Uniform Commercial Code

Question 1

What is the Uniform Commercial Code and when was it first published?

Answer 1

• First published in 1952
• Establishes general duty standards for parties to act in good faith and exercise ordinary care in their transactions
• UCC and revisions written by experts in commercial law [American Law Institute (ALI) and Uniform Law Commission (ULC), monitor developments in commercial law and update the UCC when necessary]

Question 2

What does the UCC model?

Answer 2

Used to model State Law:
* Must be adopted by each state
* Enacted in all 50 states and District of Columbia, Puerto Rico, Guam
and U.S. Virgin Islands
* Many states have own variation of Uniform Commercial Code

Question 3

Which articles of UCC address the boundaries for most aspects of check processing?

Answer 3

• Together with case law, UCC Articles 3 and 4 document legal boundaries for most aspects of check processing

Question 4

What is the statute of limitations for UCC?

Answer 4

3 Years

Question 5

Define negotiable instrument and where is this found in UCC?

Answer 5

THE PROMISE TO PAY - THE NOTE - UCC 3-104.

A WRITTEN, signed document that
orders or promises to pay a specific amount of money to a named person or the bearer, either on demand or at a set time with no extra conditions.
* WRITTEN order signed by the DRAWER (must be in writing, physical item)

Question 6

What is the promise pay referred to:

Answer 6

The NOTE

Question 7

What is the Order to pay known as?

Answer 7

The DRAFT (a check is a draft payable on demand)

Question 8

What are the exceptions to an unconditional promise or order to pay the fixed sum of money?

Answer 8

• It states an express condition to payment
• Is subject to or governed by another record (oil & lease payments)
• Rights or obligations are stated in another record

Question 9

UCC 3 is in reference to negotiable instruments which are checks only. T/F?

Answer 9

FALSE.

While UCC 3 is in reference to negotiable instruments, negotiable instruments can be in reference to more than just checks.

Question 10

What is the difference between a Maker vs. Drawer:

Question 11

List the 5 things that make up a check according to UCC 3-104-Negotiable Instruments:

Answer 11

1. Draft (a check is a draft)
2. Written Instruction
3. Signed by the drawer
4. To pay fixed amount of money
5. On Demand

Question 12

What is the definition of a check according to UCC and where is this found?

Answer 12

UCC 3-104(f): A check is a draft, payable on demand and drawn a bank.

A cashier’s check or teller’s check are considered checks.
* May be a check even though described by another term, such as “money order”

Question 13

Define a Cashier’s Check as defined in UCC 3-104(f):

Answer 13

Cashier’s check: F.I.’s OBLIGATION TO PAY
* Draft where Drawer and Drawee (Paying Bank) are the same bank or branches of the same bank
* May be called an official check

Question 14

Define a Teller’s Check as defined in UCC 3-104(f):

Answer 14

Teller’s check
* Drawn by a bank on another bank or payable through a bank

Question 15

Explain difference from payable on demand vs. at a definite time and where this is defined in UCC:

Answer 15

UCC 3-108

ON DEMAND: Payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder
* Does not state any time of payment

AT A DEFINITE TIME:
* Payable upon elapse of a definite period of time after sight or acceptance; or
* At a fixed date; or
* A time readily ascertainable when order is issued

Question 16

Is a stale dated check still a negotiable instrument.

Answer 16

YES. (Stale dated is past 6 months on the date of the instrument)

The F.I. may doubt collectability and the won’t have any holder in due course claims but it is still a negotiable instrument.

Question 17

Can you accept a negotiable instrument without a date?

Answer 17

Yes

Question 18

If a check is undated, how is it recognized if presented for payment?

Answer 18

Date of its issue OR date it first comes in the possession of a holder-presented for payment.
* Doesn’t have to be written.

Question 19

Define Postdated check:

Answer 19

May be paid by paying bank, unless agreement exists with issuer.
* They would need to place a stop on the item with expiration until that date.

Question 20

Define Antedated check:

Answer 20

Staledated, may also be paid, depending on deposit account or other agreements
* Still negotiable

Question 21

What is considered the date of instrument as defined by UCC and where is this information found?

Answer 21

UCC 3-113 Date of Instrument: Day on or after which the transfer of the amount of the check may take place
* Required for negotiability [BUT IT WILL BE ASSUMED IF LEFT BLANK]

Question 22

What is the difference between Payable to “Bearer” vs. Payable to “Order” and where is this found in UCC?

Answer 22

UCC 3-109: Payable to BEARER or to ORDER

ORDER: Payable to named payee

BEARER: Anyone in possession of the check is entitled to payment
* ex. Payable to Cash or left Blank

Question 23

How is the identification of person to whom the instrument is payable defined in UCC and where is this found?

Answer 23

UCC 3-110: Identification of Person to Whom Instrument is Payable.

Identity of the payee determined by intent of the drawer.
* To Name of the person or organization to receive funds [Usually preceded by: Pay to the order of, Pay to, or Pay]
– Even if that person is identified by a name or other identification that is not that of the intended person [Example: Check payable to maiden name, but now married]

Examples:
* Pay to order: Payee A or Payee B
* Names may also be separated by a slash (‘/’) or a comma (‘,’)
* Either payee may indorse to negotiate
* Pay to order: Payee A and Payee B
* Both payees must indorse to negotiate

Question 24

Define Ambiguous intent:

Answer 24

Ambiguous intent: Pay to order: Payee A Payee B
* Without the “or”, “and”, or other specific instructions, any payee listed may indorse to negotiate.

“OR” IS ASSUMED, NOT “AND” WITH AMBIGUOUS INTENT.

Question 25

What is the method of identification as listed in UCC?

Answer 25

Method of identification may be identified in any way, including by name, identifying number, office, or account number

Question 26

Explain Contradictory Terms of Instrument as defined in UCC and where this is found.

Answer 26

UCC 3-114: Contradictory Terms of Instrument When the LEGAL WRITTEN AMOUNT varies from the NUMERIC AMOUNT. * Typewritten terms prevail over printed terms * Handwritten terms prevail over both * Words prevail over numbers

Question 27

Define Amount in reference to a check in UCC and how does this appear?

Answer 27

Amount: Value passing from account of the drawer to payee * Required for negotiability To deter unauthorized alteration, amount appears twice * Numbers: Courtesy amount or convenience amount * Words: Legal amount

Question 28

The typed amount prevails on a check vs. the written amount.

Answer 28

NO. HAND-WRITTEN PREVAILS. (You can reject for altered)

Question 29

Explain Incomplete Instrument as defined in UCC and where is this found?

Answer 29

UCC 3-115: Incomplete Instrument Instrument that is incomplete at the time of signing, but the signer intended it to be completed by the addition of words or numbers * If words or numbers are added to an incomplete instrument without authority of the signer, there is an alteration of the incomplete instrument. * The burden of establishing that words or numbers were added to an incomplete instrument without authority of the signer is on the person asserting the lack of authority IF FIELDS ARE BLANK, F.I. WOULD WANT TO ACCEPT AND NOT HAVE ANYTHING ADDED TO AN IMCOMPLETE INSTRUMENT BECAUSE IT BECOMES ALTERED.

Question 30

Define negotiation as defined in UCC and where this is found?

Answer 30

UCC 3-201: Negotiation Result of the transfer of possession of instrument * From holder to another person or a bank who becomes holder as a result of the transfer

Question 31

Define Indorsement as defined by UCC and where this is found.

Answer 31

UCC 3-204: Indorsement, can be a combination of a couple things: 1. Can be signature alone OR accompanied by words for purpose of: * Negotiating the instrument (Example: Cash or deposit check) * Restricting transfer (Bank restrictive indorsement [ex. Deposit to ABC Bank]) or (Payee’s restrictive indorsement [For Deposit Only]) 2. Payee indorsement * Need NOT be exact, MAY BE SUBSTANTIALLY SIMILAR (Example: Check payable to Robert Smith - May indorse as Bob Smith)

Question 32

Define Special Indorsement as defined in UCC and where is this found?

Answer 32

UCC 3-205: Special or Blank Indorsement * Transfers the check to a specified payee * Endorsed as payable to someone else (Negotiation then requires that person’s subsequent indorsement)

Question 33

Define Blank Indorsement as defined in UCC and where is this found?

Answer 33

UCC 3-205: Blank Indorsement Payee simply signs their name * Blank does not mean unindorsed * Check becomes a bearer instrument and can be transferred to anyone simply by giving the check to another party

Question 34

Define Anomalous Indorsement as defined in UCC and where is this found?

Answer 34

UCC 3-205: Anomalous Indorsement Made by person who is not holder of the instrument * Only effect of anomalous indorsement * Makes the signer liable on the instrument as an indorser * Normally made by an accommodation party (defined in UCC 3-419)

Question 35

Define Restrictive Indorsement as defined in UCC and where is this found?

Answer 35

Imposes limitations on transferring check * Conditional or qualified indorsement * Common example: “For Deposit Only” * Another common example is For Mobile Deposit Only @ F.I. name

Question 36

Define Unindorced item as defined in UCC and where is this found?

Answer 36

UCC 4-205-Depositary bank becomes a holder of the item at the time it receives the item for collection * If the customer was holder of the item, whether or not the customer indorses the item * Depositary bank warrants that amount of the item was paid to the customer or deposited to the customer's account

Question 37

Who is the Holder in reference to Holder in Due Course with UCC and where located?

Answer 37

UCC 3-301-Holder is the person entitled to enforce the item

Question 38

Define Holder in Due Course as found in UCC and where located?

Answer 38

Holder in Due Course (HIDC): Must meet these 5 conditions in order to be considered the enforcer of the item - the holder who has possession of the item, that: * Took the item in good faith * Gave value for the item * Has no knowledge of the item being overdue or dishonored * Is not aware of any unauthorized signature or alteration * Does not know of any claims against the item

Question 39

Define Overdue Instrument as found in UCC and where located

Answer 39

UCC 3-304: Overdue Instrument An instrument payable on demand becomes overdue at the earliest of the following times: * On the day after the day demand for payment is duly made; or * If the instrument is a check, it is 90 days after its date Different from stale dated, stale dated is over 6 months and overdue, but not all overdue are stale dated b/c those are at the 90 days.

Question 40

What is the HIDC Benefit as found in UCC and where located?

Answer 40

UCC 3-302: Benefit to having HIDC status: Can enforce item against drawer (not the paying bank but the drawer -- unless it is a cashier's check) * HIDC can make a claim to the person who signed the check and ordered payment (drawer) -- Even if that check was returned unpaid by the drawer’s bank (paying bank) Financial intermediary, such as depositary bank (BOFD) or collecting bank * Should not be affected by disputes between the drawer and payee of check regarding the underlying transaction -- HIDC provisions allows HIDC to make a claim directly back to drawer

Question 41

What is the bank's obligation to Lost, Destroyed, Stolen cashier's checks? Where is this found in UCC?

Answer 41

UCC 3-312: Lost, Destroyed or Stolen Cashier’s Checks A bank’s obligation to pay cashier's check (UCC 3-411) * However, if a cashier’s check (or other official item) is lost or destroyed the person making the claim must sign a declaration of loss * Made under penalty of perjury (by remitter or payee) * Only made if check is lost, stolen or destroyed * Claim becomes enforceable at time claim is asserted or on the 90th day following date of check which ever is later (i.e., 91st day of item)

Question 42

How is a signature defined in UCC and where is this found?

Answer 42

UCC 3-401: Signature * Authorizes the paying bank to disburse funds - Required for negotiability * Must coincide with the conditions of payment on the signature card - Example: Two signatures required * May contain restrictive notations for which bank may require an indemnity - Example: Not valid after 90 days/over $1,000.00 * No particular form of signature required (Manually, By device or machine, Name including trade or assumed name, Mark or symbol with intent to authenticate * Multiple signatures: Must contain number of signatures required in accordance with agreed upon instructions --Usually on signature card --Unauthorized if one of the required signatures is lacking

Question 43

Define Unauthorized Signature as found within UCC and where is this found?

Answer 43

UCC 3-403: Unauthorized Signature Person is not liable for an instrument unless it is signed by: * Accountholder, or * Other designated party, such as power of attorney or trustee (The represented person is liable if instrument is signed by a representative) If person’s name is signed without authority, the signature is unauthorized

Question 44

Explain Price Vs. Neal

Answer 44

Case decided in English court in 1762, commonly known as the “Rule of Price v. Neal” * Decision essentially was that a PAYING BANK is in best position to detect a forged drawer’s signature and should bear the loss arising from its payment of a check containing a FORGED DRAWER'S SIGNATURE

Question 45

Where is the decision commonly known as the "Rule of Price vs. Neal embodied in UCC?

Answer 45

Embodied in the UCC presentment warranties in sections UCC 3-417(a) and UCC 4- 208(a)

Question 46

Define Imposters as defined in UCC and where is this found?

Answer 46

UCC 3-404: Imposters; Fictitious payee If an imposter induces the issuer of an instrument to issue the instrument to the impostor, indorsement of the instrument is effective in favor of a person who in good faith, pays the instrument or takes it for value

Question 47

What is the employers responsibility as defined in UCC and where is this found?

Answer 47

Covers two categories of fraudulent indorsements made by employees * Indorsement made in name of employer on check payable to employer; and * Indorsement made in name of payee on check issued by employer Employee of a company or a person acting in concert with employee (e.g., an independent contractor) makes a fraudulent indorsement * Checks written, stamped or deposited fraudulently using company’s account * Employee was entrusted with responsibility for checks * Bank was not negligent * EMPLOYER IS LIABLE AND NOT THE PAYING BANK

Question 48

Define Alteration as found in UCC and where is this found?

Answer 48

UCC 3-407: Alteration is an unauthorized change in an instrument the purports to modify in any respect the obligation of a party; OR An unauthorized addition of words or numbers to an incomplete instrument * Burden of establishing words or numbers were added to an incomplete instrument without authority of the signer falls on the person asserting there was a lack of authority

Question 49

Define Final Payment in relation to UCC and where is this found?

Answer 49

UCC 4-215: Final Payment Item is finally paid when payor bank has either: * Paid the item in cash * Settled for the item without a right to revoke the settlement If a provisional settlement was made * Item is finally paid if payor bank fails to revoke the settlement in the time permitted by statute or clearing-house rule or agreement

Question 50

What is the return timeframe the return of a negotiable instrument as defined in UCC and where is this found?

Answer 50

4-301: Return of Items by Payor Bank is required to pay or return an item by the midnight deadline. This allows a payor bank to recover settlement of an item * Must not be presented over the counter * Must have settled for the item by midnight of the day of receipt of the item * Must take one of the following actions: 1) Return the item 2) Send notice of nonpayment

Question 51

Define Midnight Deadline as found in UCC and where is this located?

Answer 51

UCC 4-301: Return of Items by Payor Bank - Midnight deadline: * With respect to a bank, is midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later

Question 52

According to UCC, when can a bank charge a customer's account and where is this found in UCC?

Answer 52

UCC 4-401 - Bank may charge customer’s account: * If an item is properly payable * Even though the charge creates an overdraft * Even though payment was made before the date of the check [Unless customer has given notice to bank of the postdating describing the check with reasonable certainty [need to place a stop payment]

Question 53

When is an item considered properly payable according to UCC and where is this found?

Answer 53

UCC 4-401: * Authorized by the customer, and * In accordance with agreement between the customer and bank (UCC 4 provisions may be altered by agreement of the parties)

Question 54

Explain customers right to stop payment as defined in UCC and where is this found?

Answer 54

UCC 4-403-Customers Right to Stop Payment: A stop payment order must be received by the bank in a time and manner as to allow the bank a reasonable opportunity to act on the request * A stop payment order is effective for six months (Lapses after 14 calendar days if the original order was oral and was not confirmed in a record within that period IF YOU CHOOSE AS A F.I.) -- May be renewed in writing for an additional six months Stopping payment does not affect the drawer’s liability on the check

Question 55

Who may stop payment on a check?

Answer 55

The account holder or any person with authority to draw checks on the account. This would include: * Any person signing in a representative capacity, or; * Joint holder (Even if they did not sign the check) * If more than one signature is required to negotiate a check only one person is needed to place the stop

Question 56

What is the DESCRIPTION OF ITEM as defined in UCC and where is this found?

Answer 56

UCC 4-403: Stop payments must be: * Described with reasonable certainty * At a time that allows a reasonable opportunity to act Most systems require accurate information provided from the customer including: * Amount * Check Number Include provisions in your account agreement and documented stop payment forms that states the item must be accurately described in every detail

Question 57

All banks are obligated to pay checks more than 6 months old. T/F?

Answer 57

False: UCC 4-404-Bank is NOT obligated to pay a check past 6 months BUT MAY DO SO. Typically addressed in account agreements with F.I.

Question 58

Explain Death or Incompetence of Customer as it applies to UCC and where is this found?

Answer 58

UCC 4-405: Neither death nor incompetence of a customer revokes the authority to accept, pay, or collect an item, or to account for proceeds until the bank knows of the fact of death or of an adjudication of incompetence and has reasonable opportunity to act on it * With knowledge, a bank may for 10 days after the date of death pay or certify checks drawn on or before that date unless ordered to stop payment by a person claiming an interest in the account

Question 59

Explain Customer's Duty to Report as defined in UCC and where is this found?

Answer 59

UCC 4-406: Customer’s duty to discover and report unauthorized signature or alteration. Bank that sends a statement of account must: * Return or make available to the customer the items paid, or * Provide sufficient information for the customer to reasonably identity paid items Customer must comply with review and notice duties to: * Exercise reasonable promptness in examining the statement; and * Promptly notify the bank of any unauthorized/altered item(s)

Question 60

How is a customer affected if they fail to comply with their duty to report?

Answer 60

If bank proves customer failed to comply with these duties, customer is precluded from asserting against the bank the: * Customer’s unauthorized signature or alteration on the item, if bank proves they (the bank) suffered a loss by reason of the customer’s failure; and * Customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if: --Payment was made before bank received notice from customer, or --After customer afforded a reasonable period of time, not exceeding 30 days, in which to examine item or statement of account and notify the bank

Question 61

Define the Statute of Repose as found in UCC and where is this found?

Answer 61

UCC 4-406(f): Statute of Repose * UCC establishes a second preclusion for customer’s failure to notify bank of unauthorized signature or alteration of item: * Regardless of lack of care of either the customer or the bank: -- Customer who does not within one year after the statement or items are made available, discover and report unauthorized signature or alteration, the customer cannot claim the unauthorized signature or alteration

Question 62

Explain Check Safe Keeping as found in UCC and what section is this found?

Answer 62

UCC 4-406(b): Check Safe Keeping - If the items are not returned to the customer, the person retaining the items shall retain the items for seven years * Upon request the bank must provide within a reasonable time -- The item or; -- A legible copy of the item

Question 63

What is a WARRANTY in relation to Transfer & Presentment Warranties?

Answer 63

WARRANTY: Travels with the item (called the chain of warranties)

Question 64

Define Transfer Warranty:

Answer 64

From person (customer) to BOFD to collecting bank

Question 65

Define Presentment Warranty:

Answer 65

From collecting (presenting) bank to paying bank

Question 66

LIST UCC TRANSFER WARRANTIES:

Answer 66

PERSON or COLLECTING BANK transferring item warrants: * Entitled to enforce the item; * All signatures on the item are authentic and authorized; * Item has not been altered; * Item is not subject to a defense or claim; and * Warrantor has no knowledge of any insolvency proceeding with respect to the maker; and * For a remotely-created consumer item, that the person on whose account the item is drawn authorized item and amount for which the item is drawn

Question 67

LIST UCC PRESENTMENT WARRANTIES:

Answer 67

COLLECTING BANK IS PRESENTING: Person obtaining payment and previous transferor presenting item warrants: * Entitled to enforce draft * Or authorized to obtain payment/acceptance of draft on behalf of a person entitled to enforce the draft; * Item has not been altered; and * Warrantor has no knowledge that signature of the purported drawer of the draft is unauthorized; and * For a remotely-created consumer item, person on whose account the item is drawn authorized item and amount for which it is drawn

Question 68

Explain the process of the Transfer & Presentment Warranties following the check:

Answer 68

1. TRANSER WARRANTY: [Deposit Customer >> Depository bank (BOFD)] 2. TRANSFER WARRANTY (follows check): Depository bank (BOFD) >> Intermediary Bank Collecting Bank Presenting Bank **could be FED or BANKERS BANK 3. PRESENTMENT WARRANTY: Intermediary Bank Collecting Bank Presenting Bank >> Paying Bank