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.