UCC Section 3: Everything You Need to Know
UCC Section 3 is a set of laws that govern the transfer of an instrument.3 min read
UCC Section 3 is a set of laws that govern the transfer of an instrument. It sets forth the rights and obligations of the transferor and transferee, as well as the rules that apply to different types of transfer.
Overview of UCC Article 3
UCC Article 3 pertains to negotiable instruments. It states that a person who acquires a negotiable instrument through delivery and any required indorsement will become the holder of the instrument. In the event that the holder does not know any of the obligations of a transferor of the instrument, he or she is referred to as a “holder-in-due-course.” A holder-in-due-course has the right to enforce the instrument and receive payment without having to take into consideration any past transferor's defenses against enforcement.
Free transferability of interests is the fundamental quality of negotiable instruments that separates them from a paper that promises to pay the specified amount of money. Since it makes negotiable instruments very important, it is an essential part of the payment system that supports the economy.
Without bank accounts and checks, and only cash, it is not easy or safe to contract business. Most forms of business cannot function properly without negotiable instruments. For instance, promissory notes are essential to every real estate transaction. The commercial paper market will not exist without negotiable instruments. By facilitating payment and credit-granting, they make economic activity possible.
To ease bad case law regarding bankruptcies, an amendment clarifies that someone who has directly or indirectly obtained ownership of an instrument from a person has the right to enforce it after losing possession. It helps the FDIC and other entities participating in transactions that involve pooled instruments solve a problem.
An amendment clarifies that payment of an instrument will be discharged to the individual identified as the party with the authority to enforce the instrument, even though the instrument has been transferred to someone else who currently has the authority to enforce, until notification of the transfer is given to the person who is required to pay.
According to the existing law, in the event that a borrower transfers a loan from one bank to another and makes a payment to the first bank, he or she may be required to pay the same amount to the second bank. This counts even if the payment is received by the first bank, if the second bank is a holder-in-due-course.
This situation will not arise with the amendment to UCC Section 3-602. The second bank will be deemed to have received notification of the payment to the first bank in the event that the borrower makes the payment before he or she was adequately notified of the transfer of rights in accordance with the negotiable note.
Telephonically Generated Checks
A new phenomenon is checks that are generated telephonically, meaning that consumers authorize the issuance of checks in their names over the phone when paying their obligations. Both Articles 3 and 4 include general warranties of transfer that facilitate the process of transferring negotiable instruments, specifically checks. However, warranties that apply to remotely generated checks do not exist. The bank or customer that transfers the check for payment is the warrantor and affirms that the check is authorized for the amount it shows.
Rules of Surety
Rules of surety have been updated to comply with the recent Restatement of Suretyship. The purpose of a surety is to guarantee or assume payment. Examples of sureties in laws pertaining to negotiable instruments include indorsers and “accommodation parties.” These parties assume payment obligations by signing negotiable instruments likely to be affected by discharge other than payment to the people who may enforce these instruments.
Articles 3 and 4 seek to achieve two things, including:
- Identifying what impact such a discharge can have on the obligations of the surety.
- Determining when those obligations will be discharged.
Generally, old Article 3 discharged indorsers and accommodation parties' obligations to the extent that the instrument's maker or drawer was discharged, while keeping any right of recourse for losses the indorsers or accommodation parties may suffer against the maker or drawer of the instrument.
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