Negotiable Instruments Negotiability 7 elements: 3-104.

Negotiable Instrument

1.Written promise (a note) or order (a draft); UCC 3-104(e) An instrument is a "note" if it is a promise and is a "draft" if it is an order. 2.Signed A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or
symbol executed or adopted by a person with present intention to authenticate a writing [ 3-401(b)]

3.Unconditional a promise or order is unconditional unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another
record, or (iii) that rights or obligations with respect to the promise or order are stated in another record [ 3-106(a)]
EXCEPTION: A promise or order is not made conditional (i) by a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration, or (ii) because payment is limited to resort to a particular fund or source [ 3-106(a)]

4.Fixed amount NOTE Interest may be stated in an instrument as a fixed or variable amount of money or it may be expressed as a fixed or variable rate or rates. The amount or rate of
interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument [ 3-112(b)]

5.No other undertaking promise/order doesnt state any other undertaking or instruction by the person promising/ordering payment to do any act other than pay $ [ 3-104(a)(3)]
EXCEPTION: but promise/order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.

Accord and Satisfaction [UCC 3-311] language does not destroy negotiabilitye.g., By cashing this check, payee agrees that drawer has made payment in full of the debt drawer owed payee as a result of the purchase HYPO payment in full (see prob 23.3)

6.Payable on demand or at a definite time [UCC 3-108] O On Demand (a) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder, OR (ii) does not state any time of payment.
Definite Time (b) payable on elapse of a definite period of time after sight or acceptance or at a fixed date or at a time readily ascertainable at the time the promise or order is issued, SUBJECT TO rights of (i) prepayment, (ii) acceleration, (iii) extension at the option of the holder, or (iv) extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.

7.Payable to bearer or order [UCC 3-109]

Bearer (a)(1) states that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession is entitled to payment; (2) does not state a payee; (3) states t that it is payable to cash or to the order of cash or otherwise indicates that it is not payable to an identified person. Order (b) A promise or order that is not payable to bearer is payable to order if it is payable (i) to the order of an identified person or (ii) to an identified person or order (i.e. special e endorsement pay to John Doe s/ payee) E EXCEPTION: pay to John Doe on a check is treated as pay to the order of John Doe [UCC 3-104(c)] making the instrument properly negotiable order paper Pay to Order of John Does Estate is payable to the trustee; Payable to the President of U.S. is payable to named person, incumbent, or successor[3-110(c)(2)] Holder person in possession of a negotiable instrument that is payable [1] to bearer or [2] to an identified person that is the person in possession[ 1-201(b)(21)(A)] Depository bank If a customer delivers an item to a depositary bank for collection: (1) the depositary bank becomes a holder of the item at the time it receives the item for collection if the customer at the time of delivery was a holder of the item, whether or not the customer indorses the item[UCC 4.205] Negotiation 3-201 (a) negotiation means a transfer of possessionof an instrument by a person other than the issuer to a person who thereby becomes a holder; (b)if an instrument is payable to an identified person, negotiation requires transfer of possession and its indorsement by the holder. If the instrument is payable to bearer, it may be negotiated by transfer of possession alone. Endorsement: Indorsement" means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser's liability on the instrument [UCC 3-204(a)]

[3-205] (1) Special Endorsement - indorsement identifies a person to whom it makes the instrument payable When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person; (2) Blank Endorsement - When indorsed in blank, an instrument becomes payable to bearer; (3) Anomalous Endorsement - Anomalous indorsement" means an indorsement made by a person who is not the holder of the instrument. An anomalous indorsement does not affect the manner in which the instrument may be negotiated

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[3-206] Restrictive Indorsement for deposit or for collection3-206(c)(1) a person, other than a bank, who purchases the instrument when so indorsed coverts the instrument unless the amount paid is received by the indorser(see prob 23.1) Forged Endorsement Proper negotiation of order paper requires a valid endorsement. Thus, no person can be a holder following a forged endorsementHYPO1: Lauras briefcase was stolen and it contained her paycheck. Laura had not indorsed the back of the check, but the thief forged Lauras signature and cashed the check at TKO Check Cashing = TKO cannot be a holder b/c proper negotiation required Lauras endorsement; CONTRAST HYPO2: Laura indorsed in blank and then the check was stolen. Thief forged another signature on it when he cashed it at TKO Check Cashing = thief was holder of bearer paper and his endorsement was anamolous and did not affect negotiation of the bearer paper.

Multiple Payees pay to order of X AND Y requires endorsements from both to negotiate; X OR Y can be endorsed by either; if ambiguous, presumed to be either/alternative Misnomer if intended to be payable to payee who is misnamed on the check, he/she can endorse using actual name, misname, or both (general practice is to sign both names) Affixed Endorsement endorsement must be on or affixed to the instrument (e.g. using an allonge) Holder in Due Course A person having rights of a holder in due course takes free of the claim to the instrument [UCC 3-306]; 4 Elements [UCC 3-302]:

1.a holder that 2.takes the instrument for value

2.a.if the instrument is issued or transferred for a promise of performance, it is taken for value to the extent the promise has been performed [3-303(a)(1)] 2.b.a bank has given value to the extent it has a security interest in an item [4-211] A collecting bank has a security interest in an item(1) in the case of an item deposited in an account, to the extent to which credit given for the item has been withdrawn or applied [4-210]i.e. to the extent the bank is out $$, it has a security interest.

2.c.FIFO Rule credit first given is first withdrawn; customer deposits a $500 check and withdraws $500, if there was already $500 in the account that is what is withdrawn and the
bank has not yet given value for the check (NOTE if the check was cashed, the bank has given value regardless of the account balance)

3.and in good faith 4.and without notice of certain claims or defenses NOTICE = actual notice, receipt of notification, facts and circumstances constitute constructive notice (should have known) 4.a.Apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity[3-302(a)(1)]; e.g. notice of breach of fiduciary duty
under 3-307 [pg. 276]

4.b.Notice the instrument is overdue or has been dishonored or that there is an uncured default w/ respect to payment of another instrument issued as part of the same series
1. An instrument payable on demand becomes overdue at the earliest of: (1) day after demand for payment is duly made; (2) 90 days after the date of a check; (3) if not a check after an unreasonably long period of time under the circumstances taking into account the nature of the instrument and usage of trade. [3-304(a)] 2. an instrument does not become overdue if there is default in payment of interest but no default in payment of principal. 4.c.Notice of a defense or claim in recoupment

1.Defense a defense of the obligor that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract (e.g., if holder
took the instrument w/ knowledge that the maker had a breach of warranty claim for the product he/she purchased)

2.Claim in Recoupment legal ability to subtract from any payment due the amount the person trying to collect the debt (or that persons predecessor) owes the debtor; debt/claim must
have arisen from the transaction given rise to the instrument [UCC 3-305(a)(3)]

3.Consumer Transactions 16 C.F.R 433.2 promulgated by the FTC requires that certain consumer credit sales and consumer purchase money loans contain a notice on the
instrument that the rights of a holder or transferee are subject to a claim or defense that the issuer could assert against the original payee; UCC 3-305 treats all instruments subject to 433.2 as having the notice even if it does not. EFFECT a holder of such an instrument as a matter of law cannot be a HDC b/c they cannot meet the without notice requirement. HYPO: Payee sold the note to Purchaser who took for value, in good faith and w/o notice of the defense of Maker. Purchaser received possession of the note but Payee neglected to indorse it. Purchaser became a person entitled to enforce the instrument but did not become the holder because of the missing indorsement. If Purchaser received notice of the defense of Maker before obtaining the indorsement of Payee, Purchaser cannot become a holder in due course because at the time notice was received the note had not been negotiated to Purchaser. If indorsement by Payee was made after Purchaser received notice, Purchaser had notice of the defense when it became the holder. Shelter Doctrine - Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course, but 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 i illegality affecting the instrument[3-302(b)] EX: Jack sold Manny a lemon car for a $2,000 promissory note payable to the order of Jack. Jack sold (and indorsed) the note to Alfredwho had no knowledge of the underlying transactionfor $1,700. Alfred then gave the $2,000 note to his daughter Jessica as a birthday present. When the note came due, Manny refused to pay Jessica because the car had fallen a apart. Jessica did not give value so she is not a HDC BUT she acquired the rights of Alfred who was a HDC under the shelter doctrine. A transferee w/ HDC rights cannot exercise those rights against the person whos actions gave rise to those rights; HDC1 > T1 > T2; T2 cannot use HDC rights against HDC1; NOTE if T2 sold the note to HDC2, then HDC2 can enforce his HDC status against HDC1; What status does HDC1 have if he re-acquires the note (e.g. after he pays HDC2); HDC1 gets only the HDC status he had originallyi.e. has HDC rights against those that came before, but not those that came after Real and Personal Defenses A. Real Defenses [UCC 3-305(a)(1)] - defeat the right of the HDC to enforce the instrument against the obligor raising/proving the real defense 1. Infancy to the extent it is a defense to a simple contract under state law 2. Duress 3. Lack of Legal Capacity 4. Illegality of the underlying transaction (defined by state contract law) 5. Discharge in Insolvency Proceeding (e.g. Bankruptcy; obligation must be listed on the schedule of debt that the court discharged)

6.Forgery a person is not liable on an instrument unless (i) the person signed the instrument[3-401(a)]; a forged signature is not effective in creating a payment obligation, therefore
the person whose signature was forged is not an obligor as that term is used in 3-305; EXCEPTION a forged counter-signature on a travelers check is a personal defense not a real defense [3-106(c) Cmt. 2] 7. Alteration 8. Fraud in the factum fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential termse.g., a maker who is tricked into signing a note in the belief that it is merely a receipt or some other document; NOTE this is in contrast to fraud in the inducement, which is a personal defense. B. Personal Defenses [UCC 3-305(a)(2)] HDC not subject to personal defenses 1. Fraud in the underlying transaction 2. Breach of Contract 3. Breach of Warranty 4. Payment C. Claim in Recoupment HDC not subject to claim in recoupment (see definition of Recoupment Claim above) Checking System

A.Properly Payable Rule UCC 4-401 (a) A bank may charge against the account of a customer an item that is properly payable from the account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank(b) A customer is not liable for the a amount of the overdraft if the customer neither signed the item nor benefited from the proceeds from the item.
Determination of Available Funds 4-402(c) can be made at any time after receipt of the item; only 1 determination need be made, if a 2nd determination is made, it is determinative Bank Agreements effect of the provisions of UCC Art. 4 can be varied by agreement; but bank cant abrogate its duty to act in good faith [UCC 4-103(a)] Post-Dated Checks - A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though payment was made before the date of the check, unless the customer has given notice to the bank of the postdating describing the check with reasonable certainty [UCC 4-401(c)] Stop Payment Order UCC 4-403(a): A customer or any person authorized to draw on the account . . . may stop payment of any item drawn on the customers account or close the account by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it . . .NOTE an oral SPO is valid for 14 days; a written SPO is valid for 6-months and can be renewed by a record given to the bank. HYPO: bank pays a ck contrary to valid SPO; bank must re-credit its customer (ck was not properly payable) but has subrogation rights against payee, drawer, or a HDC under UCC 4-407 (e.g. product was defective, bank re-credits customer, and pursues drawers breach of warranty claim against the payee).

Stale Checks A bank is under no obligation to a customer to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customers account for a payment made thereafter in good faith. [UCC 4-404] B. Expedited Funds Availability Act & Regulation CC

1.Next Day Availability: C.F.R. 229.10(c)(1) available for withdraw on the next business day following the banking day the check was deposited.
Low Risk Checks i) Check drawn on the U.S. Treasury deposited (A) in an acct held by the payee ii) U.S.P.S. money order deposited (A) in an acct held by a payee of the money order AND (B) in person to an employee of the depository bank iii) Check drawn on Fed Reserve Bank deposited (A) in acct held by the payee AND (B) in person iv) Check drawn on state/local govt deposited (A) in acct held by the payee AND (B) in a depository bank located in the same state AND (C) in person v) Cashiers check deposited (A) in acct held by the payee AND (B) in person AND (C) w/ special deposit slip/envelope if required by the bank vi) Check deposited in a branch of depository bank drawn on the same or another branch in the same state or check processing region NOTE if these low risk items are not deposited in person, then they are available for withdraw on the 2nd business day following the banking day[229.10(c)(2)]; $100 would still be made available under 229.10(c)(1)(vii) on the next business day following the banking day. Other Local Checks vii) $100 is available for cash withdraw on the next business day following the banking day the check was deposited.

2.Remaining Funds Availability C.F.R. 229.12(b) makes remaining funds of a local check available after 2 business days following the banking day check was deposited.
EXCEPTION for Cash Withdraws [C.F.R. 229.12(d)]: ONLY $400 can be withdrawn on the 2nd business day and the remaining amount is made available for cash withdrawal on the 3rd business day following the banking day up to a total amount of $5,000 (see large deposit exception below). EXCEPTION for Nonproprietary ATM Deposits [C.F.R. 229.12(f)]: cash or check deposited at nonproprietary ATM available no later than 5th bus day following banking day 3. EXCEPTIONS 229.13

a. New Accounts 229.13(a)(1)new accounts are (i) still subject to next-day availability of cash deposits and electronic payments; (ii) still subject to next day availability of low risk
checks up to $5,000 with balance available not later than the 9th business day following the banking day on which funds were deposited; (iii) NOT SUBJECT TO (vi) and (vii) above (i.e. bank does not have to comply with those requirements for a new account. Definition (a)(2) first 30 days of a new account except if customer already has another 30+day old acct at the bank.

b.Large Deposits 229.13(b)229.10(c) and 229.12 do not apply to amounts deposited in excess of $5,000. 4.

229.13(h)(2) reasonable time added to excess amount of low risk checks (i) (v); 229.13(h)(4)1 day is added to excess amount of a on-us check (iv) above; 5 days are added to excess amount of local checks under 229.12(b)

Final Payment Rule 4-215(e) requires availability of funds upon final settlement,i.e. when the $$ is actually & irrevocably (as to 3rd parties) in customers account. C. Collection of Items

D.Wrongful Dishonor UCC 4-402(a) payor bank dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it has agreed otherwise
Liability/Damages (b) A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages NOTE damages not limited by foreseeability.

Funds Availability Determination (c) can be made at any time after receipt of the item; only 1 determination need be made, if a 2nd determination is made, it is determinative

E.Midnight Deadline 4-301(a) payor bank has until midnight of the next banking day following the banking day on which it receives the item to dishonor the item by (1) returning it, (2) r returning an image if there is an agreement b/w the banks to accept images, or (3) by sending record providing notice of dishonor if the item is unavailable.
On Us Items UCC 4-301(b):If a demand item is received by a payor bank for credit on its books, it may return the item or send notice of dishonor and may revoke any credit g given or recover the amount thereof withdrawn by the customer, if it acts within the time limit specified in subsection (a). EXCEPTION if payor bank cashes an on-us item then it has made final payment under 4-215(a)(1) and cannot dishonor, revoke settlement and recover funds

Reg CC Extension of the Midnight Deadline C.F.R. 229.30(c) extends the midnight deadline to the time of dispatch if the paying bank uses a means delivery that would ordinarily result in delivery on or before (?)this deadline is extended further if a paying bank uses a highly expeditious means of transportation. F. Reg CC Deadlines Return of Checks 12 C.F.R. 229.30(a) If a paying bank determines not to pay a check, it shall return the check in an expeditious manner by either (1) sending it in a manner that would normally cause the check to be delivered to the depository bank by the 2nd business day following the banking day on which the check was presented to the paying bank, if the paying bank is located in the same check processing region as the depositary bank OR (2)forward collection test

Notice of Return 12 C.F.R. 229.33(a) If a paying bank determines not to pay a check in the amount of $2,500 or more, it shall provide notice of nonpayment such that the notice is received by the depositary bank by 4:00 p.m. (local time) on the second business day following the banking day on which the check was presented to the paying bank. G. Violations of UCC and Reg CC Deadlines UCC 4-302(a) Payors Bank Responsibility for Late Return of an Item. Payor bank is accountable for the amount of a demand item ifit does not pay or return the item or send notice of dishonor until after its midnight deadline; NOTE under 4-302(b) payor bank liability is subject to defense based on breach of presentment warranty.

Ability of Collecting Bank (typically the Depository Bank) to Revoke a Provisional Settlement Under UCC 4-214(a) a collecting bank is entitled to charge back its customers account if the payor bank properly dishonors a check. Under UCC 4-215(d) if a collecting bank receives a settlement for an item which is or becomes final, the bank is accountable to its customer for the amount of the item and any provisional credit given for the item in an account with its customer becomes final. When the payor bank fails to dishonor by the midnight deadline, the settlement becomes final and the collecting bank loses it ability to charge back its customers account.

Reg CC Warranties 12 C.F.R. 229.34 (a) payor bank warrants that the returned check met the midnight deadline...(b) payor bank warrants that when it provides notice under 229.33(a) it has returned or will return the check before its midnight deadline Damages [229.34(e)] Damages for breach of these warranties shall not exceed the consideration received by the bank that presents or transfers a check or returned check, plus interest compensation and expenses related to the check or returned check, if any.

1 Encoding Warranties UCC 4-209(a) A person who encodes information on or with respect to an item after issue warrants to any subsequent collecting bank and to the payor bank or
other payor that the information is correctly encoded. If the customer of a depositary bank encodes, that bank also makes the warranty. May recover damages equal to the loss suffered plus expenses and loss of interest. H. Risk of Loss in the Checking System I. Liability on a Check

Drawers Liability UCC 3-414(b) If an unaccepted draft is dishonored, the drawer is obliged to pay the draft (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or (ii) if the drawer signed an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. The obligation is owed to a person entitled to enforce the draft or to an indorser who paid the draft under Section 3-415.

a a

Forged Drawers Signature 3-401A person is not liable on an instrument unless (i) the person signed the instrument. BUT the forger is liable as the drawer b/c under 3403an unauthorized signature is ineffective except as the signature of the unauthorized signer Endorsers Liability UCC 3-415(a) If an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed, or (ii) if the indorser indorsed an incomplete instrument, according to its terms when completedThe obligation of the indorser is owed to a person entitled to enforce the instrument (holder) or to a subsequent indorser who paid the instrument under this section.

NOTE - 3-415(b) If an indorsement states that it is made "without recourse" or otherwise disclaims liability of the indorser, the indorser is not liable under subsection (a) to pay t the instrument. NOTE presentment and transfer warranties below cannot be disclaimed NOTE Drawer and Endorser Liability only arise when a check is dishonored

b Presentment Warranty UCC 4-208 if drawee/payor bank accepts and pays a check, the presenting party and all prior transferors of the check warrant to the payor bank:
1. 2. 3. 4. entitled to enforce the check (holder) check has not been altered no [actual] knowledge that the drawers signature is forged/unauthorized r remotely-created check has been authorized for the amount of the check NOTE Only a payor bank can bring a breach of presentment warranty claim

EX: payor bank pays a stolen check with a forged indorsement and agrees to re-credit its customers account payor bank can bring a claim for breach of presentment warranty against the presenting bank and prior transferors of the instrument because they were not entitled to enforce the instrument; RULE: no one can be a holder entitled to enforce an instrument with a forged indorsement.

Transfer Warranty UCC 4-207 a customer or collecting bank that transfers an item and receives a settlement or other consideration warrants to the transferee and any subsequent collecting bank that: 1. entitled to enforce the check (holder) 2. all signatures on the check are authentic and authorized 3. check has not been altered 4. item is not subject to a claim of recoupment of any party that can be asserted against the warrantor 5. no [actual] knowledge of insolvency of the maker or acceptor 6. remotely-created check has been authorized for the amount of the check r NOTE (1) Payor bank is not a collecting bank and can therefore not bring a breach of transfer warranty claim; (2) Issuer/Drawer is not a transferor [UCC 3-203] and therefore cannot be liable for a breach of transfer or presentment warranty

EX1: Payor bank notices the forged endorsement and dishonors the check, but the depository bank paid its customer depository bank cannot bring a claim under endorser liability against its customer because that remedy is only available to parties entitled to enforce the instrument (forged endorsement prevents the depository bank from being a holder

entitled to enforce the check; BUT it can bring a breach of transfer warranty claim against customer and prior transferors because they were not entitled to enforce the instrument AND all the signatures were not authentic/authorized.

EX2: stolen check with a forged signature is transferred to A who deposits at Bank B, Bank B endorses w/o recourse and transfers to Bank C, who presents check for payment to Bank D who dishonors the check. Bank C would be able to bring a claim under a theory of indorser liability against Bank B (RULE a forged drawers signature does not prevent holder status) EXCEPT for bank Bs disclaimer. Bank C can bring a breach of transfer warranty against Bank B and A b/c all signatures on the check were not authentic/authorized; NOTE the forger in this case has drawers liability because the forged signature is treated as his own under 3-403

d Alteration UCC 3-407(c) A payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith and without notice of the alteration, may
enforce rights with respect to the instrument (i) according to its original terms, or (ii) in the case of an incomplete instrument altered by unauthorized completion, according to its terms as completed. ALSO under the properly payable rule 4-401(d)A bank that in good faith makes payment to a holder may charge the indicated account of its customer according to: (1) the original terms of the altered item; or (2) the terms of the completed item, even though the bank knows the item has been completed unless the bank has notice that t the completion was improper. Drawer signs a check and leaves it blank; it is later stolen and completed: Drawer is liable for a completed check (drawer has a conversion claim against the thief; 3-420 the law applicable to conversion of personal property applies to instruments); NOTE payor bank could not credit customers account and bring a presentment warranty claim instead b because under 4-208(b) banks damages are what they paid less what they could get from the drawer, which in this case is the entire amount. Thief alters the check by adding a zero to $100 to make it $1,000: Drawer is only liable only for $100; presentment warranty claim would be available to the payor bank; transfer warranty claim would be available to the collecting bank. 2 Defenses/Special Rules

2.a.Negligence Contributing to a Forgery or Alteration UCC 3-406 (a) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or
to the making of a forged signature is precluded from asserting the alteration or the forgery(b) if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion [contributory n negligence scheme] EX: Employee w/o check writing authority steals unsecured check stock and signature stamp and forges checks. Check is not properly payable under 4-401 b/c it was not authorized by the company. BUT company will likely be barred from asserting the forgery under 3-406 b/c it failed to exercise ordinary care

Imposter 3-404(a) If an impostorinduces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a p person who, in good faith, pays the instrument or takes it for value or for collection. EX: Stiffy poses as a supplier of Spode (Basset) and obtains a check written and signed by Spode to Basset. Imposter (Stiffy) indorses the check in the suppliers name and cashes it. 3-404(a) prevents payor bank from bringing a presentment warranty claim, prevents a collecting bank from bringing a transfer warranty claim therefore shifts the liability to Spode (the issuer). Padded Payroll/Fictitious Payee UCC 3-404(b) If (i) a person whose intent determines to whom an instrument is payable (Section 3-110(a) or (b)) does not intend the person identified as payee to have any interest in the instrument, or (ii) the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement: (1) Any person in possession of the instrument is its holder. (2) An indorsement by any person in the name of the payee stated in the instrument is e 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 for collection. EX1: Employee w/o checking writing authority steals check stock and makes a check to a supplier intending to give the check to an accomplice to forge the suppliers endorsement and cash the check. Liability for forged drawers signature will depend on negligence analysis under 3-406. Analysis of the fraudulent indorsement falls under 3-404, the employees intent determines who the payee is and the indorsement is effective as that of the intended payee. Prevents payor bank from bringing a presentment warranty claim and t the collecting bank from bringing a transfer warranty claim on the indorsement and therefore shifts liability to the employer. E EX2: Employee w/o check writing authority steals check stock and makes a check to a fictitious personsame analysis as above. NOTE under 3-404(d) if the bank was negligent in paying the check, the employer can raise this as a defense in a padded payroll/fictitious payee situation.

NOTE Bank Agreement providing that electronic signatures will be treated as authorized is allowed under 4-103 and enforceable so long as the agreement does not disclaim banks duty to act in good faith, with reasonable care, or limited damages for lack of good faith or failure to exercise reasonable care.

g Employee w/ Check Writing Authority

1 3-402. If a person acting, or purporting to act, as a representative signs an instrument by signing either the name of the represented person or the name of the signer, the represented person is bound by the signature to the same extent the represented person would be bound if the signature were on a simple contracti.e. check is authorized and employer is liable on the check. 2 3-405. a fraudulent endorsement by an employee with authority to write/process checks is effective as the endorsement of the payeei.e. the employer will be liable UNLESS the bank was negligent and that substantially contributed to the loss resulting from the fraud (e.g., bank becomes suspicious about repeated deposits and does nothing)

h Bank Statement Rule - 4-406(a) A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make
available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount, and date of payment. IF THE BANK DOES THIS THEN:

1.30-Day Rule under 4-406(d)(2) within 30 days of a customers receipt of a bank statement containing a fraudulent transaction (forgery), the customer must notify the bank or
he/she will be liable for all subsequent fraudulent transactions by the same forger.

2.One-Year Rule under 4-406(f) if 12 months passes from the time a customer receives a statement with a fraudulent transaction, customer is precluded from raising the forged
signature/indorsement.

i j

Conversion of an Instrument - 3-420(a) The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it 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 of an instrument may not be brought by (i) the issuer or acceptor of the instrument or (ii) a payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.

Effect of Instrument on Obligation 3-310 obligation suspended until check is paid or dishonored; NOTE Cmt. 4If the payor bank pays a person not entitled to enforce the instrument. . . the suspension of the underlying obligation continues because the check has not been paid. J. Check Truncation and the Check 21 Act

K.Banks Duty to Retain/Furnish Checks 4-406(b) If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed,
maintain the capacity to furnish legible copies of the items until the expiration of seven years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank must provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy. L. Substitute Checks Definition 12 U.S.C. 5002 (16) "substitute check" means a paper reproduction of the original check that (A) contains an image of the front and back of the original check; (B) bears a MICR line containing all the information appearing on the MICR line of the original check; (C) conforms, in paper stock, dimension, and otherwise, with generally applicable industry standards for substitute checks; and (D) is suitable for automated processing in the same manner as the original check.

Legal Equivalence 12 U.S.C. 5003(b) A substitute check shall be the legal equivalent of the original check for all purposes, including any provision of any Federal or State law, and for all persons if the substitute check (1) meets the definition above AND (2) bears the legend: "This is a legal copy of your check. You can use it the same way you would use the o original check." HYPO: Customer deposits a check that is returned NSFhe has a breach of contract claim AND he has a claim on the instrument itself under 3-414(b) the drawer has an unconditional obligation to pay following dishonor. Drawer is obligated to pay the person entitled to enforce the instrumenti.e. the holder (3-301). To be a holder you must be in possession of the instrument (1-201(b)(21)(A). If it is a substitute check it is legally equivalent to the original and customer can request the substitute check and be a holder for purposes of a claim on the instrument. If it is not a substitute check, he is not in possession and therefore not a holder and therefore limited to his breach of contract claim. BUT he could argue for liberal construction of 3-309 [see pg. xxx].

k Warranties i) 5004 (Substitute Check Warranty) A bank that transfers, presents, or returns a substitute check warrants (1) check complies with requirements for legal equivalence; (2) original or duplicate will not be presented; Note 12 CFR 229.2 (ccc) adds additional meaning to transfer to cover when a payee bank provides a substitute check to someone other than the bank (e.g. providing its customer with a substitute check) ii) 5006 (Re-Credit Claim) provides for a re-credit to a banks customer if the check was not authorized OR the substitute check warranty was breached AND the original would have prevented the loss; EX: pen impression evidence would have proven a forgery but is not possible b/c of truncation and use of substitute check. iii) 5005 (Indemnity) a reconverting bank (creator of the substitute check) indemnifies parties the check is issued to for loss b/c it is a substitute and not an original Credit Card System

iii.A.Applicable Law: (1) Private Agreements; (2) Truth in Lending Act (TILE) & Regulation Z
NOTE 15 U.S.C. 1603 this subchapter does not apply to the following: (1) Credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes, or to government or governmental agencies or instrumentalities, or to organizations.

iii.B.Parties: Issuing Bank >> Consumer >> Merchant >> Merchant Bank (Acquirer) >> Card Network >> Issuing Bank
iii.C.Consumer Rights

1.Claims/Defenses Against Merchants 15 U.S.C. 1666i credit card issuer shall be subject to all claims (other than tort claims) and defenses arising out of any transaction in which the credit
card is used IF (1) the consumer has made a good faith attempt to obtain satisfactory resolution of a disagreement with the merchant, (2) the amount of the initial transaction exceeds $50; a and (3) the place where the initial transaction occurred was in the same State as the mailing address previously provided by the cardholder or was within 100 miles from such address Customer is entitled to withhold payment for the amount of the disputed purchase; customer is NOT entitled to a refund if he/she pays the charge on the credit card bill; payments received are applied to any late charges, then to finance charges, then to other debits that are outstanding and not in dispute (1666i(b))i.e. card issuer cannot apply money received t to the disputed charge. Issuer will likely have recourse (i.e. charge-back rights) against merchant bank through its agreement w/ that bank and the merchant bank is likely to have recourse against the merchant through its agreement with that merchant. 2. Error and Credit Cart Fraud a. Unauthorized Charges (Fraud) 15 U.S.C. 1643 consumers liability for unauthorized charges is limited to $50

15 U.S.C. 1602 (o) "unauthorized use" means a use of a credit card by a person other than the cardholder who does not have actual, implied, or apparent authority for such use and from which the cardholder receives no benefit. Card issuer has the Burden of Proving that use was authorized (1643(b)). NOTE Continuing to pay credit card bills with unauthorized charges made by an employee, may be construed as apparent authority making the charges authorized (DBI Architects) b. Billing Error 1666(a) Notice of Error [pg. 1438]. 1666(b) Definition of Billing Error [pg. 1439]. 1666(c) Restrictions on Collection [pg. 1439]. 1666(d) Restrictions on C Collection [pg. 1440]. 1666(e) Effect of Non-Compliance with Requirements by Creditor [pg. 1440]. NOTE definition of billing error includes charge for property or services not accepted by or not delivered to the consumer (1666(b)(3)). This might be used by a consumer who has a claim/defense against a merchant not falling under 1666i b/c of the 100 mile rule. 3. Credit Cards Issued to Employees of a Business G General rule: Business credit card use is not protected by TILA. 15 U.S.C. 1603(1). EXCEPTION a card issuer and a business or other organization which provides credit cards issued by the same card issuer to ten or more of its employees may by contract agree as to liability of the business or other organization with respect to unauthorized use of such credit cards BUT in no case may such business or other organization or card issuer impose liability upon any employee with respect to unauthorized use of such a credit card except in accordance with and subject to the limitations of section 1643 of this title ($50 limit on liability). Debit Card System

A.Applicable Law Electronic Funds Transfer Act (EFTA) & Regulation E

NOTE for a debit/credit card, the actual transaction that was run determines which law appliesi.e. run as a credit card TILA applies; run as a debit card EFTA applies

B.Liability for Unauthorized Use 15 U.S.C. 1693g liability is limited to $50 if customer reports the lost or stolen card w/in 2 business days of learning of its loss. N

Liability for failure to report the card lost or stolen after learning of the loss is capped at $500 EXCEPT if customer fails to report lost or stolen debit card after 60 days of receiving a statement, liability is u unlimited. NOTE - Regulation E expressly makes the banks rights not to re-credit accounts cumulative so the 2-day and 60-day rules can be combined. 12 C.F.R. 205.6(b)(3) Unauthorized Use 15 U.S.C. 1693(a)(11) "unauthorized electronic fund transfer" means an electronic fund transfer from a consumer's account initiated by a person other than the consumer without actual authority to initiate such transfer and from which the consumer receives no benefit, but the term does not include any electronic fund transfer (A) initiated by a person other than the consumer who was furnished with the card, code, or other means of access to such consumer's account by such consumer, unless the consumer has notified the financial institution involved that transfers by such other person are no longer authorized, (B) initiated with fraudulent intent by the consumer or any person acting in concert with the consumer, or (C) which constitutes an error committed by a financial institution.

C.Banks Obligation to Re-Credit the Account 15 U.S.C. 1693(f)(c) bank has 10 days to resolve the claim of unauthorized use or if it is going to take more than 10 days, it must provide a
provisional re-credit on the 10th day and it has a total of 45 days from the customers notice to finally resolve the matter. EX: Customer reports unauthorized charges and bank fails to provide provisional re-credit w/in 10 days causing other checks to be dishonored customer would have a claim for wrongful dishonor under 4-402 and bank would be liable for damages proximately caused by the wrongful dishonor.

PIN-less Debit Card agreement b/w the card network and issuing banks has capped liability at $50 for these types of cards AND have made the deadline for a provisional re-credit 5 days instead of 10 days. Automated Clearing House (ACH) Transactions

A.Applicable Law: NACHA Operating Rules apply to all ACH transaction; EFTA (which is limited to consumer transactions) also applies to ACH transactions. B.Typical Parties Originator > Originating Depository Financial Institution (ODFI) > Originating ACH Operator (Fed. Reserve Bank) > Receiving ACH Operator (Fed. Reserve Bank >
Receiving Depository Financial Institution (RDFI) > Receiver

C.Types of ACH Transactions NACHA 14.1.26

1. Debit Entry originator orders the withdrawal of $$ from a transaction or general ledger account of the receiver 2. Credit Entry originator orders the transfer of $$ to the account of a receiver. C NOTE For all entries except RCK entries, each debit entry shall be considered an item within the meaning of UCC Art. 4 and that Article shall apply to such entries except where the application is inconsistent with these rules, in which case these rules shall control. D. Stop Payment

E.Debit Entry NACHA 8.4 Receiver may stop the payment of a debit entry initiated or to be initiated to a Consumer Account of the Receiver by providing either verbal or written
notification at least three banking days before the scheduled date of the transfer. NOTE an RDFI may (at its option) honor a stop payment received from the customer fewer than 3 days before the account is scheduled to be debited and if it does it is released from any liability for honoring the request. NOTE banking day under the NACHA rules is any day the DFI is open (NACHA 14.1.14).

F.Credit Entry NACHA 8.1 Except as allowed by sections 2.4 (Reversing Files), 2.5 (Reversing Entries), and 2.6 (Reclamation Entries), neither an Originator nor an ODFI has the right to
recall an entry of file, to require the return of or adjustment to an entry, or to stop the payment or posting of an entry. EXCEPTIONS:

a. NACHA Rule 2.5.1 An Originator may initiate an reversing entry to correct an erroneous credit or debit entrydefined as an entry that (1) is a duplicate of entry previously initiated
by the Originator or ODFI; (2) orders payment to or from a Receiver not intended to be credited or debited by the Originator; or (3) orders payment in a dollar amount different than what was intended by the Originator

G.Errors/Unauthorized Use in Consumer ACH transactions EFTA applies to ACH consumer transactions, so 15 U.S.C. 1693 governs resolution of unauthorized use and errors (e.g. 10 d days to provide provisional re-credit upon notice of an error under 1693(f)(c); see above).
Accompanying NACHA Rule - NACHA 8.6.1 For all entries to a consumer account except [3 types], an RDFI must promptly credit the amount of a debit entry to a Consumer Account of a receiver if w/in 15 days of the RDFI sending or making a bank statement available to the receiver, the receiver delivers a written affidavit to the RDFI stating that the debit entry was not authorized.

TEL Entry like a telephone check transaction, but uses the ACH system and is therefore governed by NACHA and EFTA. RDFIs Recourse/Warranty Claim NACHA 2.2.1 each ODFI sending an entry warrants to each RDFI, ACH Operator and Association thatExcept in [cases of certain exceptional entries like destroyed or re-presented checks], each entry transmitted by the ODFI to an ACH Operator is in accordance with proper authorization provided by the Originator and the Receiver (2.2.2.1). Wire Funds Transfer System

A.Applicable Law: UCC Art. 4A; NOTE 4A only applies to credit transactions; 4A does not apply to consumer transactions covered by the EFTA B.Funds transfer means the series of transactions, beginning with the originator's payment order, made for the purpose of making payment to the beneficiary of the orderA funds transfer is c completed by acceptance by the beneficiary's bank of a payment order for the benefit of the beneficiary of the originator's payment order (UCC 4A-104(a)).
Parties: Originator > Originators Bank > Intermediary Bank > Beneficiarys Bank > Beneficiary

C.Payment Order means an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount
of money to a beneficiary if: (i) the instruction does not state a condition to payment to the beneficiary other than time of payment, (ii) the receiving bank is to be reimbursed by debiting an account of, or otherwise receiving payment from, the sender, and (iii) the instruction is transmitted by the sender directly to the receiving bank or to an agent, funds-transfer system, or communication system for transmittal to the receiving bank (UCC 4A-103(a)(1)).

D.Acceptance 4A-209(b)a beneficiary's bank accepts a payment order at the earliest of the following times: (1) when the bank pays the beneficiary or notifies the beneficiary of receipt of
the order or that the account has been credit; (2) when bank receives payment of the entire amount of the senders order; or (3) next funds-transfer business day following payment date of t the order if the sender's order is fully covered by a withdrawable credit balance in an authorized account of the sender or the bank has otherwise received full payment from the sender NOTE under 4A-406 payment is made upon acceptance and if payment is being made to satisfy an obligation, that obligation is discharged upon acceptance

NOTE If Fedwire is used to make a funds-transfer, it is deemed accepted when the Federal Reserve Bank receives the order (4A-209 Cmt. 6 & 12 C.F.R. 210.29)

E.Consequence of Acceptance:
1 Beneficiary Bank is obligated to Pay Beneficiary and is liable for consequential damages if it refuses to pay (4A-404(a)). 2 acceptance of the order by the bank obliges the sender to pay the bank the amount of the order, but payment is not due until the payment date of the order (4A-404(b)).

H.Rejection 4A-210(a)A payment order is rejected by the receiving bank by a notice of rejection transmitted to the sender orally, electronically, or in writingproper rejection prevents
acceptance and consequences thereof

I. Cancellation & Modification 4A-211(b)a communication by the sender cancelling or amending a payment order is effective to cancel or amend the order if notice of the communication
is received at a time and in a manner affording the receiving bank a reasonable opportunity to act on the communication before acceptance. J. Errors by the Originator/Sender Bank Failure to Send a Payment Order if bank fails to execute a payment order on the execution date where there is sufficient funds to cover the order and does not send notice of rejection, then the bank is obliged to pay interest at the federal funds rate each day it is not sent or cancelled (4A-210(b)).

Sending a Payment Order before the Execution Date HYPO: customer sends a payment order to its bank on Monday w/ an execution date of Friday. Bank sends the payment order on Monday by mistake. Customer cancels the order on Wed. Analysis: acceptance cannot occur before the execution date (4A-209(d)) and therefore cancellation was effective under 4A211 and therefore bank must re-credit customers account under 4A-402(d) If the sender of a payment order pays the order and was not obliged to pay all or part of the amount paid, the bank receiving payment is obliged to refund payment to the extent the sender was not obliged to pay. Except as provided in Sections 4A-204 and 4A-304, interest is payable on the refundable amount from the date of payment. K. Other Funds-Transfer Errors Misdescription of Beneficiary HYPO: Payment Order correctly identifies the beneficiary by name but lists the wrong acct#. Under 4-407(c) the sender is not obligated to pay UNLESS the bank provided notice that it can pay on the basis of an identifying or bank acct# even if it identifies a person different from the named beneficiary. IF notice was properly provided, then the customer must rely on the law of mistake and restitution described in 4A-407(d) to get the $ back. A. NOTE if beneficiary bank notices the discrepancy and the correct person does not receive the funds, then the transaction is deemed to have no beneficiaryeffectively cancelling the transaction (4A-407(b)(2)).

Unauthorized Order or Mistake (Duplicate Order, Wrong Person, or Too Much $$) Customer must rely on Exception to Cancellation/Modification rule described in: 4A-211(c)(2)If payment order is accepted by beneficiary's bank, cancellation/amendment is not effective UNLESS (1) the order was unauthorized or (2) was a mistake that resulted in (i) a duplicate payment order being sent, (ii) payment to a beneficiary not entitled to receive payment from the originator, or (iii) payment in an amount greater than the amount the beneficiary was entitled to receive from the originator. If the payment order is canceled or amended, the beneficiary's bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution. NOTE the beneficiary bank must agree to the amendment/cancellation. A. Beneficiary Bank agrees to refund the $$, then it can recover from the beneficiary based on the law of mistake and restitution (4A-211(c)(2)) B. If beneficiary Bank refuses to refund the $$, then the Originating Bank can recover from beneficiary based on the law of mistake and restitution (4A-303(a)).

C.In the case of an overpayment, where the law of mistake and restitution applies, if additional monies are owed to the beneficiary above the intended payment, then he/she is entitled to
keep the funds (Banque Worms case). In that case Originating Bank can rely on subrogation to stand in the shoes of the beneficiary in order not to have to re-credit its customer for the excess amount.

D.If the mistake is b/c the sender completed the payment order incorrectly, then he/she bears the lossUCC 4A-402(b) obligates the sender to pay any payment order that the
receiving bank executes as instructed. In this case, sender must rely on law of mistake and restitution to recover any funds the beneficiary was not entitled to receive.

E.Bank Statement Rule UCC 4A-505 precludes the originator from challenging any debit from its account for a wire-transfer order unless the originator challenges the transaction
within one year of the date that the originator received notice of the transaction from the originators bank. ALSO, under the 90-Day Rule [UCC 4A-304] customer must notify bank w/in 90 days of receipt of notice of the erroneous wire-transfer in order to have a claim for interest on the erroneous wire-transfer.

F.Consequential Damages a customer is entitled to consequential damages for an erroneous wire-transfer only if provided for in the bank agreement (4A-305(c)).

NOTE the way around this would be to bring a wrongful dishonor claim on bounced checks resulting from lack of funds due to erroneous wire transfer, which does allow recovery of consequential d damages. Fraud A. Security Procedures if [1] the bank and customer agree on a security procedure, [2] the procedure is commercially reasonable AND [3] it was followed, then the bank is not liable for unauthorized transfers (4A-202(b)). NOTE Comparison of a signature on a payment order or communication with an authorized specimen signature of the customer is not by itself a security procedure (see 4A-201 for definition of security procedure).

EXCEPTION: 4A-203(a)(2)The receiving bank is not entitled to enforce or retain payment of the payment order if the customer proves that the order was not caused, directly or indirectly, by a person (i) entrusted at any time with duties to act for the customer with respect to payment orders or the security procedure, or (ii) who obtained access to transmitting facilities of the customer or who obtained, from a source controlled by the customer and without authority of the receiving bank, information facilitating breach of the security procedure, regardless of how the information was obtained or whether the customer was at fault. Information includes any access device, computer software, or the like.

3 System Failure Doomsday Rule 4A-405 Cmt. 4 in the event of multiple bank failures that thwarted the CHIPS loss-sharing rule, then all payment orders made over the system
would be cancelled under the CHIPS rule. Thus, no bank would receive settlement, whether or not a failed bank was involved in a particular funds transfer. Guarantor/Surety A. Applicable Law: UCC Art. 3 applies to accommodation parties; CL of suretyship applies to guarantors/sureties not meeting the definition of an accommodation party.

B.Accommodation Party UCC 3-419 (a) a party who signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for
the instrument(b) An accommodation party may sign the instrument as maker, drawer, acceptor, or indorser and, subject to subsection (d), is obliged to pay the instrument in the capacity in which the accommodation party signs(c) A person signing an instrument is presumed to be an accommodation party and there is notice that the instrument is signed for accommodation if the signature is an anomalous indorsement or is accompanied by words indicating that the signer is acting as surety or guarantor with respect to the obligation of another party to the instrument.

B.1.Signs the Instrument must sign the instrument to be an accommodation party; a separate guaranty agreement will be governed by CL of suretyship. B.2.Anomalous indorsement means an indorsement made by a person who is not the holder of the instrument (3-205(d)). Presumed to be an accommodation party. B.3.Guarantor of Collection v. Payment UCC 3-419 (d) If the signature of a party to an instrument is accompanied by words indicating unambiguously that the party is
guaranteeing collection rather than payment, the signer is obliged to pay the amount due on the instrument to a person entitled to enforce the instrument only if (i) execution of judgment against the other party has been returned unsatisfied, (ii) the other party is insolvent or in an insolvency proceeding, (iii) the other party cannot be served with process, or(iv) it is otherwise apparent that payment cannot be obtained from the other party(e) otherwise Signer is obligated to pay without prior resort to the accommodated party by the person entitled to enforce the instrument.

B.4.Endorsers Obligation to Pay UCC 3-415(a)Subject to subsections (b), (c), (d), (e) and to Section 3-419(d), if an instrument is dishonored, an indorser is obliged to pay the
amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed, or (ii) if the indorser indorsed an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. The obligation of the indorser is owed to a person entitled to enforce the instrument or to a subsequent indorser who paid the instrument under this section.

B.5.Right of Reimbursement UCC 3-419(f) An accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce
t the instrument against the accommodated party. HYPO: Mom obtains loan and gives proceeds to Daughter; D endorses the back of the instrument (anomalous endorser); D refuses to pay when the note comes due. As executed M is the maker (accommodated party) and D is the accommodation party. Can M force D to pay? UCC 3-419(f) allows M to challenge Ds accommodation party status so that M can be treated as accommodation party and D as accommodated party and M can sue for reimbursement. C. Tender of Payment C.1.Primary Obligor Offers to Pay UCC 3-603(c)If tender of payment of an amount due on an instrument is made to a person entitled to enforce the instrument, the obligation of the obligor to pay interest after the due date on the amount tendered is discharged.

C.2.Surety/Guarantor Offers to Pay UCC 3-603(b)If tender of payment of an obligation to pay an instrument is made to a person entitled to enforce the instrument and the tender
is refused, there is discharge, to the extent of the amount of the tender, of the obligation of an indorser or accommodation party having a right of recourse with respect to the obligation to which the tender relates. D. Protections for Guarantors

D.1.Discharge of Secondary Obligors An accommodation party is a secondary obligor] and UCC 3-605(a) applies as follows:
U UCC 3-605 does not apply when the guarantors obligation arises from elsewhere than from signing a negotiable instrument. A creditors release of the debtor that is silent as to the guarantor releases the guarantor completely.

A creditors release of the debtor that preserves only the creditors rights against the guarantor (and not the guarantors rights against the debtor) releases the guarantor to the extent t that the guarantor could have recovered reimbursement(though the guarantor does not actually have such a right). A creditors release of the debtor that expressly preserves the guarantors right to recover from the debtor does not release the guarantor at all. 1 Modifications 3-605(c) if PETE an instrument agrees, w/ or w/o consideration to a modification(2) the secondary obligor is discharged from any unperformed portion of its obligation to the extent that the modification would otherwise cause the secondary obligor a loss; (3) to the extend not released under (2), secondary obligor may satisfy its obligation as if the modification had not occurred...