Consumer Banking and Payments Law: 3.5.3.4 Good Faith
To be a holder in due course, the party taking the check must have good faith. Good faith means “honesty in fact and the observance of reasonable commercial standards of fair dealing.”183
To be a holder in due course, the party taking the check must have good faith. Good faith means “honesty in fact and the observance of reasonable commercial standards of fair dealing.”183
To be a holder in due course, the party taking the check must take the check:
To be a holder in due course, the holder of a check has to take the check “(iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series”192 If a holder of a check takes the check ninety days or more after its date, the holder cannot be a holder in due course.
A party to a check cannot be a holder in due course if that party has notice that someone else has a claim to the physical instrument.196 If a fiduciary deposits a check in the fiduciary’s own account that is made out to the beneficiary or to the fiduciary as fiduciary, the depository bank would have notice that the beneficiary has a claim to the instrument, and the depository bank would not be a holder in due course.197
If someone takes a check with notice that the drawer has a defense to payment on the check, or a claim in recoupment against the original payee of the check if the claim arose from the transaction that gave rise to the check, that party cannot be a holder in due course.198 This is the case even if the defense or claim in recoupment later turns out to be invalid.
The payee of a check can be, but is very rarely, a holder in due course because the payee is too tied to the underlying transaction.200
Even if a holder does not meet the requirements of being a holder in due course, the holder may have the rights of a holder in due course by “taking shelter” in the holder-in-due-course status of a previous party.
If a holder of a check is not a holder in due course and does not have the rights of a holder in due course, the holder is subject to all defenses to payment that could be asserted by an obligor on a check. That holder is also subject to all claims in recoupment that could be made by an obligor on the check so long as the claim in recoupment “arose from the transaction that gave rise to the instrument” and “only to reduce the amount owing on the instrument at the time the action is brought.”206
Certain defenses, called “real defenses,” are assertable even against a holder in due course. The real defenses are:
The rules of UCC Articles 3 and 4 dictate the rights and liabilities of the parties that handle a check based on whether and how each party signs the check and whether each party is a holder in due course. The previous section explained how “ownership” of a check is passed forward (called “negotiation”), how an owner of a check becomes a holder in due course, and the rights of a holder in due course. This section discusses what constitutes a signature on a check and what liabilities a party takes on by signing a check.
The underlying obligation is the obligation for which a check is issued. If a consumer buys a car, the underlying obligation is the car contract.
Anyone who does not sign a check, or authorize someone else to sign it on her behalf, has absolutely no liability on the check.227 Each party that signs a check takes on some liability on the check (except for an agent in certain circumstances, discussed below). The liability taken on by each party who signs the check is dictated by the capacity in which the party signed the check.
Remotely created checks are checks that not created by the drawee bank and do not bear the signature (purported or actual) of the drawee. Instead, they bear the words “authorized by drawer” or words to that effect.242
The rules governing authorizations of remotely created checks are discussed in § 3.13.2, infra.
The life of a check usually begins when the drawer decides to pay for something with a check. The drawer, who has a deposit account with the drawee, fills out and signs the check and gives it to the payee. The code calls this the “issue” of the instrument.243
A drawer may also have liability if the drawer signs an incomplete check or if the check is altered.250 An incomplete check is defined as “a signed writing, whether or not issued by the signer, the contents of which show at the time of signing that it is incomplete but that the signer intended it to be completed by the addition of words or numbers.”251 This might happen if a consumer signs a check before knowing the exact name of the payee, and leaves the payee line blank.
If the payee or any special indorsee’s name is forged, the check is not properly payable from the drawer’s account, and the drawer has the right to demand that the drawee bank re-credit the account.268 Note that this outcome may change if the drawer is negligent or ratifies the forgery.
The indorser’s obligation is minimally relevant to situations in which the practitioner is representing a consumer who has paid for something by personal check.
Even though the drawer and the drawee bank have obligations to each other based on their contract and UCC Article 4, the drawee bank is not obligated on a particular check until it accepts the check by signing the check.281 Because of this lack of liability by the drawee, sometimes the payee will want the drawer to pay with a check that the drawee bank has already agreed to pay.
A bank is obligated to follow the customer’s instructions and is therefore an agent of the customer.292 A check is the method by which the bank’s customer (the creditor and principal) tells the bank (debtor and agent) to pay some of the bank customer’s money to someone else.
A bank with which a customer has a checking account can charge the customers’ account only if the check is “properly payable.”294 “Properly payable” means that the customer has authorized the payment and the payment violates no agreement between the customer and the bank.295 If a check is not properly payable and the bank pays it anyway, the bank must re-credit the customer’s account unless the bank can resist re-crediting the account by asserting subrogation rights, which are addressed in
A check may not be properly payable if the drawer’s signature is missing or forged. The essence of a checking account is that the drawee bank follows the orders of the depositor to pay money out of the account. When the drawer signs a check, the drawer is ordering the drawee bank to make the payment indicated in the check.
Although foreclosure procedures vary considerably from state to state, most require that the foreclosing party serve one or more notices upon the borrower before a valid sale can take place. The most common notices that state laws require are notice of a right to cure, which may include information about loss mitigation contacts and options, notice of acceleration or default, and notice of the foreclosure sale itself. These notices may be mandated by statute or by the terms of the parties’ loan documents.
Certain states have long-standing statutory requirements for service of a notice informing the borrower of a time frame and procedure for exercise of a right to cure a default before formal steps are taken to foreclose.190 In recent years, several states added to their foreclosure procedures specific new notice requirements to inform borrowers in default of options to be considered for loss mitigation.191 Over a dozen states have enacted statutes mandating some form of preforeclosure mediation o