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Consumer Banking and Payments Law: 3.4.6 The UCC Statute of Limitations

A lawsuit to enforce the obligation of a party to an uncertified check has to be brought “within three years after dishonor of the draft or [ten] years after the date of the draft, whichever period expires first.”121 An action under Article 4 of the UCC must be brought “within three years after the cause of action accrues.”122 This would include lawsuits over whether a check is properly payable,123 wrongful dishonor,

Consumer Banking and Payments Law: 3.5.1 Introduction

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. This section explains how “ownership” of a check is passed forward (called “negotiation”), how an owner of a check becomes a “holder in due course,” and what rights a holder in due course has. The next section discusses what constitutes a signature on a check and what liabilities a party takes on by signing a check.

Consumer Banking and Payments Law: 3.5.2.1 Tracing Good Title to the Check—Issuance and Negotiation

The liability rules on checks are different for checks that have been handled by parties with “good title” to the check and checks to which “good title” is disrupted by theft of the check or a forgery of a name other than the drawer’s name. This section describes how good title to a check drawn by the drawer is passed from party to party, and how one becomes entitled to enforce a check.

Consumer Banking and Payments Law: 3.5.3.1 Introduction

If a party to a check can establish that it is a holder in due course or that it has the rights of a holder in due course under the shelter rule,164 that party is immune from most defenses to payment and claims in recoupment that could be raised by an obligor on a check.165

Consumer Banking and Payments Law: 3.5.3.5.3 Notice of a claim to the instrument

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

Consumer Banking and Payments Law: 3.5.3.5.4 Notice of a defense or recoupment claim

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.

Consumer Banking and Payments Law: 3.5.7.1 Introduction

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

Consumer Banking and Payments Law: 3.6.1 Introduction

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.

Consumer Banking and Payments Law: 3.6.3.1 Actual Signatures

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.

Consumer Banking and Payments Law: 3.6.4.1 General Rules

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

Consumer Banking and Payments Law: 3.6.4.2 Incomplete and Altered Checks

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.