-214

Subrogation Rule

If the bank accidentally pays over the stop-payment order and recredits the account it can use sub rule to step into the shoes of its customer and sue any party he could have sued. 4-407. Anytime there is a HDC in the chain bank doesn't have to credit back the cust bc HDC rights sub to bank

Co-Surety

If the sureties have agreed to share liability they are co-sureties.

Anomalous Indorsement

Indorsement made by a person who is not the holder of the instrument. Does not affect the manner in which the inst may be negotiated. 3-205(d)

Strict Liability

Means no defense can be asserted. NO SL for Indorsers, can raise all defenses. If a HDC can still raise real defenses.

Drawer's Obligation

Is secondary to that of the drawee b/c the draft must be presented to ehte drawee for payment and dishonored before the drawer has a legal obligation to pay the instrument. (unlike liab of maker of a note, which is primary since it is not subject to these conditions precedent.

Excuse

It is what you go to if you don't have anything else (like estoppel) look at it because maybe there is a reason to get your client off. 3-504. Waiver of presentment and notice is effective.a(iv)(b)(ii)

Defense

Legal excuse the obligor may have to avoid paying the obligation; most common defense is failure of consideration. Only if a defense or claim to the inst arises will the HDC status become relevant, & then the holder has burden of showing he is HDC. 3-308(b)

Negotiability

Refers to form (is an instrument negotiable? Asks if the inst is in the proper form to meet the technical requirements of negotiability found in 3-104(a).)

Dishonor

Refusal of the presentee to pay3-502

Contribution

Right of partial reimbursement that co-sureties have against each other for proportionate shares of the debt. If X, Y, & Z sign M's note agreeing to be co-S, the payee may enforce the entire obligation against any 1, and that 1 can sue the other 2 for their shares.

Secondary Obligation

Once a payee signs the back of the inst, they automatically incur the obligation the law imposes on an indorser. Unlike the oblig of the maker, the indorser's obligation is secondary. To be liable it must have been presented and dishonored. 3-415

Teller's check

One bank draws a draft on another or makes the draft "payable through" another bank. 3-104(h)

Order Paper

Payable to an identified person. Negotiation requires transfer of possession of the inst and its indorsement by the holder. 3-201(b) & 3-205(a)

Bearer Paper

Payable to bearer, cash, not identified person. BP only requires transfer of possession for negotiation. 3-201(b). Indorsed in blank makes it bearer paper. 3-205(b).

Real Defenses

Real Defenses (FAIDS might be a helpful mnemonic): a. Forgery: if the signature of the payee or any special indorsee was forged, generally no subsequent taker can be a HDC because no one can obtain the right to enforce necessary to qualify as a "holder." However, if the person whose name was forged ratifies the unauthorized signature or is estopped from denying it, subsequent takers can qualify as HDC. The forgery of a name other than the payee or a special indorsee does not affect the right to enforce; subsequent takers can qualify as HDC. b. Fraud in the Factum: causes the obligor to sign an instrument without knowledge or reasonable opportunity to learn of its character or essential terms c. Alteration of the instrument: must be a "material" alteration d. Incapacity: e.g. infancy, adjudicated insanity, etc. e. Illegality: so long as it renders the transaction void; if the K is merely voidable, it becomes a personal defense f. Duress: gun pointed to the head g. Discharge in Insolvency Proceedings: fancy name for "bankruptcy" h. Suretyship Defenses: when HDC knows a prior party signed the instrument as a surety i. Statute of Limitations: for checks it's 6 years after dishonor or 10 years from date of check, whichever is first

Obligee

Person entitled to enforce the instrument

Holder

Person in possession if the instrument is payable to bearer or, in if instrument payable to an identified person, if the identified person is in possession. 1-201(20) - to be a holder there must be proper negotiation. Need to be holder to be a HDC.

Provisional Settlement

Place a hold on the funds. Basically a bookkeeping entry hoping that my check is good... Bank has option of making a provisional settlement of placing a hold on the check. the settlement is subject to revocation. Which is a charge back. 4-214

Signature 2

Putting ones signature on an instrument leads to a promise implied in law (intent is irrelevant.

Fraud in the Factum

Real defense - you tricked someone into signing something they had no idea it was a note/draft. Theory is he did not intend to sign such an instrument therefore his signature is ineffective. Extends when signed w knowledge its inst. But w/o know of essen. terms.

Setoff

The customers obligation to the bank is offset against the banks to the customer. Setoff may be had only against general accounts of the depostitor. Special accounts created for a limited purpose cannot be used for setoff of non-related debts of the depositor. 4-201a, 4-215e, 4-303

Presentment

The demand for payment made to the maker of note, for drafts to the drawee. Demand is made to the presentee. 3-501. The drawee is not a holder and the surrender of the inst to the drawee is neither a transfer or a negation...it is a presentment

Transit

The depository bank and the payor bank are not the same, then the check is in transit and go through some multi-bank collection machinery. As soon as your bank (the depository bank) begins this process, it is called a collecting bank. (during this process acts as your agent.)4-201a

Certification

The drawee bank's acceptance of a check. code secions on acceptance apply equally to certification. 3-409(d) & 3-413. Once a bank accepts the check and certifies it all other parties are discharged.

Acceptor

The drawee who places a signature on a draft (by signing diag across front) is said to have accepted it and incurs obligation of acceptor. 3-413

Acceptance

The drawee's signed agreement to pay a draft as presented. 3-409

Recoupment

The legal ability to subtract from any payment due the amount the person trying to collect the debt (or that person's predecessor) happens to owe the debtor.

Super-Plaintiff

The original maker and all other parties to the paper will have to pay it at maturity even if they have defenses arising from the transactions in which they signed the paper. If non-negotiable, the transfer is an assignment of a K right.

On us

The payee and drawer each have acct at saome bank (ie. The depository and payor banks are the same. Payee deposits into his account he can remove the $ at the opening of the 2nd banking day following the receipt of the item. 4-215(e)(2)Unless it is dishonored. 4-202(a)(2) & 3-503(c)

Across counter presentments

The payee walks into the drawee bank and presents it across the counter it must honor before the close of business. 3-502(b)(2)

Payee

The person who receives the payment (from the Drawee) / (a draft is a written order by the drawer to the Drawee, directing the Drawee to pay money to the payee.)

Jointly and Severally Liable

They can be sued individually or as a group. 3-116. If there is more than one party, those who signed are presumed J&S liable. Maker is absolutely liable; maker's liability has no technical or implied conditions to it. Same w/ a cashier's check. see 3-412 (both issuers)

Agent

To sign as an agent and not be liable you must name the principal and unambiguously indicate the individual is signing in a representative capacity. Money corporation, John Smith, its President.

HDC

Took the instrument 1) for value; 2) in good faith; and 3) without notice. 3-302

Checks

When the draft is a check, so that the drawee is a bank, the same rules apply. The drawer writing the check does not give the holder a right to money until the bank accepts it. Bank is bound by the terms of the checking account agreement. 3-408 check is not an assignment of funds.

Signed

Using any symbol executed or adopted by a party with present intention to adopt or accept writing. 1-201(39).

Firm Up

When final settlement occurs, the bookkeeping entry turns into a legal right to get the money. Provisional settlements become final settlements when the payor bank pays the check at issue.

Properly Payable

When it is authorized by the cust and in accordance with any agreement between the cust and bank. The bank may pay out the customer's money only if it follows his or her orders exactly. It if does not it must recredit the account.4-401. MUST be signed by cust.

Value

Whether or not someone qualifies as a HDC is measured at the moment he gave value for the instrument. Things that happen after value is given (like receiving notice of problems with the inst) do not destroy HDC status once achieved. Gifts not value(shelter rule) 3-303

Sureties

Whether the indorses intends it or not, 3-415 makes the indorser an unintentional surety for the parties who have signed the instrument prior to the indorser, and code gives indorsers the rights it gives to voluntary sureties called accommodation parties.

Wrongful Dishonor

Wrongful dishonor by the bank under 4-402. The bank does not have any liability until the bank accepts it. The only person who can sue bank is its customer. Payee cannot sue the bank, they can only sue Drawer under §3-414. Customer may recover damages if check was prop. payable.

Dollar Bill

a bill of exchange - that is a draft drawn on US treasury

Indorsement

a signature placed on an instrument by the payee or later transferees. 3-204

Draft

a written order to pay money. 3 parties (3-414(b) states that by drawing a draft, the drawer engages that upon dishonor of the draft by the drawee the drawer will pay the amount of the draft.) AKA a bill of exchange.

Note

a written promise to pay money

Personal Defenses

basically everything else, including defenses and claims available in ordinary K actions. (e.g., ownership claims, misrepresentation, simple fraud, breach of K, breach of warranty, payment, etc.)

Shelter Rule

basically says a transferee acquires whatever rights her transferor enjoyed, taking "shelter" in the status of her transferor. (there is a limitation, however—the rule doesn't apply if the transferee is a party to fraud or illegality affecting the instrument).

Funds availibility

f you deposit cash it has to be available the next day. 4-215(f) & bankers day when bank is open to the public. 4-104(a)(3). Banks can establish a cutoff hour 4-108

Payor Bank

rticle 3 drawee bank→(cannot ever be a collecting bank). 4-105

Obligor

party to the instrument who is being sued by the holder of the instrument; drawer, maker, someone who indorsed it.

Blank Indorsement

payee sings the back of instrument—has the legal effect of converting the instrument into bearer paper. 3-205(b)

Principal Obligor

principal

Obligee 2

the creditor

Underlying obligation

the obligation that underlies the piece of paper given

Special Indorsement

to preserve the order char of the inst, the orig payee may specify a new payee by writing "pay (name of new payee) above indorsement-legal effect of making inst the sole-prop of the new payee who becomes a holder as soon as the inst is delivered. 3-205(a)

Forgery

unauthorized signature is ineffective except as the sig. of the unauth. signer in favor of a person who in good faith pays the instrument or takes for value. 3-403(a); A person is not liable on an instrument unless the person signed the instrument.3-401(a) & burden 3-308a

Negotiable Instrument

unconditional promise or order (P & O must be written and signed) to pay a fixed amount of money if it; payable to bearer or order; payable on demand or definite time; no other undertaking or instruction 3-104