BILL ANALYSIS
Business & Industry Committee
C.S.H.B. 1728
By: Grusendorf
4-4-95
Committee Report (Substituted)
BACKGROUND
In 1985, a project was initiated by the National Conference of
Commissioners on State Laws ("NCCUSL") and the American Law
Institute ("ALI") to revise Articles 3 and 4 of the Uniform
Commercial Code ("UCC"). Revised Articles 3 and 4 were approved by
NCCUSL and ALI in 1990. As of October 1994, 36 states had adopted
the revised articles. Four states and the District of Columbia
have introduced the revised articles in 1994. The revised Chapters
3 and 4 of the Texas Business and Commerce Code that follow are in
substantially the form of the uniform articles, with some Texas
revisions to address consumer and other issues.
New Chapter 3 is a new statute in the sense that no attempt
has been made to preserve the language of former Chapter 3, but it
is not a radical departure from the previous law. The basic
doctrines of negotiable instruments in old Chapter 3 are carried
forward; the organization of new Chapter 3 follows the
organizational structure of the former chapter.
The new Chapter 3, however, clarifies ambiguities in the
former chapter, reconciles issues on which jurisdictions were
split, replaces archaic terminology, and deletes obsolete
provisions. The major substantive changes represent attempts by
the national drafting committee to modernize the UCC by recognizing
the advances in business and banking methods.
The scope of Chapter 3 remains negotiable instruments, but
with important adjustments and clarifications. For example,
instruments are not excluded from its coverage because payment is
limited to resort to a particular fund. Any notice required by the
Federal Trade Commission "Holder Rule" does not destroy
negotiability, but only limits holder in due course status.
Interest is not included within the "sum certain" requirement. In
accordance with modern expectations, a check not payable to order
or bearer is fully negotiable. Additionally, Chapter 3 clarifies
its relationship with federal law, expressly deferring to the
regulations of the Board of Governors of the Federal Reserve
System.
Former Chapter 4 was derived from the prior uniform Article 4
that was drafted in the 1950s near the end of the manual check
processing era. Since that time, the use of checks as a payment
system has exploded; in 1990, 56 billion checks were drawn in the
United States. Two areas of technological innovation--the
automated processing of checks based on the Magnetic Ink Character
Recognition technology that became widespread in the 1960s and the
end of a paper-based payment system and the emergence of an
electronic-based payments system--mandated changes to the former
statute. Additionally, revisions were needed to recognize the
intervention by Congress in 1987 through the Expedited Funds
Availability Act and a new, voluminous Regulation CC issued by the
Federal Reserve Board in 1988.
The goal of the national drafters of the revised uniform
articles was a faster, more efficient, less costly bank collection
system. Revised Chapter 4 continues the Price v. Neal rule that a
payor bank generally is liable for a forged drawer's signature,
while establishing a comparative negligence analysis for the
liability of payor banks if the customer fails to exercise
reasonable care in examining its bank statements.
PURPOSE
Chapters 3 and 4, as noted above, contain some non-uniform
changes to the revised Articles 3 and 4, such as slight revisions
that address certain consumer concerns in the comparative
negligence area (see Sections 3.404, 3.405, 3.406 and 4.406) and
those that carry forward the existing special Texas policy
requiring stop payment orders to be in writing (see Section 4.403).
RULEMAKING AUTHORITY
It is the committee's opinion that this bill does not expressly
grant any additional rulemaking authority to a state officer,
department, agency or institution.
SECTION BY SECTION ANALYSIS
SECTION 1. Chapter 3, Business and Commerce Code, by deleting
all of existing Chapter 3 and adding new Chapter 3 to read as
follows:
CHAPTER 3: NEGOTIABLE INSTRUMENTS
SUBCHAPTER A. GENERAL PROVISIONS AND DEFINITIONS
Section 3.101. SHORT TITLE. This section changes the title
of Chapter 3 to "Negotiable Instruments" from "Commercial Paper."
Section 3.102. SUBJECT MATTER. (a) The limitation of Chapter
3 to negotiable instruments, which was implied in former Chapter 3,
is expressly stated in this section.
(b) Chapters 4 (four) and 9 (nine) govern, if there is a
conflict between chapters 4 and 9 and this chapter.
(c) Regulations of the Board of Governors of the Federal
Reserve System and operating circulars of the Federal Reserve Banks
supersede any provision of this chapter.
Section 3.103. DEFINITIONS. Adds new definitions of
"acceptor", "drawee", "drawer" "good faith", "maker", "order",
"ordinary care", "party", "promise", "prove", and "remitter". The
new definition of "good faith" requires the observance of
reasonable commercial standards of fair dealing. This change is
consistent with the definitions of good faith applicable to
Chapters 2, 2A, 4, and 4A of the Business and Commerce Code. A new
definition of "ordinary care" has been added. This definition is
important because of the shift in emphasis in Chapters 3 and 4 from
strict liability standards to comparative negligence standards.
Section 3.104. NEGOTIABLE INSTRUMENT. (a) Revised Section
3.104 confirms that a variable rate of interest on an instrument
does not preclude classification of that instrument as a negotiable
instrument if it:
(1) is payable to bearer or first comes into possession
of a holder;
(2) is payable on demand;
(3) does not state any other undertaking or instruction
by the promising person to do any act; the promise may
contain:
(A) a power to given, maintain, or protect
collateral;
(B) an authorization to the holder to confess
judgment;
(C) a waiver of any law intended for the protection
of an obligor;
New or revised definitions of "instrument", "check",
"cashier's check", "teller's check", "traveler's check", and
"certificate of deposit" appear in Section 3.104. This is
consistent with existing Texas case law under Amberboy v. Societe
de Banque Privee, 831 S.W.2d 793 (Tex. 1992), certified question
accepted sub nom from Ackerman v. Federal Deposit Ins. Corp., 930
F.2d 3 (5th Cir. 1991).
Section 3.105. ISSUE OF INSTRUMENT. Clarifies the definition
of "issue" and "issuer". In addition, new defenses are established
for parties other than holders in due course if the instrument was
not issued or issued on a condition.
Section 3.106. UNCONDITIONAL PROMISE OR ORDER. This section
clarifies what provisions do not constitute conditions for purposes
of Section 3.104(a) and describes the type of instruments that are
negotiable and therefore subject to Chapter 3.
(a) States the conditions for a promise or order as (i) an
express condition to payment; (ii) subject to another writing;
(iii) the rights or obligations are stated in another writing.
(b) States what is not conditional for a promise or order:
(i) reference to another writing for a statement of rights; (ii)
because payment is limited to resort to a particular fund or
source.
(c) States a countersignature by a person whose signature
appears on the promise or order is required. Failure to
countersign is a defense of the issuer, but the failure does not
prevent a transferee from becoming a holder of the instrument.
(d) States that if a promise or order first comes into
possession of a holder and contains a statement, the rights of the
holder or transferee are subject to claims or defenses that the
issuer could assert against the original payee.
Section 3.107. INSTRUMENT PAYABLE IN FOREIGN MONEY. This
section provides that an instrument payable in foreign money may be
paid in the foreign money unless the instrument otherwise provides.
The phrase "current bank-offered spot rate" is adopted from the
Uniform Foreign Money Claims Act promulgated by the National
Conference of Commissioners of Uniform Laws in 1989. As a
consequence, the ratio is that which a bank is currently offering,
at the place of payment to customers who request it, to purchase
United States dollars and deliver the stated foreign currency.
Section 3.108. PAYABLE ON DEMAND OR AT A DEFINITE TIME.
Subsections (a) and (b) of Section 3.108 are restatements of former
Sections 3.108 and 3.109(a). Subsection (c) addresses a note which
is payable at a fixed date or on demand. Under revised Section
3.118, limitations should run from the earlier of demand or the
fixed date.
Section 3.109. PAYABLE TO BEARER OR TO ORDER. Section 3.109
(a) Specifies an instrument is payable to bearer or to order if it:
(1) states that it is payable to bearer or to the order
of bearer or the person in possession of the promise or
order;
(2) does not state a payee; or
(3) states that is payable to or to the order of cash
or is not payable to an identified person.
(b) A promise or order is payable to order if it is payable
(i) to the order of an identified person; (ii) to an identified
person or order.
(c) An instrument payable to bearer may become payable to an
identified person if it is specially indorsed.
Section 3.110. IDENTIFICATION OF PERSON TO WHOM INSTRUMENT IS
PAYABLE. (a) States rules for determining the identity of the
person to whom an instrument is initially payable if the instrument
is payable to an identifiable person.
(b) If the signature of the issuer of an instrument is made by
automated means, such as a check-writing machine.
(c) States how the holder of an instrument may be identified,
with the following rules being applies:
(1) if an account is identified only by number;
(2) if an instrument is payable to:
(A) a trust, an estate, or a person described as
trustee or representative of a trust or estate;
(B) an agent, or similar representative of the
identified person;
(C) a fund or organization that is not a legal
entity; or
(D) an office or to a person holding an office.
(d) If the instrument is payable to two or more persons, it
may negotiated, discharged, or enforced by any or all of persons in
possession of the instrument.
Section 3.111. PLACE OF PAYMENT. This section is new and
specifies that an instrument is payable at the place of payment
stated in the instrument. If there is no address stated, the place
of payment is the place of business of the drawee or maker.
Section 3.112. INTEREST. Most of the provisions of Section
3.112 are new and have no counterpart in former Chapter 3. (a)
States that an instrument, unless otherwise provided, (1) is not
payable with interest; and (2) interest on an interest-bearing
instrument is payable from the date of the instrument.
(b) Validates the negotiability of variable interest rate
instruments.
Section 3.113. DATE OF INSTRUMENT. (a) This section provides
rules with respect to antedating and postdating instruments and
with respect to instruments that mature after a fixed period.
(b) The date will be the date of its issuance, if an
instrument is undated.
Section 3.114. CONTRADICTORY TERMS OF INSTRUMENT. This
section sets forth rules with respect to the contradictory terms
within an instrument.
Section 3.115. INCOMPLETE INSTRUMENT. (a) This section
defines "incomplete instrument".
(b) This section expands the rules regarding incomplete
instruments.
(c) If words or numbers are added to an incomplete instrument
without authority of the signer, there is an alteration of the
incomplete instrument under Section 3.407.
(d) 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.
Section 3.116. JOINT AND SEVERAL LIABILITY; CONTRIBUTION.
Section 3.116 sets forth rules regarding joint and several
liability. (a) If two or more persons have the same liability on
an instrument are jointly liable in the capacity in which they
sign.
(b) Affirmatively provides the ability of the paying party to
obtain contribution.
(c) Specifies that the discharge of one joint and several
party does not discharge the contribution rights of another party
against the discharged party.
Section 3.117. OTHER AGREEMENTS AFFECTING INSTRUMENT.
Section 3.117 states that the obligation of a party to an
instrument may be modified, supplemented, or nullified by a
separate agreement of the obligor and a person entitled to enforce
the instrument. The separate agreement can constitute a defense to
the obligation.
Section 3.118. STATUTE OF LIMITATIONS. This section is new
and has no counterpart in former Chapter 3. (a) States that an
action to enforce the obligation of a party to pay a note payable
at a definite time must be commenced within 6 years after the due
date or dates stated in the note, or, if the due date is
accelerated, within 6 years after the accelerated due date.
(b) Provides that if a note is payable on demand, an action to
enforce the obligation of a party to pay the note must be commenced
within 6 years after demand for payment is made. If no demand for
payment is made, an action to enforce the note is barred if neither
principal or interest on the note has been paid for a continuous
period of 10 years.
(c) pertains to the limitations period applicable to personal
uncertified checks. An action to enforce the obligation of a party
to an unaccepted draft to pay the draft must be commenced within 3
years after dishonor of the draft or 10 years after the date of the
draft, whichever period expires first.
(d) An action to enforce the obligation of the accept of a
certified check must be commenced within three years after demand
for payment is made.
(e) An action to enforce the obligation of a party to a
certificate of deposit to pay the instrument must be commenced
within six years after demand for payment is made to the maker.
(f) An action to enforce the obligation of a party to pay an
accepted draft must be (1) within six years after the due date; or
(2) within six years after the date of the acceptance of the
obligation.
(g) The following actions must be commenced within three years
after the cause of action: (1) an action for conversion of an
instrument; (2) an action for breach of warranty; or (3) an action
to enforce an obligation.
Section 3.119. NOTICE OF RIGHT TO DEFEND ACTION. This
section is intended to supplement, not displace, existing
procedures for interpleader or joinder of parties. The section
conforms to the analogous provision in Section 2.607 of the
Business and Commerce Code. It extends to such liabilities as
those arising from forged indorsements even though not "on the
instrument," and is intended to make it clear that the notification
is not effective until received.
Subchapter B. NEGOTIATION, TRANSFER, AND INDORSEMENT.
Section 3.201. NEGOTIATION. (a) This section sets forth the
definition of the term "negotiation" which is crucial to the
classification of a person in possession of an instrument as a
"holder."
(b) States that except for negotiation by a remitter, if an
instrument is payable to bearer, it may be negotiated by transfer
of possession.
Section 3.202. NEGOTIATION SUBJECT TO RESCISSION. This
section is derived from former Section 3.207. (a) Negotiation is
effective even if obtained:
(1) from an infant, corporation exceeding powers, or a
person without capacity;
(2) by fraud, duress, or mistake; or
(3) in breach of duty or as part of an illegal
transaction.
(b) Provides that negotiation is subject to remedies provided
in other law except that such remedies may not be asserted against
a subsequent holder in due course.
Section 3.203. TRANSFER OF INSTRUMENT; RIGHTS ACQUIRED BY
TRANSFER. This section sets forth rules with respect to transfer
of an instrument. (a) Sets forth a definition of "transfer."
(b) Based on former subsections 3.201(a) and (c). The
transferee cannot acquire rights of a holder in due course by a
transfer, directly or indirectly, from a holder in due course if
the transferee engaged in fraud or illegality affecting the
instrument.
(c) Based on former subsections 3.201(a) and (c). If an
instrument is transferred for value and the transferee does not
become a holder because of lack of indorsement by the transferor,
the negotiation of the instrument does not occur until the
indorsement is made.
(d) Based on former Section 3.202(c). If a transferor
purports to transfer less than the entire instrument, negotiation
of the instrument does not occur.
Section 3.204. INDORSEMENT. (a) Defines "indorsement" as any
signature (other than in the capacity of maker, drawer, or
acceptor) on an instrument for the purpose of negotiating the
instrument, restricting payment of the instrument, or incurring
indorser's liability on the instrument.
(b) Defines "indorser" as a person who makes an indorsement.
(c) An indorsement that transfers a security interest in the
instrument is effective as an unqualified indorsement of the
instrument.
(d) A signature in both the indorser's name and the name
stated on the instrument may be required by a person paying or
taking the instrument for value or collection.
Section 3.205. SPECIAL INDORSEMENT; BLANK INDORSEMENT;
ANOMALOUS INDORSEMENT. (a) Defines "special indorsement" as an
indorsement made by the holder of an instrument, whether payable to
an identified person or payable to bearer, and the indorsement
identifies a person to whom it makes the instrument payable.
(b) Defines "blank indorsement" when an indorsement is made by
the holder of an instrument and it is not a special indorsement.
(c) States that the holder may convert a blank indorsement
that consists only of a signature into a special indorsement by
writing.
(d) Defines "anomalous indorsement" as an indorsement made by
a person who is not the holder of the instrument.
Section 3.206. RESTRICTIVE INDORSEMENT. This section renders
ineffective any indorsement that: (a) Limits payment to a
particular person or prohibiting further transfer or negotiation;
(b) States a condition to the right of an indorsee to receive
payment.
(c) Sets forth rules applicable when an instrument bears a so-called restrictive indorsement, such as "for deposit only" or "pay
to A as trustee for B". Having the instrument collected by a bank
for the indorser must follow these rule:
(1) a person, other than a bank, who purchases the
instrument when so indorsed converted the instrument
unless the amount paid for the instrument is received;
(2) a depositary bank that purchases the instrument or
takes it for collection when so indorsed converts the
instrument;
(3) a payor bank that is also the depositary bank or
that takes the instrument for immediate payment over the
counter from a person other than a collecting g bank
converts the instrument; and
(4) a payor bank or intermediary bank may disregard the
indorsement and is not liable if the proceeds of the
instrument are not received.
(d) If an instrument bears an indorsement using words to the
effect that the payment is to be made to the indorsee, except for
an indorsement covered by subsection (c), the following rules
apply:
(1) a person who purchases the instrument from the
indorsee or takes the instrument for collection or
payment may pay the proceeds of payment or the value
given; and
(2) a subsequent transferee of the instrument or person
who pays the instrument is not given notice.
(e) The presence of an instrument of an indorsement does not
prevent a purchaser of the instrument from becoming a holder in due
course of the instrument unless the purchaser is a coverter under
subsection (c), or has notice or knowledge of breach of fiduciary
duty as stated in subsection (d).
(f) The obligor has a defense if payment would violate an
indorsement.
Section 3.207. REACQUISITION. This section permits a former
holder who reacquires an instrument to cancel indorsements made
after the person first became a holder and, if cancellation renders
the instrument payable to the reacquiring holder or to bearer,
thereafter negotiate and enforce the instrument. However, a person
whose indorsement is canceled by the reacquiring holder is also
discharged from liability on the instrument.
Subchapter C. ENFORCEMENT OF INSTRUMENTS.
Section 3.301. PERSON ENTITLED TO ENFORCE INSTRUMENT. This
section defines the phrase "person entitled to enforce" an
instrument -- a phrase used throughout Chapter 3. In certain
situations, the definition permits enforcement by a person in
wrongful possession of the instrument and a person that is not the
legal owner of the instrument.
Section 3.302. HOLDER IN DUE COURSE. (a) This section
defines "holder in due course" as the holder of an instrument if:
(1) the instrument when issued or negotiated does not
bear apparent evidence of forgery or alteration; and
(2) the holder took the instrument for value; in good
faith; without notice that the instrument has been
dishonored; without notice the instrument contains an
unauthorized signature; without notice of any claim; and
without notice that any party has a defense or claim.
(b) States a discharge is effective against a person who
became a holder in due course with notice of the discharge.
(c) States a person does not acquire rights of a holder in due
course of an instrument taken:
(1) legal process or by purchase;
(2) by purchase as part of a bulk transaction not in
ordinary course of business; or
(3) as the successor in interest to anastate or other
organization.
(d) States the promise of performance under 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.
(e) States if the person has either a security interest or is
obliged to pay the instrument has a defense, that the person
entitled to enforce the instrument may assert rights as a holder in
due course only to an amount payable under the instrument that,
does not exceed the amount of the unpaid obligation secured.
(f) States that notice must be received at a time and in a
manner that gives a reasonable opportunity to act on it.
(g) This section is subject to any law limiting status as a
holder in due course in particular classes of transaction.
Section 3.303. VALUE AND CONSIDERATION. This section states
when an instrument is issued or transferred for "value" -- one of
the elements of holder-in-due-course status. The section also
defines "consideration," which, if not present when the instrument
is issued, provides the drawer or maker of the instrument with a
defense to payment.
Section 3.304. OVERDUE INSTRUMENT. A person cannot be a
holder in due course if it takes the instrument with notice that
the instrument is overdue. This section indicates when an
instrument is overdue.
Section 3.305. DEFENSES AND CLAIMS IN RECOUPMENT. This
section states that a person's right to enforce an instrument is
subject to certain defenses and claims in recoupment of the
obligor. The section also states that the right of a holder in due
course to enforce payment is not subject to any of the obligor's
claims in recoupment or defenses other than the defenses of
infancy, duress, incapacity, illegality, fraud in the fact, and
insolvency.
Section 3.306. CLAIMS TO AN INSTRUMENT. This section states
that a non-holder in due course takes an instrument subject to
property and possessory claims to the instrument and its proceeds.
Section 3.307. NOTICE OF BREACH OF FIDUCIARY DUTY. This
section states the circumstances under which a person who takes an
instrument from a fiduciary may be deemed to have notice of a
breach of fiduciary duty. The section also states that notice of
breach of a fiduciary duty is notice of a claim to the instrument
by the represented person. Notice of such a claim prevents the
taker from being a holder in due course.
Section 3.308. PROOF OF SIGNATURES AND STATUS AS HOLDER IN
DUE COURSE. This section provides pleading and presumption rules
concerning the validity of signatures on an instrument. The
section also states that once the validity of signatures on an
instrument is proved, a party entitled to enforce the instrument is
entitled to payment upon producing the instrument unless the
obligor then proves a defense to payment or claim in recoupment, at
which time the party seeking payment may prove that it enjoys the
rights of a holder in due course and is not subject to the asserted
defense or claim in recoupment.
Section 3.309. ENFORCEMENT OF LOST, DESTROYED, OR STOLEN
INSTRUMENT. This section allows a person that does not possess an
instrument to enforce the instrument under certain circumstances.
The section also prohibits a court from entering judgment in favor
of such a person until it has determined that the obligor is
adequately protected against claims of other parties entitled to
enforce payment of the instrument.
Section 3.310. EFFECT OF INSTRUMENT ON OBLIGATION FOR WHICH
TAKEN. This section discusses the effect on the underlying
obligation when an instrument is taken on that obligation. The
effect varies with the type of the instrument (e.g., a cashier's
check or an uncertified check) taken.
Section 3.311. ACCORD AND SATISFACTION BY USE OF INSTRUMENT.
This section establishes rules that permit a person to create an
enforceable accord and satisfaction by tendering an instrument.
Section 3.312. LOST, DESTROYED, OR STOLEN CASHIER'S CHECK,
TELLER'S CHECK, OR CERTIFIED CHECK. This section discusses
procedures that permit a person to claim a refund for a lost,
stolen, or destroyed cashier's check, teller's check, or certified
check. The section also states when such a claim becomes
enforceable and the resulting payment duties of the obligated bank.
SUBCHAPTER D. LIABILITY OF PARTIES.
Section 3.401. SIGNATURE. This section provides that a
person is not liable on an instrument unless he has signed it. It
clarifies that a signature can be accomplished by a representative
and by a variety of means, including marks, machines, and use of
trade or assumed names.
Section 3.402. SIGNATURE BY REPRESENTATIVE. This section
provides the rules for signature by a representative such as an
officer of a corporation. It continues the provision that a
representative is not personally liable if he signs in a
representative capacity and this appears on the instrument.
However, it clarifies that the representative will not be liable to
one who is not a holder in due course if the instrument is
ambiguous and the representative can prove that he signed in a
representative capacity.
Section 3.403. UNAUTHORIZED SIGNATURE. An unauthorized
signature (e.g. forgery or one who does not have permission to
sign) is ineffective except as a signature of that person.
However, unauthorized signatures can be ratified. This section
clarifies and adds a provision that if more than one signature is
required, then the signature is unauthorized if one of the required
signatures is lacking.
Section 3.404. IMPOSTORS; FICTITIOUS PAYEES. This section
provides the rules where an impostor induces an instrument to be
issued or a fictitious payee is named. It introduces the concept
of comparative negligence in determining who bears the risk.
Further, an indorsement in the name of a payee is effective as the
indorsement of the payee in favor of a person who in good faith
pays the instrument or takes it for value or collection.
Subsection 3.404(d) reflects a non-uniform amendment patterned
after that made by the California legislature to address consumer
concerns: that subsection, as drafted, provides that a person
bearing the loss may recover from the person paying an instrument
or taking it for value or collection who fails to exercise ordinary
care in paying or taking the instrument if that failure contributes
(as opposed to "substantially" contributes, as drafted in the
uniform Article 3) to the loss.
Section 3.405. EMPLOYER'S RESPONSIBILITY FOR FRAUDULENT
INDORSEMENT BY EMPLOYEE. This is a new section. It clarifies the
responsibility in the all too frequent situation where a fraudulent
indorsement occurs as a result of the action of a faithless
employee. It introduces the concept of comparative negligence as
to the person who pays an instrument or takes it for collection but
fails to exercise ordinary care when that failure contributes to
the loss resulting from the fraud. As in Section 3.405, a non-uniform amendment patterned after California's was made to delete
the requirement that the failure "substantially" contribute to the
loss.
Section 3.406. NEGLIGENCE CONTRIBUTING TO FORGED SIGNATURE OR
ALTERATION OF INSTRUMENT. This section modifies existing law by
providing for comparative negligence. Generally a person whose
failure to exercise ordinary care substantially contributes to an
alteration or forgery cannot assert that against a person who in
good faith pays the instrument or takes it for value. However, if
that person also fails to exercise ordinary care, then the loss
will be allocated.
Section 3.407. ALTERATION. This section revises the
definition of an alteration by referring to unauthorized changes as
opposed to "material" changes. The section also states the rights
of a party who takes or pays the altered instrument.
Section 3.408. DRAWEE NOT LIABLE ON UNACCEPTED DRAFT. Checks
or drafts do not constitute an assignment of funds until they are
accepted.
Section 3.409. ACCEPTANCE OF DRAFT; CERTIFIED CHECK. This
section includes a definition of "acceptance": meaning the
drawee's signed agreement to pay a draft as presented. Incomplete
drafts may be "accepted". A definition is added for a "certified
check." Further, a drawee has no obligation to certify a check,
and refusal to do so is not dishonor.
Section 3.410. ACCEPTANCE VARYING DRAFT. This section
basically continues current law providing that if the terms of a
drawee's acceptance vary from the terms of the draft as presented,
the holder may refuse the acceptance and treat the draft as
dishonored. Further, if a holder assents to an acceptance varying
the terms, the obligation of drawers and indorsers who do not
expressly assent to the acceptance is discharged.
Section 3.411. REFUSAL TO PAY CASHIER'S CHECKS, TELLER'S
CHECKS, AND CERTIFIED CHECKS. This is a completely new section.
It provides for consequential damages arising from failure to pay
such items unless the refusal occurs because a bank suspends
payments, a reasonable claim or a defense is asserted, the
obligated bank has reasonable doubt regarding whether the person
demanding payment is entitled to enforce it, or the payment is
prohibited by law.
Section 3.412. OBLIGATION OF ISSUER OF NOTE OR CASHIER'S
CHECK. This section is comparable to the prior law. A drawer is
obligated to pay the instrument according to its terms at issuance
(or, if not issued, when it first comes into possession of a
holder) or as completed.
Section 3.413. OBLIGATION OF ACCEPTOR. This section is an
expansion of the prior law which was previously captioned "Contract
of [Maker, Drawer] and Acceptor." An acceptor is obligated to pay
according to terms at acceptance or as completed. A section is
added relating to certification of a check or other acceptance that
states that the amount is certified or accepted.
Section 3.414. OBLIGATION OF DRAWER. This section does not
apply to cashier's checks or other drafts drawn on the drawer. It
provides that if an unaccepted draft is dishonored, the drawer is
obligated to pay the draft according to its terms at issuance (or,
if not issued, when it first comes into possession of a holder) or
as completed. If a draft is accepted by a bank, the drawer is
discharged. However, if the draft is accepted and the acceptor is
not a bank, the obligation of the drawer to pay the draft if the
draft is dishonored by the acceptor is the same as the obligation
of an indorser. A section is added for items drawn "without
recourse" to provide that the drawer is not liable to pay if the
draft is not a check. Finally, if a check is not presented for
payment or given to a bank for collection within 30 days after its
date, the drawee suspends payments after expiration of the 30-day
period without paying the check and because of the suspension of
payments the drawer is deprived of funds maintained with the drawee
to cover payment of the check, then the drawer may discharge its
obligation to pay the check by assigning to the person entitled to
enforce it the rights of the drawer.
Section 3.415. OBLIGATION OF INDORSER. An indorser is
obligated to pay an amount due on the instrument if the instrument
is dishonored. However, an indorser may be discharged if notice of
dishonor is required by Section 3.505 and notice was not given to
the indorser. Further, if a draft is accepted by a bank after an
indorsement is made, liability of the indorser is discharged. An
indorser of a check where the check is not presented for payment or
given to a bank for collection within 30 days is discharged. An
indorser also avoids indorser liability by indorsing "without
recourse."
Section 3.416. TRANSFER WARRANTIES. For transfers by
indorsement, the transferor warrants that the transferor is a
person entitled to enforce the instrument, all signatures are
authentic and authorized, the instrument has not been altered, the
instrument is not subject to a defense in recoupment that can be
asserted against the transferor, and the transferor has no
knowledge of an insolvency proceeding commenced with respect to the
maker or acceptor or the drawer of an unaccepted draft. These
warranties cannot be disclaimed with respect to checks.
Section 3.417. PRESENTMENT WARRANTIES. This section
describes the warranties of the person obtaining payment or
acceptance and a previous transferor of the draft made to the
drawee making payment or accepting the draft in good faith. A
claim for breach of warranty may be defended by proving that an
indorsement is effective or that the drawer is precluded from
asserting unauthorized indorsement or alteration. The damages that
may be recovered are spelled out in this section. The rules are
outlined for a situation where a dishonored draft is presented for
payment to drawer or an indorser or any other instrument (e.g., an
accepted draft) is presented for payment to a party obligated to
pay the instrument. Warranties cannot be disclaimed with respect
to checks.
Section 3.418. PAYMENT OR ACCEPTANCE BY MISTAKE. This is a
new section. Generally, if the drawee of a draft pays or accepts
the draft and the drawee acted on a mistaken belief that payment
had not been stopped or signature of the drawer of the draft was
authorized, the drawee may recover the amount of the draft from the
person to whom or for whose benefit payment was made. However,
these remedies may not be asserted against a person who took the
instrument in good faith and for value or who changed position in
reliance on the payment or acceptance.
Section 3.419. INSTRUMENTS SIGNED FOR ACCOMMODATION. This
section deals with the obligations of an accommodation party. It
also clarifies the difference between an accommodation party's
guaranty of payment and its guaranty of collection. A party
seeking to enforce the instrument where there is a guaranty of
collection must first enforce the instrument through execution of
judgment against the accommodated party. An accommodation party
who pays an instrument is entitled to reimbursement from the
accommodated party.
Section 3.420. CONVERSION OF INSTRUMENT. This section
applies the tort law of conversion of personal property to
conversion of instruments. Further, a conversion occurs if an
instrument is taken by transfer other than a negotiation from a
person not entitled to enforce the instrument or a bank makes or
obtains payment with respect to the instrument for a person not
entitled to enforce the instrument or receive payment. An action
for conversion may not be brought by the issuer or acceptor of the
instrument or a payee or indorsee who did not receive delivery of
the instrument either directly or through delivery to an agent or
co-payee. This section also deals with the measure of recovery.
SUBCHAPTER E. DISHONOR.
Section 3.501. PRESENTMENT. This section defines what
constitutes a presentment seeking payment or acceptance of an
instrument and explains when and where such a presentment should be
made. It specifically authorizes electronic presentment. It also
explains the rights of the person to whom presentment is made and
the circumstances when such person may refuse to make payment or
accept the instrument without such refusal constituting a dishonor.
Section 3.502. DISHONOR. This section indicates when a
dishonor takes place. The requirements for dishonor vary depending
upon the type of instrument. Different requirements exist for each
of the following: notes, unaccepted documentary drafts, other
unaccepted drafts and accepted drafts.
Section 3.503. NOTICE OF DISHONOR. This section describes
when a notice of dishonor is required, what constitutes such a
notice of dishonor, and to whom such a notice must be given. In
conjunction with Section 3.414, this requirement is no longer
relevant to the liability of the typical drawer. This section also
lengthens to 30 days the time for a non-bank person involved in the
collection process to give notice of dishonor.
Section 3.504. EXCUSED PRESENTMENT AND NOTICE OF DISHONOR.
This section describes when either a presentment for payment or
acceptance will be excused or when a notice of dishonor will be
excused.
Section 3.505. EVIDENCE OF DISHONOR. This section describes
what can be used as evidence of a dishonor and, if necessary, a
notice of dishonor. It also explains what a protest is and how it
can serve as a notice of dishonor although not required to
determine either drawers' or indorsers' liability.
SUBCHAPTER F. DISCHARGE AND PAYMENT.
Section 3.601. DISCHARGE AND EFFECT OF DISCHARGE. This
section indicates that the obligation of a party to pay an
instrument may be discharged under certain circumstances described
in Chapter 3. Nonetheless, it notes that such a discharge will not
be effective against a person who has acquired the rights of a
holder in due course without notice of the discharge.
Section 3.602. PAYMENT. This section indicates that payment
of the instrument is a method of discharging the liability of a
party to the instrument. Certain situations are described where
there will be no discharge even if payment is made, such as payment
contrary to court order or to a person known to be in wrongful
possession of a stolen instrument.
Section 3.603. TENDER OF PAYMENT. This section indicates
that if a tender of payment on an obligation is made and that
tender is refused, there will be a discharge of the liability of
various parties to the extent that they are harmed by the refusal
to accept the tender of payment. Generally, a liable party making
the tender will be harmed only to the extent of further additional
liability while a party having a right of recourse against the
tendering party will be harmed only to the extent of the tender
that is refused.
Section 3.604. DISCHARGE BY CANCELLATION OR RENUNCIATION.
This section allows a party entitled to enforce the instrument to
voluntarily discharge the obligation of a party to pay on the
instrument by cancellation or renunciation. It needs to be read in
conjunction with Section 3.605 to determine the effect on other
parties that are liable on the instrument.
Section 3.605. DISCHARGE OF INDORSERS AND ACCOMMODATION
PARTIES. This section creates special rules regarding the discharge
of liability of indorsers and accommodation parties. Indorsers or
accommodation parties may be discharged to the extent that they are
harmed by extensions of the due date of the obligation of a party
to pay, or by a modification of the agreement affecting the
obligation of another party to pay. This section also addresses
the possible discharge of a party when another party to the
instrument impairs the value of collateral given to secure payment.
It is possible under this section for these rights to be the
subject of a valid waiver.
SECTION 2: Amends Section 1.201(20), (24), (43), and (44),
Business and Commerce Code, to conform to amendments to Chapters 3
and 4 of the Business and Commerce Code. The definition of
"holder" set out in subsection (20) is amended to distinguish
between negotiable instruments and documents of title. This
distinction clarifies the elements a person must prove to establish
that it has the status of a "holder" as to these instruments or
documents.
The definition of "money" set out in subsection (24) is
amended to include monetary units of account as defined by
international agreement or international bodies. This would
include, for example, "special drawing rights" established by the
International Monetary Fund.
The definition of "unauthorized signature" in subsection (43)
is amended by deleting the words "or indorsement." The deletion is
intended to clarify that all signatures, whether an indorsement or
not, are "unauthorized signatures" when those words are used in
Chapters 3 and 4.
SECTION 3: Amends Section 1.207, Business and Commerce Code,
to conform to amendments to Chapters 3 and 4 of the Business and
Commerce Code. New subsection (b) excludes an accord and
satisfaction from the scope of Section 1.207. This exclusion
clarifies that this section is intended to provide a procedure for
continuing a transaction when one party claims something as of
right and the other party believes the claim is unwarranted.
SECTION 4: Amends Chapter 4, Business and Commerce Code, as
follows:
CHAPTER 4. BANK DEPOSITS AND COLLECTIONS.
SUBCHAPTER A. BANK DEPOSITS AND COLLECTIONS
Section 4.101. SHORT TITLE. This section gives the name of
this chapter. No changes are made.
Section 4.102. APPLICABILITY. This section determines the
applicability of Chapter 4 regarding bank deposits and collections.
It indicates that this chapter controls over Chapter 3 but is in
turn governed by Chapter 8. It also describes the normal choice of
law provision regarding the liability of a bank as the law of the
place where the bank is located. The changes are stylistic and not
substantive.
Section 4.103. VARIATION BY AGREEMENT; MEASURE OF DAMAGES;
ACTION CONSTITUTING ORDINARY CARE. This section describes the
general ability of parties to vary by agreement the effect of
provisions in this chapter. These variations are not allowed to
limit the bank's duty to exercise good faith and ordinary care, nor
may they limit a bank's liability for damages caused by a bank's
lack of ordinary care. The changes are stylistic and not
substantive.
Section 4.104. DEFINITIONS AND INDEX OF DEFINITIONS. This
section includes definitions of terms used throughout this chapter.
In addition to terms specifically defined in this section, there is
included an index to terms defined at other locations in this
chapter or in other chapters.
The definition of "account" is amended to make clear that it
includes both assets accounts in which a customer has deposited
money and accounts from which a customer may draw on a line of
credit. The remainder of the definition is amended to bring it
more into conformity with the definition of "deposit account" in
Section 9.105(1)(e).
The definition of "documentary draft" is amended to recognize
the existence of uncertificated securities.
The definitions of "draft" and "drawee" are new and are
explained in the Official Comment to the UCC.
The definition of "item" is amended because the term
"instrument" as defined in Section 3.104 and as used in Chapter 4
is narrower than the term "item."
The definition of "properly payable" is deleted. The phrase
is defined in amended Section 4.401(1) in terms of the items
authorized by the customer and in accordance with the bank-customer
agreement.
The definition of "settle" is amended by changing "instructed"
to "agreed" to conform to Section 4.213.
The terms "remitting bank," "protest," and "second party" are
deleted because they are not used in Chapter 4. Numerous
definitions from Chapter 3 of the Business and Commerce Code are
added by cross reference.
Section 4.105. "BANK"; "DEPOSITARY BANK"; "INTERMEDIARY
BANK"; "COLLECTING BANK"; "PAYOR BANK"; "PRESENTING BANK." This
section defines the term bank. It includes more specific
definitions for particular types of banks based upon the role in
the collection process the bank is playing.
The definition of "bank" is added and is in conformity with
that found in Section 4A.105(a)(2).
The definition of "depositary bank" is amended. The amendment
makes clear that a payor bank is not also a depositary bank with
respect to an item presented for immediate payment over the
counter.
The definition of "payor bank" is amended to clarify that the
bank must be the drawee of a draft. As a result of the new
definition of drawee, in order for a bank to be a payor bank, it
must be instructed rather than authorized to pay and that the
instruction must be contained in the item.
The definition of "remitting bank" is deleted because the term
is not used in Chapter 4.
Section 4.106. PAYABLE THROUGH OR PAYABLE AT BANK; COLLECTING
BANK. This section explains the use of terms "payable through" or
"payable at" a bank identified in the item and the proper procedure
to be thereafter followed. This section replaces former Sections
3.120 and 3.121.
Section 4.107. SEPARATE OFFICE OF A BANK. A branch or
separate office of a bank is a seperate bank for the purpose of
computing the time within which and determinig the palce at or to
which action may be taken ornotices or orders must be given under
this chapter and under Chapter 3. Renumbers the remaining sections
of this chapter.
Section 4.108. TIME OF RECEIPT OF ITEMS. This section allows
the bank to fix a time period as the official cutoff time for a
banking day at a time of 2 p.m. or later. The changes are
stylistic and not substantive.
Section 4.109. DELAYS. This section describes circumstances
under which a bank may extend the time period for taking action
under this chapter without being treated as having discharged
parties to the instrument. The section further describes the
circumstances under which delays beyond the permissible time period
will be excused.
Subsection (a) is amended to exclude checks and other items
drawn on banks from its application so that the provision will not
impede the speedy collection of these items. The amended
subsection authorizes a collecting bank to take additional time,
not in excess of two days, in a good faith effort to collect drafts
drawn on nonbank payors with or without the approval of any
interested party. Subsection (b) is amended to make clear that
the delay is excused for one of the reasons stated only if the bank
exercises such diligence as the circumstances require. With the
addition of reference to the interruption of computer facilities
and the failure of equipment, the permissible reasons for delay
enumerated are made to conform to those stated in Regulation CC
Section 229.38(e).
Section 4.110. ELECTRONIC PRESENTMENT. This new section
describes the term electronic presentment and indicates how
agreements may be entered between the parties to permit presentment
in this fashion.
Section 4.111. STATUTE OF LIMITATIONS. This section creates
a statute of limitations for all actions under this chapter of
three years from the date the cause of action accrues. The
previous form of this chapter did not include any statute of
limitations provision. This section conforms to the period of
limitations set by new Section 3.118(g) for actions for breach of
warranty and to enforce other obligations.
SUBCHAPTER B. COLLECTION OF ITEMS; DEPOSITARY AND COLLECTING
BANKS.
Section 4.201. STATUS OF COLLECTING BANK AS AGENT AND
PROVISIONAL STATUS OF CREDITS; APPLICABILITY OF CHAPTER; ITEM
INDORSED "PAY ANY BANK." Subsection (a) is amended to delete the
cross references to former Sections 4.211, 4.212 and 4.213. The
reason for the deletion is to remove any implication that final
settlement is determined only by those provisions. "Recoupment" is
added by the second sentence to clarify the collecting bank's
rights against the item or its proceeds. Terms like "valid" or
"binding" have been deleted entirely from Chapter 4 as superfluous.
"Or return" is added to the third sentence to make clear that the
effect of the provision is not restricted to the forward collection
activities of banks but also extends to their acts in returning
items. This section indicates that a collecting bank generally acts
as an agent or sub-agent for the party requesting collection (who
continues to be deemed the owner of the item during the collection
process). The section also states the general rule that credit
given by the collecting bank is provisional, even if the credit is
subject to immediate withdrawal as of right or is in fact
withdrawn.
Section 4.202. RESPONSIBILITY FOR COLLECTION OR RETURN; WHEN
ACTION TIMELY. This section requires a collecting bank to exercise
ordinary care in carrying out certain basic responsibilities.
Subsection (b) is a restatement of former subsection (b) and states
that a collecting bank exercises ordinary care if it takes proper
action before its midnight deadline; if the collecting bank takes
proper action thereafter, it must prove timeliness. The term
"timely" is substituted for "seasonable" throughout the section.
Paragraph 4 of former subsection (a) is deleted because Chapter 4
has no requirement of protest.
Section 4.203. EFFECT OF INSTRUCTIONS. Chapter 4 no longer
has provisions on restrictive indorsements; hence, the reference to
Chapter 4 is deleted. This section states a general rule that only
a collecting bank's transferor can give instructions that affect or
constitute notice to the collecting bank.
Section 4.204. METHODS OF SENDING AND PRESENTING; SENDING
DIRECTLY TO PAYOR BANK. This section requires a collecting bank to
forward items in a reasonably prompt manner after considering
various relevant factors. Subsection (c) is amended to allow non-bank payors to request a place of payment.
Section 4.205. DEPOSITARY BANK HOLDER OF UNINDORSED ITEM.
This section provides that a depositary bank is a holder (and may
be a holder in due course) of an item delivered by its customer for
collection if the customer was a holder at the time of delivery;
whether the customer has indorsed the item, or whether the
depositary bank supplies the customer's indorsement as was provided
by former Section 4.205(a), is irrelevant. Additionally, the
section imposes on the depositary bank a warranty that it has
either paid the amount of the item to the customer or deposited the
amount to the customer's account.
Section 4.206. TRANSFER BETWEEN BANKS. This section permits
a transferor bank to use any agreed method to identify itself when
it transfers an item to another bank. The revision does not change
the substance.
Section 4.207. TRANSFER WARRANTIES. Former Section 4.207 is
replaced by this section (transfer warranties) and Section 4.208
(presentment warranties). This section conforms to Section 3.416
and extends its coverage to items. This section imposes certain
warranties on any customer or collecting bank that transfers an
item for consideration. The warranties are made to the transferee
and to any subsequent collecting bank.
Section 4.208. PRESENTMENT WARRANTIES. This section and new
Section 4.207 replace former Section 4.208. This section conforms
to Section 3.417 and extends its coverage to items. This section
imposes certain warranties on (i) any person obtaining payment or
acceptance of an item and (ii) prior transferor of the item. The
warranties are made to the person paying or accepting the item in
good faith.
Section 4.209. ENCODING AND RETENTION WARRANTIES. This
section is new and imposes certain warranties on any person who
encodes information on an item or retains an item pursuant to an
agreement for electronic presentment. The warranties are made to
any subsequent collecting bank and to the payor bank or other
payor.
Section 4.210. SECURITY INTEREST OF COLLECTING BANK IN ITEMS,
ACCOMPANYING DOCUMENTS AND PROCEEDS. This section gives a
collecting bank a security interest in an item in certain
situations, including when it gives credit for, or makes an advance
against, the item. The security interest terminates when the
collecting bank receives final settlement for the item. No
substantive change is made; a clarification adds "collection" in
subsection (a).
Section 4.211. WHEN BANK GIVES VALUE FOR PURPOSES OF HOLDER
IN DUE COURSE. This section states that a security interest
satisfies the "value" requirement of holder-in-due-course status.
No substantive change is made.
Section 4.212. PRESENTMENT BY NOTICE OF ITEM NOT PAYABLE BY,
THROUGH, OR AT BANK; LIABILITY OF DRAWER OR INDORSER. This section
permits a collecting bank to present a draft drawn on a nonbank
payor by sending timely written notice to the party that will
accept or pay the draft. The section also permits the collecting
bank to treat the item as dishonored if the payor fails to timely
respond. "Secondary party" is replaced because it is a term no
longer used in Chapters 3 and 4; no substantive change is made.
Section 4.213. MEDIUM AND TIME OF SETTLEMENT BY BANK. This
section states the medium and time of settlement by a bank in the
absence of any applicable agreement, Federal Reserve regulations or
circulars, or clearing-house rules. This section replaces former
Section 4.211. Former Section 4.211 applied only to settlements by
remittance instruments and authorities to charge that could be
received in settlement by a collecting bank without the collecting
bank being responsible if the remittance was not paid. The new
section is much broader in stating general rules for all types of
settlements with respect to the time settlement is made and the
medium that the person receiving settlement must accept.
Subsections (c) and (d) apply to the issues treated in former
Section 4.211.
Section 4.214. RIGHT OF CHARGE-BACK OR REFUND; LIABILITY OF
COLLECTING BANK; RETURN OF ITEM. This section allows a collecting
bank to obtain a refund from its customer of, or revoke or charge
back, any provisional settlement until settlement for the relevant
item is or becomes final. The section imposes liability on a
collecting bank for any loss resulting from its unreasonable delay
in returning the item or giving notice of the facts. Subsection
(a) is amended by the addition of the second sentence which adopts
the view of Appliance Buyers Credit Corp. v. Prospect National
Bank, 708 F.2d 290 (7th Cir. 1983), that if the midnight deadline
for returning an item or giving notice is not met, a collecting
bank loses its rights only to the extent of damages for any loss
resulting from the delay. The cross references to former Sections
4.211 and 4.213 are deleted. The reason for the deletion is to
remove any implication that final settlement is determined by only
these provisions. Former subsection (b) broadly allowed for direct
return of all types of unpaid items. The purpose of the amendment
is to limit the right of direct return with respect to noncheck
items. This purpose is accomplished by subsection (b) when read
against the background of Regulation CC Section 229.31, which
allows for the direct return of checks but does not apply to
noncheck items. Since Regulation CC preempts subsection (b) with
respect to checks, the result is that the limitation on direct
return found in subsection (b) applies only to noncheck items.
Subsection (f) is amended to conform to the terminology
("bank-offered spot rate") used in Section 3.107.
Section 4.215. FINAL PAYMENT OF ITEM BY PAYOR BANK; WHEN
PROVISIONAL DEBITS AND CREDITS BECOME FINAL; WHEN CERTAIN CREDITS
BECOME AVAILABLE FOR WITHDRAWAL. This section indicates that a
payor bank makes final payment of an item when it takes certain
action. Additionally, the section states when credit and cash
deposits become available to a customer as of right.
Subsection (a)(2) is amended to provide that a payor bank
cannot make settlement provisional by unilaterally reserving a
right to revoke the settlement. The right to revoke must come from
a statute (e.g., Section 4.301), clearinghouse rule or other
agreement.
Subsection (b) was added to clarify the relationship of final
settlement to final payment under Section 4.215.
Subsection (d) is amended to delete the cross references to
former Sections 4.211 and 4.213. The reason for the deletion is to
remove any implication that final settlement is determined by only
those provisions.
The preamble to subsection (e), as well as subsection (f), is
amended to recognize that Regulation CC Sections 229.10-229.13
prescribes times for the availability of a depositor's funds.
Section 4.216. INSOLVENCY AND PREFERENCE. Section 4.216 is
amended by deleting cross references to former Sections 4.211 and
4.213. This deletion removes any implication that final settlement
is determined by only those sections.
SUBCHAPTER C. COLLECTION OF ITEMS; PAYOR BANKS.
Section 4.301. DEFERRED POSTING; RECOVERY OF PAYMENT BY
RETURN OF ITEMS; TIME OF DISHONOR; RETURN OF ITEMS BY PAYOR BANK.
Section 4.301 is amended to conform with changes introduced in
other sections of Chapter 4. The term "authorized settlement" is
deleted in subsection (a) because Section 4.213 makes the term
superfluous. The substitution of "settlement" for "payment" in
subsection (a) is made to conform with the distinction between the
act of settlement and the effect of settlement as final payment.
This distinction is made consistently throughout Chapter 4. The
cross reference in subsection (a) to Section 4.213 is deleted to
remove any implication that final settlement is determined by only
that section.
Section 4.302. PAYOR BANK'S RESPONSIBILITY FOR LATE RETURN OF
ITEM. Section 4.302 is amended by deleting its introductory clause
and adding a new subsection (b). Subsection (b) clarifies the
substance of the deleted introductory clause by omitting the
ambiguous phrase "or the like," by omitting the superfluous phrase
"settlement effected," and by providing that a payor bank may raise
the defense of fraud.
Section 4.303. WHEN ITEMS SUBJECT TO NOTICE, STOP-PAYMENT
ORDER, LEGAL PROCESS, OR SETOFF; ORDER IN WHICH ITEMS MAY BE
CHARGED OR CERTIFIED. Subsection (a) of Section 4.303 is amended
by adding paragraph (5) to allow paying banks to fix an earlier
cutoff hour. These banks are required by federal regulation to
return checks earlier on the next banking day after the banking day
of receipt. An earlier cutoff hour allows the bank time to
evaluate the effect of stop-payment orders, legal process, or
setoff. Paragraphs (1)-(4) of subsection (a) are redrafted to
conform with paragraph (5), which is stated in terms of the
reaching of a cutoff hour rather than the doing of an act. The
preamble of subsection (a) is restated to improve comprehension.
Subsection (b) is amended by deleting the words "convenient to
the bank" as superfluous. Subsection (b) retains the non-uniform language added in 1985 to the official text by Texas
legislation. Acts 1985, 69th Leg., Ch. 621 § 2, eff. June 14,
1985. This language eliminates the uncertainty of the point in
time at which knowledge, notice, or stop-payment order received by,
legal process served upon, or setoff exercised by a payor bank is
too late to be effective.
Subchapter D. RELATIONSHIP BETWEEN PAYOR BANK AND ITS CUSTOMER.
Section 4.401. WHEN BANK MAY CHARGE CUSTOMER'S ACCOUNT.
Section 4.401 is amended by adding a sentence at the end of
subsection (a) and inserting two new subsections following
subsection (a). Former subsection (b) is consequently relettered
subsection (d).
The sentence to be added to subsection (a) defines when an
item is "properly payable." The sentence replaces the narrow
definition found in former section 4.104(a)(9), which is deleted.
Under this definition, a bank may properly charge a customer's
account if the customer authorized payment of an item and payment
is not contrary to the bank-customer agreement.
New subsection (b) provides that a customer is not liable for
an overdraft if the customer neither signed the item nor benefitted
from payment of the item. This subsection is intended to codify
the outcome of such cases as William v. Cullen Center Bank & Trust,
685 S.W.2d 311 (Tex. 1985).
New subsection (c) provides a procedure for payment of post-dated checks. Under this procedure a bank may pay a post-dated
check before its date unless the customer notifies the bank that
the customer has issued the post-dated check. The procedure
recognizes that current check processing equipment is unable to
identify post-dated checks. The procedure is analogous to that for
stop-payment orders in Section 4.403. If the bank fails to act on
an effective notice from the customer, the bank may be liable for
damages for the resulting loss.
Section 4.402. BANK'S LIABILITY TO CUSTOMER FOR WRONGFUL
DISHONOR; TIME OF DETERMINING INSUFFICIENCY OF ACCOUNT. Section
4.402 is amended by adding a new subsection (a) before the former
text and a new subsection (c) after the former text. The former
text becomes subsection (b).
Subsection (a) states that a bank that fails to honor a
properly payable item may be liable to its customer for wrongful
dishonor. This states affirmatively a rule that was assumed in the
former text.
Subsection (b) amends the former text to clarify the relation
between the first two sentences of the former text. The reference
to dishonor by "mistake" is deleted because it suggested that when
the bank did not act by mistake it was liable for damages not
proximately caused by the dishonor. The deletion is intended to
preclude any inference that a customer may recover substantial
damages without proof of damages actually suffered (i.e., the so-called "trader" rule). The deletion does not exclude the
possibility that a customer who suffers actual damages may also
recover non-compensatory damages, such as punitive damages. Such
recovery would be under other rules of law as provided by Sections
1.103 and 1.106 of the Business and Commerce Code.
Subsection (c) clarifies the procedures a bank must follow
when determining whether there are sufficient funds in a customer's
account to cover an item drawn on the account. A bank need only
make the determination one time and may do so any time between the
time the bank receives the item and the time it returns it. If,
however, the bank redetermines the account balance, the bank is
bound by that balance when deciding whether to dishonor the item
for insufficient funds.
Section 4.403. CUSTOMER'S RIGHT TO STOP PAYMENT; BURDEN OF
PROOF OF LOSS. Subsection (a) of Section 4.403 is amended to
clarify who may stop payment. Any person authorized to draw on an
account may order the bank to stop payment. If more than one
person may draw on the account, any of those persons may do so.
Subsection (a) is also amended to assimilate a customer's
order to close an account with an order to stop payment.
Subsection (b) continues, with minor modification to the
language, the non-uniform Texas rule that stop-payment orders must
be in writing to bind the bank.
Subsection (c) is amended by adding a last sentence stating
that a customer's damages may include damages for wrongful dishonor
of items subsequently presented to the bank for payment. The
sentence states expressly what was implicit in the former text.
Section 4.404. BANK NOT OBLIGATED TO PAY CHECK MORE THAN SIX
MONTHS OLD. Changes the word "which" to "that".
Section 4.405. DEATH OR INCOMPETENCE OF CUSTOMER. Minor
modifications are made to the language and punctuation of Section
4.405 to conform with current drafting practices. The
modifications are not intended to change the substance of the
section.
Section 4.406. CUSTOMER'S DUTY TO DISCOVER AND REPORT
UNAUTHORIZED SIGNATURE OR ALTERATION. Section 4.406 is
substantially redrafted. Subsections (a), (b), and (c) replace
former subsection (a). Subsection (a) amends the former subsection
by authorizing a bank to send a statement of account without the
items if the statement provides sufficient information to allow the
customer reasonably to identify the items paid. The subsection
provides a safe harbor rule by stating that a bank provides
sufficient information if it gives the item number, amount, and
date of payment for each item. The statement must, however, also
state the telephone number that a customer may call to obtain an
item or a copy of the item.
Subsection (b) authorizes a bank to destroy an item, such as
a check, so long as the bank has the capacity to furnish a legible
copy for seven years. As a special non-uniform amendment modeled
on a similar provision adopted in California, the subsection
explicitly requires a bank to provide, upon request and without
charge, at least two items or legible copies of two items with
respect to each bank statement sent to the customer.
Subsection (c) continues the rule that a customer must
promptly examine bank statements and items and must promptly notify
the bank if the customer discovers or should have discovered an
unauthorized payment.
Subsection (d) replaces former subsection (b). The subsection
requires a customer to examine items or statements of account and
to notify the bank of discrepancies within a stated period of time.
Former subsection (b) requires the customer to act within 14 days.
The amended text extends the 14-day period to a 30-day period. The
additional time is appropriate because of the huge volume of checks
that must be handled today.
Subsection (e) replaces former subsection (c). The amended
text substitutes a comparative negligence test for the absolute bar
test in the former subsection. This substitution conforms with
similar changes introduced in Sections 3.404, 3.405, and 3.406.
Subsection (f) replaces former subsections (d) and (e). The
amended text deletes the reference to a three-year period to
discover an unauthorized indorsement. The reference is unnecessary
because Section 4.406 does not impose a duty on a customer to
discover a forged indorsement.
Section 4.407. PAYOR BANK'S RIGHT TO SUBROGATION ON IMPROPER
PAYMENT. Payor Bank's Right to Subrogation on Improper Payment.
Section 4.407 is amended by assimilating a customer's order to
close an account with an order to stop payment. These orders are
functionally the same from the bank's point of view.
Subchapter E. COLLECTION OF DOCUMENTARY DRAFTS.
Section 4.501. HANDLING OF DOCUMENTARY DRAFTS; DUTY TO SEND
FOR PRESENTMENT AND TO NOTIFY CUSTOMER OF DISHONOR. Minor
modifications are made to the language of Section 4.501 to conform
with current drafting practices. The modifications are not
intended to change the substance of the section.
Section 4.502. PRESENTMENT OF "ON ARRIVAL" DRAFTS. Minor
modifications are made to the language of Section 4.502 to conform
with current drafting practices. The modifications are not
intended to change the substance of the section.
Section 4.503. RESPONSIBILITY OF PRESENTING BANK FOR
DOCUMENTS AND GOODS; REPORT OF REASONS FOR DISHONOR; REFEREE IN
CASE OF NEED. Minor modifications are made to the language and
punctuation of Section 4.503 to conform with current drafting
practices. The modifications are not intended to change the
substance of the section.
Section 4.504. PRIVILEGE OF PRESENTING BANK TO DEAL WITH
GOODS; SECURITY INTEREST FOR EXPENSES. Minor modifications are
made to the language and punctuation of Section 4.504 to conform
with current drafting practices. The modifications are not
intended to change the substance of the section.
SECTION 5: Amends Section 5.103(c), Business and Commerce
Code, to conform to amendments to Chapters 3 and 4 of the Business
and Commerce Code.
SECTION 6: Amends Section 9.203(a), Business and Commerce
Code, to conform to amendments to Chapters 3 and 4 of the Business
and Commerce Code.
SECTION 7: Amends Section 9.302(a), Business and Commerce
Code, to conform to amendments to Chapters 3 and 4 of the Business
and Commerce Code.
SECTION 8: Amends Section 9.312(a), Business and Commerce
Code, to conform to amendments to Chapters 3 and 4 of the Business
and Commerce Code.
SECTION 9: The changes made by this Act apply only to an
action or proceeding that is commenced or a right that accrues on
or after the effective date of this Act.
SECTION 10: Effective date: January 1, 1996.
SECTION 11: Emergency clause.
COMPARISON OF ORIGINAL TO SUBSTITUTE
The committee substitute for H.B. 1728 makes correcting word
changes to the originally filed bill so that the bill will conform
to the words utilized in Chapters 3 and 4 of the Uniform Commercial
Code which are adopted by the bill. The word changes are the
following:
Section 3.308, The words "incapacity" or "incapacitated" are
replaced with the words "incompetence" or "incompetent".
Section 3.418 and Section 3.603, the word "considered" is replaced
with the word "deemed".
Section 4.501, Section 4.503 and Section 4.504, the word "timely"
is replaced by the word "seasonably".
Section 4.104, the committee substitute corrects the definition of
the word "draft", to conform to the definition contained in the
Uniform Commercial Code.
The committee substitute, by revised Section 9, also changes the
application of the effective date of the Act and, by revised
Section 10, changed the effective date from September 1, 1995 to
January 1, 1996.
SUMMARY OF COMMITTEE ACTION
The Business and Industry Committee considered H.B. 1728 in a
public hearing on March 7, 1995. The following persons testified
for H.B. 1728: Dr. W. David East, representing Texas Business Law
Foundation; Daryl B. Robertson, representing Texas Business Law
Foundation; and Arthur Val Perkins, representing Texas Business Law
Foundation. The committee considered a complete substitute for the
bill. The committee considered 1 (one) amendment to the committee
substitute. The bill, committee substitute, and amendment were
left as pending before the committee. H.B. 1728 was reconsidered
in a public hearing on April 4, 1995. The committee considered a
complete committee substitute for H.B. 1728. The substitute was
adopted without objection. H.B. 1728, as substituted, was reported
favorably with the recommendation that it do pass and be printed,
by a record vote 6 (six) ayes, 0 (zero) nays, 0 (zero) present-not-voting, 3 (three) absent.