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39 Cards in this Set

  • Front
  • Back
Depository Bank
The first bank to take an item unless the item is presented for immediate payment over the counter.

The bank where the payee deposits.
Payor Bank
The bank that is the drawee of the draft.
presenting bank
a bank presenting an item to the payor bank
when checks are not properly payable?
Dishonor-checks that are dishonored are not properly payable

Stop Payment Order

forged signature of drawer

forged indorsement

overdue checks

alterations--partially PP for the original terms.

post-dated--ordinarily PP unless Customer has given notice to bank of post dating.
When is an item Properly payable?
An item is PP if:

(1) it is authorized by the customer and

(2) it is in accordence with any agreement b/w the customer and bank.
Properly payable Rule
A bank may charge the customers account for an item that is properly payable from the account,even if the charge creates an over draft.

An item is PP if:

(1) Its authorized by the customer

(2) its in accordence with any agreement between the customer and the bank.
Person entitled to enforce (PEE)
A PEE is a holder of an instrument or a non holder with the rights of a holder
Negotiation
A transfer of posession whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.
who is the "person whose intent determines to whom an instrument is payable" mean?
generally the person who signed the instrument, but if there was a check writing machine then it means the person who supplied the name of the payee whether or not authorized to do so.
If a check payable to an impostor, fictitious payee, or payee not intended to have an interest in the check is paid then who does the loss fall on?
The loss is placed on the drawer of the check rather than on the drawee or depository bank that took the check for collection.
When a Payor bank receives an item that is “properly payable” from a customer’s account, but the funds in the account are insufficient to pay it, the bank has 2 options
(a) They can dishonor (see “Wrongful Dishonor” below) the item and return it, or
(b) Pay the item and charge its customer’s account, even though an overdraft results.
When WRONGFUL DISHONOR occurs
Customer may recover all actual and consequential damages whenever the bank wrongfully or mistakenly dishonors a check that is properly payable from the account; actual damages include mental anguish (i.e., financial embarrassment)
BANKS STATEMENTS §4-406
Generally: Banks are required to return sufficient information about checks to customers (i.e., item number, amount and date of payment) to enable customers to see if any forgeries or mistakes have happened.
After receiving the bank statement, the customer has a duty to examine the statement for unauthorized signatures or alterations and requires prompt reporting of these matters to the bank.
- So, Customer must examine the bank statement or be estopped from asserting unauthorized signatures or material alterations that could have been discovered if the bank can prove that it suffered a loss by reason of the failure of the customer to notify the bank.
FORGERY OF THE PAYEE’S NAME—This impacts Art. 4 Banks who take the instrument
Recall: § 3-301 and re-read who is entitled to enforce the draft.
(1) An instrument may be enforced by a HOLDER;
(2) A nonholder in possession with rights of a holder (subrogee-“stepped into the shoes”);
(3) Or, a person not in possession but entitled to enforce (i.e., lost, stolen or destroyed instruments)
Basic rule is: that forgery of a payee or special indorser’s name means no valid negotiation, thus no one taking the instrument can qualify as a holder; FORGERY breaks the chain of title!!!
FINAL PAYMENT RULE
§4-215 states: an item is finally paid by a Payor bank when the bank has FIRST done ANY of the following:

(1) paid the item in cash

(2) settled for the item without having a right to revoke the settlement…

(3) made provisional settlement for the item and failed to revoke the settlement in the time and manner permitted by statute
WHY is the Final Payment Rule important?
(1) It means that the bank has lost its right to “dishonor” the check; (which is important for purposes of establishing conditional-secondary liability of indorser & drawer-liability conditioned upon presentment and dishonor.
With Final Payment, then CAN NOT establish indorser or Drawer liability because there has been no dishonor or “refusal” to pay.)

(2) It means that the bank must pay instrument to the person entitled to enforce the check. Basically, the bank is accountable for the item and must pay it.
PRESENTMENT WARRANTY: §3-417, §4-208
-Presentment warranties are made by:

(1) The entity that physically presented the check for payment, and

(2) (“backwards”) by every person transferring the check after issuance.
-Under the Presentment Warranty, the person obtaining payment and previous transferors warrant:

(1) that the warrantor is entitled to enforce the draft
(i.e., warranty of good title: which means no unauthorized or missing payee or special indorsee’s indorsements)

(2) that the draft is not altered

(3) that the warrantor has no knowledge that the drawer’s signature is unauthorized
(4) Damages are recovery of the loss suffered as a result of the breach but not more than the instrument plus expenses and loss of interest incurred as a result of the breach; usually no attorney’s fees.


1. ONLY POSSIBLE PLAINTIFF in Presentment Warranty suit is Drawee.
2. Compare and Read BOTH provisions above CAREFULLY—same language EXCEPT one part. The comment to 3-417 lays out explanation.
TRANSFER WARRANTY: § 3-416 AND 4-207
These warranties made by any person who:
(1) transfers (which is any movement except issuance and presentment) the instrument
(2) for value
Warranties run to all subsequent holders of the transfer if the transfer is by indorsement;
but, run only to the immediate transferee if the transfer is not by indorsement (bearer paper).
other than on checks, warranty liability can be negated by the transferor placing “without warranty” on the instrument.
Transferor warrants:

1. that she is entitled to enforce the instrument

2. that all signatures are genuine or authorized

3. that the instrument has not been materially altered

4. that no defense of any party is good against the Transferor

5. that she has no knowledge of any insolvency proceedings that have been instituted against the maker, acceptor or drawer

6. that, if instrument is a demand draft, creation of the instrument was authorized by person identified as drawer.
CONVERSION (§3-420)
This is a civil action for misappropriation of another’s property.

With conversion, someone is improperly in possession of your property. That person is someone not entitled to enforce the instrument, and is enforcing the instrument;

Only the person whose property rights are adversely affected may sue for conversion (that is, a payee or holder that payee has negotiated the instrument to).
But:
Neither the issuer nor, a payee or indorsee, who never received delivery of the instrument may maintain an action for conversion;
FORGERY OF DRAWER’S NAME: §3-403
Forged drawer’s signature does not break the chain of title;
-This means that a person can still be a “holder” and a HDC.
KEY POINT: Under the Code, forgery of the Drawer’s name acts as if the forger had signed his/her own name. IT IS NOT TREATED AS A FORGERY.
RULE: If a bank pays out on a forged drawer’s signature:

(1) The payment is final.

(2) The bank cannot recover the money back from the party paid because there is no breach of presentment warranty.

(3) The forgery is treated as a valid signature of the forger;

(4) Thus, the presenter to the bank had the right to enforce the forger’s instrument as against the forger;

(5) AS A DISTINCTION: If the bank pays on a forged indorser’s, NOT DRAWER’S signature, a presentment warranty is broken which means that the presenter did not have the right to enforce the instrument against the drawer because it is a forgery.

Forger steals Drawer’s checkbook and writes a check payable to him signing Drawer’s name. Forger then indorses the check as payee and deposits it with his Depository bank, which in turn receives payment from Drawee bank.
Forger steals Drawer’s checkbook and writes a check payable to him signing Drawer’s name. Forger then indorses the check as payee and deposits it with his Depository bank, which in turn receives payment from Drawee bank.
Main Points:

When Depository bank presented check to Drawee bank for payment, it warranted that it was a person entitled to enforce the check, and this warranty has not been breached.

The depository bank is a “holder” of the check drawn by Forger that is payable to the order of Forger and properly indorsed by him as payee.
Drawee should have been more careful in checking the drawer’s signature. If Drawee Bank does not have time to be more careful, then it can invest in forgery loss insurance.

Policy: Forgery of drawer’s name is a rare circumstance which is why drawer’s signature is presumed to be genuine;
 It’s the drawer’s burden to prove that signature is not Drawer;
 Drawee Bank is the least cost avoider in that the banks have a relationship with the Drawer so they would be in a better position to determine if the Drawer’s signature is forged as compared to a depository bank or check cashing company’s ability to detect forgery.
Stop Payment Orders (Be sure to REVIEW requirements for WRITTEN and ORAL)
A customer may revoke the order to pay a sum of money (as contained in a check) with a stop payment order. If the order does not come too late, the bank is bound by it.
Bank's Right to Subrogation on Improper Payment
If a payor bank pays an item over a stop payment order or otherwise in violation of its contract with the drawer, the bank is subrogated to (obtains) the rights of :

(a) any holder in due course on the item against the drawer or maker;

(b) the payee or any other holder against the drawer or maker; and

(c) the drawer or maker against the payee or any other holder.
COLLECTION OF ITEMS
When a check is deposited (in the depositary bank), the bank credits the account for that amount. This is provisional credit and, normally, a bank does not permit a customer to draw funds against a provisional credit. If the bank does permit its customer to draw against the provisional credit, it has given value and may qualify to be a holder in due course. Under the customer’s contract with her bank, the bank must make a reasonable effort to obtain payment of all checks deposited for collection. When the amount of the check has been collected from the payor bank (the drawee), the credit becomes final.

Where the depository and payor banks are different, a check must pass from one bank to the other, either through one or more intermediary banks or through a clearinghouse — an association, composed of banks or other payors, whose purpose is to settle its members’ accounts on a daily basis.
Collecting Banks
A collecting bank is one that handles an instrument for payment, excluding the payor bank. Typically, the depositary bank gives a provisional credit to its customer and then transfers the item to the next bank in the chain, receiving a provisional credit or “settlement” from it, and so on to the payor bank, which then debits the drawer’s account. When the check is paid, all the provisional settlements become final; the transaction is completed.

If the payor bank does not pay the check, however, it returns the check, and each intermediary or collecting bank reverses the provisional settlement or credit it previously gave to its forwarding bank. Ultimately, the depositary bank will charge the account of its customer who deposited the item, and the customer must seek recovery from the indorsers or the drawer
Indorsements
A restrictive indorsement such as “Pay any bank” locks the check into the bank collection process, and protects the collecting bank by making it impossible for the item to stray from regular collection channels. A depository bank that receives an item without indorsement becomes a holder if the customer was a holder.
Warranties
Customers and collecting banks give the same transfer warranties as parties, including: 1) he is entitled to enforce the item, 2) all signatures are authentic and authorized, 3) there are no alterations, 4) he is not subject to any defense or claim in recoupment; and 5) he has no knowledge of any insolvency proceeding involving the maker or the drawer of an unaccepted draft. The presenter’s warranties to a drawee on a draft are 1) she is a person entitled to enforce, 2) the item has not been altered, and 3) she has no knowledge that the signature of the drawer is unauthorized
Final Payment
The UCC states that a payor bank has made final payment when it first does one of these: 1) the item is paid in cash, 2) it settles without the right to revoke the settlement through statute, agreement, or clearing house rule, or 3) enters into a provisional settlement that is not timely revoked.
Payor Banks
A payor (drawee) bank is obligated to pay on a drawer's check assuming no stop payment order has been filed and adequate funds are available in the account. In most cases, a payor bank must give its transferor a provisional settlement; otherwise it may become liable to its transferor for the amount of the item unless it has a valid defense, such as breach of a presentment warranty.

The bank may dishonor an item because: the drawer has no account or the account has insufficient funds, a signature may be forged, or the drawer may have stopped payment on the item
Bank's Right to Subrogation on Improper Payment
If a payor bank pays an item over a stop payment order or otherwise in violation of its contract with the drawer, the bank is subrogated to (obtains) the rights of (a) any holder in due course on the item against the drawer or maker; (b) the payee or any other holder against the drawer or maker; and (c) the drawer or maker against the payee or any other holder.
Payment of an Item
A payor bank owes a duty to its customer, the drawer, to pay checks properly drawn by the customer on an account that has funds sufficient to cover the items, although the holder of a check has no right to require the drawee bank to pay it. However, if an item which is less than six months old is presented to a payor bank and the bank improperly refuses payment, it will incur a liability to the customer from whose account the item should have been paid. Checks over six months old are considered “stale” but may be paid at the bank’s option if done in good faith.
When a payor bank receives an item properly payable from a customer’s account, but the funds in the account are insufficient to pay it, the bank may?
When a payor bank receives an item properly payable from a customer’s account, but the funds in the account are insufficient to pay it, the bank may (1) dishonor the item and return it, or (2) pay the item and charge its customer’s account, even though an overdraft results. The customer may be liable to the bank to pay a service charge for the bank’s handling of the overdraft or may be liable to pay interest on the amount of the overdraft.
Payment or Acceptance by Mistake §3-418
This validation serves as restitution for the drawee bank who pays a check under mistaken belief that:

(1) payment of the draft had NOT been stopped or
(2) that the signature of a drawer was authorized.

Drawee bank may recover from the person to whom or for whose benefit the payment was made.
BUT, Drawee bank can NOT recover against a person who took the instrument in good faith and for value or who in good faith changed his position in reliance on payment.
SIGNATURES
This term is broadly defined to include any name, word, or mark — handwritten, typed, printed, or any other form, intended to authenticate the instrument. These concepts relate directly to forgeries.
Unauthorized Signatures
This includes forgeries and signatures by an agent who lacks the proper authority. Unauthorized signatures will impose liability on the signer regardless of whose name appears on the instrument
Ratification of Unauthorized Signature
Makes the signature valid and relieves the actual signer from liability for the instrument, but not from action by the person whose name was forged.
Imposter Rule
validates forgery and treat as indorsement of the Forger; So, where ordinarily forged payee indorsement means NOT properly payable, a Bank who pays can assert and make instrument properly payable IF rule requirement met.
Employee Indorsement Rule
If an employer entrusts an employee with responsibility with respect to an instrument and the employee makes a fraudulent indorsement on the instrument, the indorsement is effective. Under §3-405, the “employee indorsement rule” applies to forgery of the employer’s name as payee on checks received in the course of business as long as the forgery is done by an employee having responsibility over the handling of such checks.
Negligence Rule Asserted as Defense --Contributing to Forged Signature
The person whose name has been forged is not bound unless his negligence contributed to the making of the unauthorized signature. Negligence is often used by Banks as a defense when the bank has assumed the loss and paid a draft that has a forged Drawer’s signature