Consumer Banking and Payments Law: 3.4.4 Variation of UCC Rules by Agreement
The UCC allows the bank and the customer to vary the effect of the rules in Article 4 by agreement.90 The right to vary the rules by contract is not unlimited.
The UCC allows the bank and the customer to vary the effect of the rules in Article 4 by agreement.90 The right to vary the rules by contract is not unlimited.
If the UCC covers the rights and liabilities of parties to a check, the common law cannot be used to displace the UCC rules. The general rule regarding the role of the common law appears in UCC Article 1:
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,
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.
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.
Good title to bearer paper passes to anyone who has physical possession of the check, and good title to order paper passes only when the party to whom the instrument is payable has signed (indorsed) it and physical possession is with the next party.
To be a holder in due course, the party taking the check must have given value for the check.173 This requirement of “value” is different from the contract law concept of consideration.
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.