Am Jur 2d Bills and Notes

BILLS AND NOTES
by
Anne M.H. Foley, J.D., John R. Kennel, J.D., Jane E. Lehman,J.D., Joan C. McKenna,
J.D., and Anne E. Melley, J.D., of the staff of National Legal Research Group, Inc.
TOPIC SCOPE
Scope of Topic:
This article covers those contracts known as bills and notes for the payment of money,
whether negotiable or nonnegotiable, and negotiable instruments from inception to
discharge, and the rights and obligations of various parties to such instruments.
Federal Aspects:
This article discusses the D'Oench, Duhme doctrine, which bars certain defenses by the
Copyright 1998, West Group

maker of a note against the Federal Deposit Insurance Corporation (FDIC) and its
assignees. Also covered herein is the statutory authority of the Secretary of the United
States Treasury to issue checks and other drafts on public money in the Treasury. See
"Federal Legislation," below, for USCA citations.
Treated Elsewhere:
Accord and satisfaction, giving of note by debtor as adequate to establish, see 1 Am Jur
2d, Accord and Satisfaction 38 , 39
Alteration of commercial paper, see 4 Am Jur 2d, Alteration of Instruments
Attachment and garnishment of negotiable instruments, see 6Am Jur 2d, Attachment and
Garnishment 149-158
Bankruptcy, creditor's presentation by creditor of negotiable instrument, and giving of
notice of dishonor of such instrument, notwithstanding automatic stay, see 9A Am Jur 2d,
Bankruptcy 1471
Banks, powers and duties of in connection with instruments for payment of money, see
10 Am Jur 2d, Banks and Financial Institutions 888 et seq.
Choice of law by parties to govern transaction that is within the scope of the Uniform
Commercial Code, see 15A Am Jur 2d, Commercial Code 11
Conflict of law relating to transaction that is within the scope of the Uniform Commercial
Code, see 15A Am Jur 2d, Commercial Code 11
Conversion of commercial paper, see 18 Am Jur 2d, Conversion
Corporate stock, bills or notes as consideration for issuance of, see 18A Am Jur 2d,
Corporations 502 , 503
Decedent's estate, right to collect money due under note as asset of, see 31 Am Jur 2d,
Executors and Administrators 507
Electronic Fund Transfer Act, see 17 Am Jur 2d, Consumer and Borrower Protection
226-240
Embezzlement, bills or notes as property subject to, see 26Am Jur 2d, Embezzlement
10
Execution upon promissory note, see 30 Am Jur 2d, Executions and Enforcement of
Judgments 156 , 253
False pretenses in obtaining bill or note, see 32 Am Jur 2d, False Pretenses 40
Gifts of bills and notes, see 38 Am Jur 2d Gifts 54-69
Larceny, bills or notes as subject of, see 50 Am Jur 2d, Larceny 78
Money, generally, see 53A Am Jur 2d, Money
Rent, notes in payment of, see 49 Am Jur Landlord and Tenant 692, 695, 697, 722
Truth in Lending Act, see 17 Am Jur 2d, Consumer and Borrower Protection 1-168
Uniform Consumer Credit Code, see 17 Am Jur 2d, Consumer and Borrower Protection
306 et seq
Wills, construction or interpretation of term "notes" as used in, see 80 Am Jur 2d, Wills
1246
RESEARCH REFERENCES
Text References:
1 Anderson, Uniform Commercial Code 3d 1-101:2, 1-102:36, 1-106:3, 1-106:5,
1-106:11, 1-201:265, 1-201:266, 1-201:277, 1-201:9; 1A Anderson, Uniform
Commercial Code 1-208:113; 5, 5A, 6 Anderson, Uniform Commercial Code 3d
3-101:1 et seq.; 6A Anderson, Uniform Commercial Code 3d [Rev] 3-101:1 et seq.; 7
Anderson, Uniform Commercial Code 3d 4-401:4, 4-401:7

Bailey & Hagedorn, Brady on Bank Checks (7th ed) paras 6.2-6.5, 7.21, 8.3, 9.15, 9.16,
9.8, 9.9, 27.1, 28.1, 28.3
Annotation References:
ALR Digest: Alteration of Instruments; Bills and Notes; Contribution; Conversion;
Corporations; Duress; Estoppel and Waiver; Evidence; Forgery; Fraud and Deceit;
Guaranty; Limitation of Actions; Lost Instruments; Parties; Partnership; Payment;
Pleading; Principal and Agent; Principal and Surety; Signature; Trial; Uniform
Commercial Code
ALR Index: Acceleration of Maturity; Acceptance; Accommodation Party or Paper;
Accord and Satisfaction; Account Stated; Agents and Agency; Annotations, Acceptance,
Alteration of Instruments; Assignments; Banks and Banking; Bills and Notes;
Cancellation or Rescission; Certificates of Deposit; Checks and Drafts; Collecting Bank;
Consideration; Conversion; Counterclaim and Setoff; Delivery; Discharge or Release;
Disclaimers; Dishonor; Duress and Coercion; Estoppel and Waiver; Fraud and Deceit;
Good Faith; Holder in Due Course; Indorsement; Lost or Destroyed Instruments;
Maturity; Notice of Dishonor; Parol Evidence; Parties; Payment; Pleadings; Presentation
or Presentment; Presumptions and Burden of Proof; Principal and Surety; Protest;
Signature; Uniform Commercial Code; Warranties
Practice References:
4A Am Jur Pl & Pr Forms (Rev), Banks ; 5 Am Jur Pl & Pr Forms (Rev), Bills and
Notes ; 6 Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 1General
Provisions; 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments; 6 Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 4Bank
Deposits and Collections
3B Am Jur Legal Forms 2d, Bills and Notes; 9A Am Jur Legal Forms 2d, Guaranty; 18
Am Jur Legal Forms 2d, Uniform Commercial Code: Article 1General Provisions; 19
Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable Instrument
1 Am Jur Proof of Facts 479, Alteration of Instruments; 9 Am Jur Proof of Facts 573,
Promissory Notes and Other Negoitable Instruments; 17 Am Jur Proof of Facts 507,
Questioned Handwriting; 7 Am Jur POF2d 283, Status as Accommodation Party; 7 Am
Jur POF2d 675, Ratification of Forged or Unauthorized Signature; 8 Am Jur POF2d 193,
Personal Liability of Corporate Officer on Promissory Note; 11 Am Jur POF2d 23,
Promissory Note Executed Under Economic Duress or Business Compulsion; 13 Am Jur
POF2d 347, Bank's Failure to Use Ordinary Care in Detecting Forged or Altered Checks;
14 Am Jur POF2d 693, Negligence Contributing to Alteration or Unauthorized Signature;
25 Am Jur POF2d 165, Bank's Liability for Payment of Check or Withdrawal on Less
Than Required Number of Signatures; 35 Am Jur POF2d 147, Foundation for Admission
of Secondary Evidence
Federal Legislation:
12 USCA 1823(e) (codification, at least in part, of the D'Oench, Duhme doctrine,
which bars certain defenses by a maker of a note against the Federal Deposit Insurance
Corporation or its assignees)
31 USCA 337 (authority of the Secretary of the United States Treasury to issue checks
and other drafts on public money in the Treasury)
Insta-Cite(R):
Cases and annotations referred to herein can be further researched through the
Insta-Cite(R) citation verification service. Use Insta-Cite to check citations for Bluebook

styling, parallel references, prior and later history, and annotation references.
I. INTRODUCTION [1-51]
A. In General; Origin and Development of the Law; Scope of UCC Article 3;

Construction [1-19]
Research References
12 USCA 4007
UCC 1-102 through 1-106, 1-108, 1-109, 1-201, 1-204; UCC 3-101 through 3-104,
3-122, 3-802, 3-805 [1952]; UCC 3-101 through 3-105, 3-310 [1990 Rev]; UCC
4-104, 4-105 [1952]; UCC 4-104 [1990]; UCC 10-101 through 10-104
ALR Digests: Bills and Notes 1-4; Duress 1-7; Estoppel and Waiver 33, 58-69;
Fraud and Deceit 1 et seq.; Principal and Agent 36, 59, 108; Uniform Commercial
Code 1-3
ALR Index: Agents and Agency; Bills and Notes; Checks and Drafts; Duress and
Coercion; Estoppel and Waiver; Fraud and Deceit; Uniform Commercial Code
6 Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 1General Provisions 1:26
18 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 1General Provisions
253.11-253:17, 253:62-253:76; 19 Am Jur Legal Forms 2d, Uniform Commercial
Code: Article 3Negotiable Instruments 253:2211-253:2263
1 Anderson, Uniform Commercial Code 3d 1-101:2, 1-102:36
1. Definitions; Nature of Commercial Paper [1, 2]
1 Generally
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Go to Parallel Reference Table
Bills and notes in their various forms are contracts, and may be negotiable or
nonnegotiable. 1 "Bills and notes" are commonly defined as commercial paper or
negotiable or nonnegotiable instruments, 2 and, in turn, "commercial paper" is
commonly defined as negotiable instruments, drafts, checks, certificates of deposit, and
promissory notes. 3
Commercial paper is governed by the provisions of Article 3 of the Uniform Commercial

Code. 4
Footnotes
Footnote 1. 2.

Footnote 2. Ballentine's Law Dictionary 3d.
Forms: Terms used in commercial paper; Types of negotiable instruments. 19 Am Jur

Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable Instruments
253:2211-253:2263.
Footnote 4. UCC 3-101 to 3-805 [1952]; UCC 3-101 to 3-605 [1990 Rev].
For a general discussion of the Uniform Commercial Code and Article 3, see 5, 13.
As to the relationship of Article 3 to other articles of the Uniform Commercial Code, see
17.
2 Contractual nature of negotiable instruments
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Bills and notes, or, in modern terminology, drafts, checks, notes, and certificates of
deposit, are contracts; 5 accordingly, the fundamental rules governing contract law 6
are applicable to the determination of the legal questions which arise over such
instruments. 7
An instrument may be negotiable, 8 and, while not removed from the law relating to
contracts, 9 such an instrument constitutes a commercial specialty. 10 A negotiable
instrument is distinguished from an ordinary contract 11 by incidents having their
foundation in the law merchant, 12 which in most jurisdictions has been in large part
codified by statute, first in the Uniform Negotiable Instruments Act 13 and subsequently
in the Uniform Commercial Code. 14
Between ordinary contracts and negotiable instruments there is the difference between
"assignability" and "negotiability." 15 Also, a negotiable instrument itself imports a
consideration under the law merchant and under the Uniform Commercial Code and,
thus, is subject to special rules as to lack of necessity for the existence or proof of
consideration. 16
Nonnegotiable instruments are governed by the rules of law applicable to ordinary

contracts, 17 and not by Article 3 of the Code. 18 However, the principles relating to
negotiability may apply to nonnegotiable instruments by analogy. 19
Footnotes
Footnote 5. Swift & Co. v Bankers Trust Co., 280 NY 135, 19 NE2d 992 (ovrld on other
grounds as stated in American Home Assurance Co. v Employers Mut. of Wausau (1st
Dept) 77 App Div 2d 421, 434 NYS2d 7).
Footnote 6. 17A Am Jur 2d, Contracts 1 et seq.
Footnote 7. Coral Gables, Inc. v Mayer, 241 App Div 340, 271 NYS 662.
As between the immediate parties, a negotiable instrument is merely a contract. Official

Comment 3 to UCC 3-119 [1952].
If an acceleration term in an instrument is uncertain it may fail on ordinary contract

principles, but the instrument remains negotiable and is payable at the defined time.
Footnote 8. 23.
Footnote 9. Beadall v Moore, 199 App Div 531, 191 NYS 826.
Footnote 10. Weissman v Banque De Bruxelles, 254 NY 488, 173 NE 835.
Footnote 11. Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988; Allison Hill
Trust Co. v Sarandrea, 236 App Div 189, 258 NYS 299.
Footnote 12. 3.
Footnote 13. 4.
Footnote 14. 5 et seq.
Footnote 15. 21.
Footnote 16. As to consideration, generally, see 141 et seq.
As to want, failure, or illegality of consideration as a defense, see 557 et seq.
As to the burden of proof regarding want, failure, or illegality of consideration, see

663.
Footnote 17. Edgar v Haines, 109 Ohio St 159, 141 NE 837, 38 ALR 795.
Footnote 18. UCC 3-102(a) [1990 Rev].
Footnote 19. Official Comment to UCC 3-805 [1952]; Official Comment 2 to UCC
3-104 [1990 Rev].
Nonnegotiable instruments are governed by many of the same principles which apply to
negotiable instruments. Rubel v Honig, 178 App Div 53, 164 NYS 219.
2. Origin and Development of Law [3-12]

a. In General [3, 4]
3 Generally; the law merchant
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The law merchant is the law which confers negotiability on commercial paper and
governs negotiable instruments, 20 More specifically, it is the prestatutory or
nonstatutory law 21 which governed bills of exchange 22 and promissory notes, 23
namely the lex mercatoria or the custom of merchants 24 and is the basis for the modern
statutes on the subject, the Uniform Negotiable Instruments Act, and the Uniform
Commercial Code, which, in a large measure but not entirely, provide the law governing
commercial paper. 25 Bills and notes were developed under the law merchant as
convenient instrumentalities of trade and commerce, 26 and it was the necessities of
such trade and commerce which impressed upon them the unique quality and the
consequences of negotiability. 27 They were intended as substitutes for money in
commercial transactions and, by the understanding and usage of those employing them,
were closely assimilated to money. 28
Originally a separate and peculiar body of law, the law merchant became a part of the
common law, 29 thereby creating exceptions to the general common-law rules 30
prohibiting the assignment of chooses in action 31 and governing rights in lost or stolen
property. 32
Unless displaced by the particular provisions of the Uniform Commercial Code, the
principles of law and equity, including the law merchant and the law relative to capacity
to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion,
mistake, bankruptcy, or other validating or invalidating clause, supplement the Code
provisions. 33
Comment: The listing given in Article 1 of the bodies of law that continue to be
applicable except insofar as they are explicitly displaced by the Code is merely
illustrative since no listing could be exhaustive. Nor is the fact that in some sections
particular circumstances have led to express reference to other fields of law intended at
any time to suggest the negation of the general application of the principles set forth in
Article 1 regarding the continued applicability of other bodies of law. 34
Footnotes
Footnote 20. Persky v Bank of America Nat'l Ass'n, 261 NY 212, 185 NE 77.
Footnote 21. Hibbs v Brown, 190 NY 167, 82 NE 1108; Rose Check Cashing Service,
Inc. v Chemical Bank New York Trust Co., 43 Misc 2d 679, 252 NYS2d 100.
Footnote 22. Commercial Bank of Kentucky v Varnum, 49 NY 269.

Footnote 25. 4.
When new forms of instruments develop, the courts are called upon to fix such forms into
the law merchant and the statutes governing negotiable instruments. Rose Check
Cashing Service, Inc. v Chemical Bank New York Trust Co., 43 Misc 2d 679, 252
NYS2d 100.
Footnote 27. Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988; In re
Goodchild, 160 Misc 738, 290 NYS 683.
Footnote 28. Akron Auto Finance Co. v Stonebraker (Summit Co) 66 Ohio App 507, 20
Ohio Ops 521, 35 NE2d 585.
Footnote 29. Hibbs v Brown, 190 NY 167, 82 NE 1108.
Footnote 30. Chauncey v Arnold, 24 NY 330.
Footnote 31. Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988; Allison Hill
Trust Co. v Sarandrea, 236 App Div 189, 258 NYS 299.
Footnote 32. Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988; In re
Goodchild, 160 Misc 738, 290 NYS 683.
Footnote 33. UCC 1-103.
UCC 1-103 is a detailed restatement of the principle that the general law applies when a
case is not covered by statute. Roy Supply, Inc. v Wells Fargo Bank (3rd Dist) 39 Cal
App 4th 1051, 46 Cal Rptr 2d 309, 95 CDOS 8401, 95 Daily Journal DAR 14450, 27
UCCRS2d 1363.
Footnote 34. Official Comment 3 to UCC 1-103.
4 Uniform Negotiable Instruments Act
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The Uniform Commercial Code supplanted the Uniform Negotiable Instruments Act,
which was promulgated in 1896 as the first "Uniform Law" by the National Conference
of Commissioners on Uniform State Laws 35 and was in force in all of the states of the
United States until superseded. 36 The Act was largely a codification of the rules of the
law merchant, or the common-law rules relating to negotiable instruments, which
previously were in force and effect by virtue of judicial pronouncement or legislative
enactment. 37 Its purpose was to establish certain fixed rules governing negotiable
instruments and to bring about a uniform system of laws on the subject, and thereby do
away with the confusion that had existed in the law of commercial paper. 38
The Act did not apply to or affect the rights or liabilities of persons on paper that was not,
within its meaning, negotiable; but if it was a negotiable instrument within the meaning
of the Act, then, in the absence of any special statutory provisions governing such an
instrument, the rights and liabilities of the parties to the instrument were fixed and
determined by the provisions of the Act alone. 39
Over the course of its more than 50-year history, the Act became obsolete because of vast
changes in commercial practices relating to the handling of negotiable instruments, and
the need for revision of this important statute was felt for some years before the drafting
of the Uniform Commercial Code was undertaken. 40
Footnotes
Footnote 35. Strother v Lynchburg Trust & Sav. Bank, 155 Va 826, 156 SE 426, 73
ALR 166.
Footnote 36. 5.
Footnote 37. President & Directors of Manhattan Co. v Morgan, 242 NY 38, 150 NE
594.
Footnote 38. Elyria Sav. & Banking Co. v Walker Bin Co., 92 Ohio St 406, 111 NE 147.
Footnote 39. George D. Harter Bank v Schrembs (Cuyahoga Co) 55 Ohio App 116, 8
Ohio Ops 378, 22 Ohio L Abs 621, 9 NE2d 154, motion overr.
Footnote 40. Official Comment to UCC 3-101 [1952].
b. The Uniform Commercial Code [5-12]
(1). In General [5-9]
5 Generally
View Entire Section

The Uniform Commercial Code has been enacted, at least in part, by every state in the
United States and by the District of Columbia and the Virgin Islands. 41 The Uniform
Commercial Code is arranged in 10 Articles; Article 1 contains general provisions,
Article 10 is the effective date and repealer article, and Articles 2 through 9 are each
concerned with a particular type of commercial activity. 42 The Code as a whole is
known and may be cited as the Uniform Commercial Code. 43
The Uniform Commercial Code as proposed by its sponsors, the American Law Institute
and the National Conference of Commissioners on Uniform State Laws, is accompanied
by extensive comments explanatory of and correlating the various Code provisions. 44
The Official Comments are not part of the Code in the sense that they are not enacted by
the state legislatures adopting the Code, 45 but the comments may be resorted to by the
courts as an aid in construction. 46
Footnotes
Footnote 41. 1 Anderson, Uniform Commercial Code 3d 1-101:2.
Footnote 42. 15A Am Jur 2d, Commercial Code 2.
Footnote 46. Appeal of Copeland (CA3 Del) 531 F2d 1195, 18 UCCRS 833; Brace v
United States (In re Brace) (BC WD Pa) 163 BR 274, 22 UCCRS2d 1184; National Sav.
& Trust Co. v Park Corp. (CA6 Ohio) 722 F2d 1303, 37 UCCRS 817, cert den 466 US
939, 80 L Ed 2d 464, 104 S Ct 1916; Yamaha Motor Corp. v Tri-City Motors & Sports,
Inc., 171 Mich App 260, 429 NW2d 871, 7 UCCRS2d 1190; Carlund Corp. v Crown Ctr.
Redevelopment (Mo App) 849 SW2d 647, 21 UCCRS2d 176; Gardner Zemke Co. v
Dunham Bush, Inc., 115 NM 260, 850 P2d 319, 20 UCCRS2d 842; B & W Glass v
Weather Shield Mfg. (Wyo) 829 P2d 809, 18 UCCRS2d 1, ans conformed to (CA10)
1992 US App LEXIS 13503.
6 Purpose of adoption; repeal of inconsistent laws
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The underlying purposes and policies of the Uniform Commercial Code are to simplify,
clarify, and modernize the law governing commercial transactions; to permit the
continued expansion of commercial practices through custom, usage, and agreement of
the parties; and to make uniform the law among the various jurisdictions. 47
The Code is intended to give a unified coverage of its subject matter; therefore, it is
provided, with certain specified exceptions, that all laws and parts of laws inconsistent
with the Code are repealed. 48 Included among the statutes expressly repealed by the
Code is the Uniform Negotiable Instruments Act. 49 Other statutes expressly repealed
by the Uniform Commercial Code are the Uniform Warehouse Receipts Act, the Uniform
Sales Act, the Uniform Bills of Lading Act, the Uniform Stock Transfer Act, the Uniform
Conditional Sales Act, the Uniform Trust Receipts Act. 50 The Code also repeals any
act regulating bank collections, bulk sales, chattel mortgages, conditional sales, and
assignment of accounts receivable, as well as factor's liens acts and farm storage or grain
or similar acts. 51
However, statutes of a regulatory nature, such as those governing interest and usury and
certain consumer financing transactions, are expressly saved from repeal. 52
Footnotes
Footnote 47. UCC 1-102(2).
The purpose of Article 3 was to modernize, clarify, and consolidate the provisions of the
Uniform Negotiable Instruments Act. Wood v Willman (Wyo) 423 P2d 82, 4 UCCRS
75.
7 Application where United States is a party
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If the United States is a party to an instrument, its rights and duties are governed by
federal common law in the absence of a specific federal statute or regulation. 53
Whether the federal common-law rule should follow the state rule is determined by a
three-pronged test. 54 In most instances, courts applying that test have shown a
willingness to adopt Uniform Commercial Code (UCC) rules in formulating federal
common law on the subject, 55 or have at least looked to the UCC for guidance. 56
Footnotes
Footnote 53. Clearfield Trust Co. v United States, 318 US 363, 87 L Ed 838, 63 S Ct
573 (not followed on other grounds by Powers v United States Postal Serv. (CA7 Ind)
671 F2d 1041) and (superseded by statute on other grounds as stated in Pennsylvania,
Dep't of Public Welfare v United States (CA3 Pa) 781 F2d 334) and (not followed on
other grounds by FDIC v Hulsey (CA10 Okla) 22 F3d 1472, 23 UCCRS2d 596) and
(among conflicting authorities on other grounds noted in United States v Administrative
Enters. (CA7 Ill) 46 F3d 670, 95-1 USTC 50083, 75 AFTR 2d 95-843).
Federal law applied to the question of whether the plaintiff bank could recover from
United States the amount of a check drawn on the bank payable to the Internal Revenue
Service, for which the bank gave its cashier's check in the mistaken belief that the
drawer's account contained sufficient funds to cover the check. First Nat'l Bank v United
States, 8 Cl Ct 774, 41 UCCRS 1583.
Federal law governed United States' suit against a bank to recover an overpayment on a
Treasury check issued by the Army. United States v Hibernia Nat'l Bank (CA5 La) 841
F2d 592, 5 UCCRS2d 1392, 96 ALR Fed 895, reh den, en banc (CA5 La) 847 F2d 840
and reh den, en banc (CA5 La) 847 F2d 840.
As to preemption by federal law, see 8.
Footnote 54. United States v Kimbell Foods, Inc., 440 US 715, 59 L Ed 2d 711, 99 S Ct
1448, 20 CBC 1, 26 UCCRS 1 (among conflicting authorities on other grounds noted in
United States v Pearson's E.F. & C., Inc. (SD Tex) 771 F Supp 810, 37 CCF 76231).
Footnote 55. Official Comment 4 to UCC 3-102 [1990 Rev].
Footnote 56. Federal Deposit Ins. Corp. v Blue Rock Shopping Center, Inc. (CA3 Del)
766 F2d 744, 41 UCCRS 1.
8 Preemption by federal or international law
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Although the terms of Article 3 of the Uniform Commercial Code apply to transactions
by federal reserve banks, federal preemption would make ineffective any such provision
that conflicts with federal law. 57 Consequently, the activities of the federal reserve
banks are governed by regulations of the Federal Reserve Board and by operating
circulars issued by the reserve banks themselves. 58 Thus, the Code expressly provides
that regulations of the Board of Governors of the Federal Reserve System and operating
circulars of the federal reserve banks supersede any inconsistent provision of Article 3 to
the extent of the inconsistency. 59
Federal statutes may also preempt Article 3; for example, the Expedited Funds
Availability Act 60 provides that the Act and the regulations issued pursuant to the Act
supersede any inconsistent provisions of the Uniform Commercial Code. 61
In 1989, the United Nations Commission on International Trade Law completed a

Convention on International Bills of Exchange and International Promissory Notes; if the
United States becomes a party to this convention, the convention will preempt state law
with respect to international bills and notes governed by the convention; thus, an
international bill of exchange or promissory note that meets the definition of "instrument"
in Article 3 will not be governed by that article if it is governed by the convention. 62
Footnotes
Footnote 59. UCC 3-102(c) [1990 Rev].
Footnote 60. 12 USCA 4001 et seq.
Footnote 61. 12 USCA 4007(b).
9 Effective date; retrospective application
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The Uniform Commercial Code provides that it will become effective at midnight on
December 31st following its enactment. 63
Observation: The majority of states have established different effective dates. 64

The Code applies to transactions entered into and events occurring after its effective date.
65
Transactions validly entered into before the effective date and the rights, duties, and
interests flowing from them remain valid thereafter and may be terminated, completed,
consummated, or enforced as required or permitted by any statute or other law amended
or repealed by the Code as though such repeal or amendment had not occurred. 66
The 1990 amendments 67 to Article 3 of the Code are not to be applied retroactively. 68
Thus, a note is governed by the version of Article 3 in force when the note was executed,
not a later version. 69 Nor, where the 1990 version of Article 3 does not contain a
provision comparable to one in the pre-1990 version, will the 1990 version be applied
retroactively to destroy rights arising under the provision in the pre-1990 version. 70
Caution: At least one court has held that to the extent the 1990 version of Article 3
seeks only to clarify the intent of the former version, its provisions may be applied
retroactively. 71

Footnotes
Footnote 64. Uniform Laws Annotated, Uniform Commercial Code, Table of

jurisdictions wherein code has been adopted.
Footnote 67. 13.
Footnote 68. In re Bahara (BC MD Pa) 191 BR 69; Title Ins. Co. v Comerica
Bank-California (6th Dist) 27 Cal App 4th 800, 32 Cal Rptr 2d 735, 94 CDOS 6325, 94
Daily Journal DAR 11493, 24 UCCRS2d 584.
Footnote 69. Qatar v First Am. Bank (ED Va) 880 F Supp 463, 26 UCCRS2d 284, later
proceeding (ED Va) 885 F Supp 849, 27 UCCRS2d 168; Bankers Trust v 236 Beltway
Inv. (ED Va) 865 F Supp 1186, 26 UCCRS2d 776; Ashland State Bank v Elkhorn
Racquetball, 246 Neb 411, 520 NW2d 189, 24 UCCRS2d 968.
Footnote 70. Smith v Haran (1st Dist) 273 Ill App 3d 866, 210 Ill Dec 191, 652 NE2d
1167, reh den (Jul 28, 1995) and app den 164 Ill 2d 583, 214 Ill Dec 332, 660 NE2d 1281
(referring to UCC 3-805 [1952]).
Footnote 71. Lassen v First Bank Eden Prairie (Minn App) 514 NW2d 831, 23
UCCRS2d 482, review den (Minn) 1994 Minn LEXIS 534.
(2). Variation of Effect of Code by Agreement of Parties [10-12]
10 Provisions for determining time
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Whenever the Uniform Commercial Code requires the taking of action within a
reasonable time, any time that is not manifestly unreasonable may be fixed by agreement.
72 Such agreement need not be part of the main agreement but may occur separately.
73
What is a reasonable time for taking any action depends on the nature, purpose, and
circumstances of such action, 74 including the course of dealing or usages of trade or
course of performance. 75
An action is taken "seasonably" when it is taken at or within the time agreed upon, or if
no time is agreed upon, at or within a reasonable time. 76
Footnotes
Forms: Time; contract provisions with respect to time for performance, time of the
essence, duration of agreement, future events as terminating the contract, and
suspension of performance. 18 Am Jur Legal Forms 2d, Uniform Commercial Code:
Article 1General Provisions 253:62-253:76.
11 Agreement to vary effect of statute
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The effect of provisions of the Uniform Commercial Code may be varied by agreement,
except as otherwise provided in the Code; but the obligations of good faith, diligence,
reasonableness, and care prescribed by the Code may not be disclaimed by agreement. 77
The parties may by agreement determine the standards by which the performance of such
obligations are to be measured, if such standards are not manifestly unreasonable. 78
The presence in certain code provisions of the words "unless otherwise agreed," or words
of similar import, does not imply that the effect of other provisions may not be varied by
agreement as described above. 79
Comment: The Code affirmatively states a "freedom of contract" principle under

which, except as otherwise provided, the effect of the Code provisions may be varied
by agreement. However, private parties cannot make an instrument negotiable within
the meaning of Article 3 of the Code, except as provided in the Code, nor can they
change the meaning of such terms as "bona fide purchaser," "holder in due course," or
"due negotiation," as used in the Code. 80
Footnotes

Forms: Variation by agreement. 18 Am Jur Legal Forms 2d, Uniform Commercial
Code: Article 1General Provisions 253:11-253:17.
As to what constitutes a negotiable instrument under the Code, see 23.
As to holders in due course, see 247 et seq.
12 Agreement to select law governing multistate transaction
View Entire Section

Generally, where a transaction bears a reasonable relation to a state which has enacted
the Uniform Commercial Code (UCC) and to another state or nation, the parties may
agree that the law of either state, or either the state or the nation, will govern their rights
and duties. 81 The chosen law must bear a reasonable relation to the transaction. 82
However, where one of certain enumerated Code provisions specifies the applicable law,
that provision controls, and a contrary agreement is effective only to the extent permitted
by law (including the conflict-of-laws rules) so specified. 83
Comment: Where a transaction has significant contacts with a state which has
enacted the UCC and also with other jurisdictions, the question of what relation is
"appropriate" is left to judicial decision. In deciding the question, the court is not
strictly bound by precedents established in other contexts. Thus, a conflict-of-laws
decision refusing to apply a purely local statute or rule of law to a particular multistate
transaction may not be valid precedent for refusal to apply the Code in an analogous
situation. Application of the Code in such circumstances may be justified by its
comprehensiveness, by the policy of uniformity, and by the fact that it is in large part a
reformulation and restatement of the law merchant and of the understanding of a
business community which transcends state and even national boundaries. In
particular, where a transaction is governed in large part by the Code, application of
another law to some detail of performance because of an accident of geography may
violate the commercial understanding of the parties. 84
Footnotes
Footnote 82. Davidson Oil Country Supply Co. v Klockner, Inc. (CA5 Tex) 908 F2d
1238, CCH Prod Liab Rep 12551, 30 Fed Rules Evid Serv 1230, 17 FR Serv 3d 473, 12

UCCRS2d 664, later proceeding (CA5 Tex) 908 F2d 1249 and corrected, reh den, in part
(CA5 Tex) 917 F2d 185; Cerami-Kote, Inc. v Energywave Corp., 116 Idaho 56, 773 P2d
1143; United Wholesale Liquor Co. v Brown-Forman Distillers Corp., 108 NM 467, 775
P2d 233, 9 UCCRS2d 18.
As to conflict-of-laws rules relating to contract rights, generally, see 16 Am Jur 2d,

Conflict of Laws 74-97.
3. Scope of UCC Article 3 [13-18]
13 Generally
View Entire Section

Article 3 of the Uniform Commercial Code, which replaced the Uniform Negotiable
Instruments Act, 85 is concerned with commercial paper. 86
The original version of Article 3 was first promulgated in 1952, and was revised in 1990;
several states have enacted a version of the 1990 revision. 87
The provisions of Article 3 under the pre-1990 version may be cited as "Uniform
Commercial CodeCommercial Paper," 88 and the provisions of Article 3 under the
1990 version may be cited as "Uniform Commercial CodeNegotiable Instruments." 89
While Article 3 deals with negotiable instruments, not all "negotiable" writings are
governed by it. 90 The Code permits variation of the effect of the Code by agreement,
91 in furtherance of its principle of freedom of contract. 92
Footnotes
Footnote 85. 4.
Footnote 86. UCC 3-101 through 3-805 [1952]; UCC 3-101 through 3-605 [1990
Rev].
As to preemption of Article 3 by federal or international law, see 8.
Footnote 87. UCC Rep Serv, State UCC Variations Binder, State Correlation Tables.
Law Reviews: Murray, Revised Articles 3 and 4 of the Uniform Commercial Code: A
Friendly Critique. 47 U Miami L Rev 337 (November 1992).
Garland, A new law of negotiable instruments: Revised Article 3 of the UCC. 109
Bank LJ 557 (November/December 1992).
Robertson, Report of the commercial code committee of the section of business law of
the State Bar of Texas on revised UCC Articles 3 and 4. 47 Baylor LR 425 (Spring
1995).
Littlefield, Articles 3, 4, and 4A (Uniform Commercial Code Survey). 49 Business

Lawyer 1937 (August 1994).
Norwood, An overview of revised articles three and four of the UCC. 97 Commercial
LJ 1 (Spring 1992).
Harrell & Miller, The new UCC Articles 3 and 4: Impact on banking operations. 47
Consum Fin LQ Rep 3:283 (Summer 1993).
Golden, Florida enacts revised Uniform Commercial Code Arts. 3 and 4. 67 Fla BJ
11:12 (1993).
Dolan, Changing commercial practices and the Uniform Commercial Code. 26 Loy
LR (LA) 579 (1993).
Lawrence, What would be wrong with a user-friendly Code?: The drafting of revised
Articles 3 and 4 of the Uniform Commercial Code. 26 Loy LR (LA) 659 (1993).
Del Duca, What the general practitioner needs to know about the new negotiable
instruments and bank deposits and collection amendments to the Uniform Commercial
Code. 64 Pa BAQ 70 (1993).
Bakey, New 1990 Uniform Commercial Code: Article 3, negotiable instruments, and
Article 4, bank deposits and collections. 29 Will LR 409 (1993).
Heatherman, Good faith in revised Article 3 of the Uniform Commercial Code: Any
change? Should there be? 29 Will LR 567 (1993).
Footnote 88. UCC 3-101 [1952].
Footnote 89. UCC 3-101 [1990 Rev].
Footnote 90. 14.
As to variation of effect of the UCC by agreement of the parties, see 12.
14 Definitions

View Entire Section
Article 3 of the Uniform Commercial Code contains a section setting forth the specific
definition of various terms used in Article 3, and these definitions apply unless the
context otherwise requires. 93 The term "instrument" as used in Article 3 means a
negotiable instrument. 94
Observation: The pre-1990 version of Article 3 provides that in other articles of the
Code, and as the context may require, the terms designating particular instruments, that
is, "draft," "check," "certificate of deposit," and "note," may refer to instruments which
are not negotiable within Article 3 as well as to instruments which are negotiable; 95
the 1990 version of Article 3 omits this provision.
Another provision of Article 3 provides a basic definition of "negotiability" by setting

forth the requirements which must be met if a writing is to be a negotiable instrument. 96
Other terms defined in Article 3 are
"issue," which means the first delivery of an instrument to a holder or a remitter. 97
"order," a direction to pay, which must be more than an authorization or request,

identifying the person to pay with reasonable certainty and addressed to one or more
persons jointly or in the alternative but not in succession. 98
"promise," which means an undertaking to pay which must be more than an

acknowledgment of an obligation. 99
"secondary party," which means a drawer or indorser. 1
Other definitions applicable to Article 3 are listed in the definitional section along with
the sections in Article 3 in which they appear. 2
The definitions of certain terms defined in Article 4 are applicable to Article 3. 3 These
definitions are:
"Bank" means a person engaged in the business of banking, including a savings bank,
savings and loan association, credit union, or trust company 4
"Banking day" means the part of a day in which a bank is open to the public for
carrying on substantially all of its banking functions 5
"Clearing house" means an association of banks or other payors regularly clearing items
6
"Collecting bank" refers to a bank, except the payor bank, handling an item for
collection 7
"Depositary bank" is the first bank to take an item even though it is also the payor bank,
unless the item is presented for immediate payment over the counter 8
"Documentary draft" means a draft to be presented for acceptance or payment if
specified documents, certificated securities or instructions for uncertificated securities, or
other certificates, statements, or the like are to be received by the drawee or other payor
before acceptance or payment of the draft 9
"Intermediary bank" is a bank, except the depositary or payor bank, to which an item is
transferred in the course of collection 10
"Item" means an instrument or a promise or order to pay money handled by a bank for
collection or payment but does not include a payment order governed by Article 4A or a
credit or debit card slip 11
"Payor bank" is a bank that is the drawee of a draft 12
"Suspends payments" means that a bank has been closed by order of the supervisory
authorities, that a public officer has been appointed to take it over, or that it ceases or
refuses to make payments in the ordinary course of business. 13
In addition, Article 1 contains general definitions and principles of construction and

interpretation 14 applicable throughout Article 3. 15
Footnotes
Footnote 93. UCC 3-102(1) [1952]; UCC 3-103(a) [1990 Rev].
Absent a contrary definition in Article 9, a definition contained in Article 3 controls the

meaning of terms used in Article 9. In re Cambridge Biotech Corp. (BC DC Mass) 178
BR 34, 26 BCD 976, 25 UCCRS2d 1076.
Footnote 94. UCC 3-102(1)(e) [1952]; UCC 3-104(b) [1990 Rev].
As to negotiable instruments generally, see 23.
Footnote 95. UCC 3-104(3) [1952].
As to negotiability generally, see 20.
Footnote 97. UCC 3-102(1)(a) [1952]; UCC 3-105(a) [1990 Rev].
Footnote 98. UCC 3-102(1)(b) [1952]; UCC 3-103(a)(6) [1990 Rev].
Footnote 99. UCC 3-102(1)(c) [1952]; UCC 103(a)(9) [1990 Rev].
Footnote 1. UCC 3-102(1)(d) [1952]; (omitted from 1990 version).
Footnote 2. UCC 3-102(2) [1952]; UCC 3-103(b) [1990 Rev].

Footnote 3. UCC 3-102(3) [1952]; UCC 3-103(c) [1990 Rev].
Footnote 4. UCC 4-105(1) [1990 Rev].
Footnote 5. UCC 4-104(1)(c) [1952]; UCC 4-104(a)(3) [1990 Rev].
Footnote 6. UCC 4-104(a)(d) [1952]; UCC 4-104(a)(4) [1990 Rev].
Footnote 7. UCC 4-105(d) [1952]; UCC 4-105(5) [1990 Rev].
Footnote 8. UCC 4-105(a) [1952]; UCC 4-105(2) [1990 Rev].
Footnote 9. UCC 4-104 (1)(f) [1952]; UCC 4-104(a)(6) [1990 Rev].
Footnote 10. UCC 4-105(c) [1952]; UCC 4-105(4) [1990 Rev].
Footnote 11. UCC 4-104(1)(g) [1952]; UCC 4-104(a)(9) [1990 Rev].
Footnote 12. UCC 4-105(b) [1952]; UCC 4-105(3) [1990 Rev].
Footnote 13. UCC 4-104(1)(k) [1952]; UCC 4-104(a)(12) [1990 Rev].
Footnote 15. UCC 3-102(4) [1952]; UCC 3-103(d) [1990 Rev].
15 Instruments affected
View Entire Section

Article 3 of the Uniform Commercial Code applies to negotiable instruments. 16
Observation: Unlike the 1990 version, the pre-1990 version of Article 3 has no
provision affirmatively stating its scope; 17 rather, an Official Comment states that
Article 3 is restricted to commercial paper, that is, negotiable instruments in the form
of drafts, checks, certificates of deposit, and notes as defined in UCC 3-104(2). 18
Article 3 does not apply to money, to payment orders governed by Article 4A, or to
securities governed by Article 8. 19
Observation: The pre-1990 version of Article 3 specifically excludes from its

coverage money, documents of title, and investment securities; 20 however, the 1990
version omits the reference to "documents of title" as superfluous because these
documents contain no promise to pay money. 21
Although treasury bills are both negotiable instruments and investment securities,

treasury bills are not governed by Article 3. 22 Also, an electronic funds transfer is not
within Article 3 because it is not a signed negotiable instrument. 23
Practice guide: Even though an instrument does not come within the scope of
Article 3, the parties may, by their agreement, specify that one or more of the
provisions of Article 3 determine their rights and obligations under the instrument. 24
Under the pre-1990 version of Article 3, nonnegotiable instruments in the technical sense
are covered by Article 3 with one exception; namely, Article 3 applies to any instrument
whose terms do not preclude transfer and which is otherwise negotiable within Article 3
but which is not payable to order or to bearer, except that there can be no holder in due
course of such an instrument. 25 The 1990 version of Article 3 contains no provision
comparable to UCC 3-805 of the pre-1990 version. 26 However, an order or promise
that is excluded from the 1990 version of Article 3 because it does not fall within the
definition of negotiable instrument 27 may nevertheless be similar to a negotiable
instrument in may respects, and although such a writing cannot be made a negotiable
instrument within Article 3 by contract or conduct of its parties, in a particular case the
court may arrive at a result similar to the result that would follow if the writing were a
negotiable instrument, 28 by using Article 3 as a guide for reaching its decision. 29
Footnotes
As to particular instruments or type of instruments as negotiable, see 26 et seq.
Footnote 17. Official Comment 1 to UCC 3-102(a) [1990 Rev].
Footnote 18. Official Comment 1 to UCC 3-103 [1952].
Article 3 applies to all checks regardless of the purpose for which they are issued.
Frangiosa v Kapoukranidis, 160 Vt 237, 627 A2d 351, 21 UCCRS2d 486.
The definition of "payment order" in UCC 4A-103(a)(1)(iii) excludes drafts which are
governed by Article 3, so this provision plus the specific exclusion in UCC 3-102(a) of
payment orders makes Article 3 and Article 4A mutually exclusive. Official Comment 2
to UCC 3-102 [1990 Rev].
Footnote 20. UCC 3-103(1) [1952].
Forms: Instruction to jury"Document of title" defined. 6 Am Jur Pl & Pr Forms

(Rev), Commercial Code : Article 1General Provisions 1:26.
Footnote 22. Morgan Guaranty Trust Co. v Third Nat'l Bank (CA1 Mass) 529 F2d 1141,
18 UCCRS 483; Brannon v First Nat'l Bank, 137 Ga App 275, 223 SE2d 473, 19 UCCRS
234.

Footnote 23. Shawmut Worcester County Bank v First American Bank & Trust (DC
Mass) 731 F Supp 57, 11 UCCRS2d 417.
Footnote 24. Official Comment 2 to UCC 3-104 [1952]; Official Comment 2 to UCC
3-104 [1990 Rev].
Footnote 25. UCC 3-805 [1952].
Footnote 29. Semler v Knowling (Iowa) 325 NW2d 395, 34 UCCRS 1542.
16 Principal changes from Uniform Negotiable Instruments Act
View Entire Section

Article 3 of the Uniform Commercial Code dealing with commercial paper represents a
complete revision and modernization of the Uniform Negotiable Instruments Act. 30
Certain matters formerly governed by the Uniform Negotiable Instruments Act are
covered by Articles of the Uniform Commercial Code other than Article 3; for example,
bearer bonds and any investment security are governed by Article 8 of the Code, a special
negotiable instruments law dealing with investment securities. 31
Footnotes
Observation In addition, matters pertaining to bank deposits and collections, letters of

credit, and secured transactions are treated in other Articles of the Code; UCC Article 4
deals with bank deposits and collections of "items" which may include commercial
paper; UCC Article 5 deals with letters of credit; UCC Article 9 deals with secured
transactions.
17 Relationship of Article 3 to other Code articles
View Entire Section

If there is conflict between Article 3 and Articles 4 or 9, Articles 4 and 9 govern. 32 In

the case of a negotiable instrument which is subject to Article 4 because it is in the course
of collection or to Article 9 because it is used as collateral, the provisions of Article 3
continue to be applicable except insofar as there may be conflicting provisions in Articles
4 or 9. 33
Occasionally, a particular writing may fit the definition of both a negotiable instrument
under Article 3 and of an investment security under Article 8 and, in such cases, the
instrument is subject exclusively to the requirements of Article 8. 34 However, although
Article 8 is the sole source of law governing the rights of parties to a transaction
involving an investment security, where a particular question as to an investment security
cannot be resolved solely on the basis of the language of Article 8, it is appropriate to
look to Article 3 for guidance. 35 Article 3 encompasses isolated transactions such as
the issuance of a savings certificate by a savings and loan association as part of the
financial arrangements for a loan, whereas Article 8 is directed to multiple transactions in
which a group of promises, all for the same amount and all due at the same time, are
made to multiple parties with the intention that the security evidencing the promises will
be traded. 36
Footnotes
The provisions of Article 3 on notice of dishonor must be considered in conjunction with

the provisions of Article 4 where the question is one of liability as between a depositor
(indorser) of a check and the depositary bank. Mercantile Bank & Trust Co. v Hunter, 31
Colo App 200, 501 P2d 486, 11 UCCRS 545; Available Iron & Metal Co. v First Nat'l
Bank (1st Dist) 56 Ill App 3d 516, 13 Ill Dec 940, 371 NE2d 1032, 23 UCCRS 694.
3-102 [1990 Rev].
Footnote 35. Bankhaus Hermann Lampe KG v Mercantile-Safe Deposit & Trust Co. (SD
NY) 466 F Supp 1133, 25 UCCRS 1141; E. F. Hutton & Co. v Manufacturers Nat'l Bank
(ED Mich) 259 F Supp 513, 3 UCCRS 752.
Footnote 36. Jones v United Sav. & Loan Asso. (Mo App) 515 SW2d 869, 16 UCCRS
179.
18 Relationship between Article 3 and law merchant and common law
View Entire Section

The Uniform Commercial Code provides that, unless displaced by its particular
provisions, the principles of law and equity, including the law merchant and the law
relating to capacity to contract, principal and agent, estoppel, fraud, misrepresentation,
duress, coercion, mistake, bankruptcy, or other validating or invalidating cause, will
supplement its provisions. 37 This provision indicates the continued applicability to
commercial contracts of all supplemental bodies of law except insofar as they are
explicitly displaced by the Code. 38
Footnotes
Footnote 38. Official Comment to UCC 1-103.
4. Construction of Governing Law [19]
19 Generally
View Entire Section

The Uniform Commercial Code must be liberally construed and applied to promote its
underlying purposes and policies, 39 which are expressly stated. 40 Remedies
provided in the Code are to be liberally administered to the end that the aggrieved party
may be put in as good a position as if the other party had fully performed, but neither
consequential or special nor penal damages may be had except as specifically provided in
the Code or by other rule of law. 41 Any right or obligation declared by the Code is
enforceable by action unless the provision declaring it specifies a different and limited
effect. 42
The Code is drawn to provide flexibility so that it will provide its own machinery for
expansion of commercial practices; and it is intended to make it possible for the law
embodied in the Code to be developed by the courts in the light of unforeseen and new
circumstances and practices. 43 However, the proper construction of the Code requires
that its interpretation and application be limited to its reason. 44
Since the Code is a general act intended as a unified coverage of its subject matter, no
part of it will be impliedly repealed by subsequent legislation if such construction can
reasonably be avoided. 45
Comment: This provision in Article 1 is intended to express the policy that no act
which bears evidence of carefully considered permanent regulative intention should
lightly be regarded as impliedly repealed by subsequent legislation. The Code,
carefully integrated and intended as a uniform codification of permanent character
covering an entire "field" of law, is to be regarded as particularly resistant to implied
repeal. 46
In accordance with the objective of the Code to secure uniformity in legislation and
decision among the states, it is the duty of courts in construing the Code to have in mind
the purpose of securing uniformity in the law of commercial paper. 47 Further, courts
should generally follow the majority rule in other jurisdictions in the construction of the
Code provisions, 48 unless there is something manifestly erroneous in the interpretation
of a statute given by the courts of one jurisdiction, in which case it should not be
followed by the courts in other jurisdictions. 49
If any provision or clause of the Code or application thereof to any person or

circumstances is held invalid, such invalidity does not affect other provisions or
applications of the Code which can be given effect without the invalid provision or
application, and to this end the provisions of the Code are declared to be severable. 50
Unless the context otherwise requires, words in the singular number include the plural
and vice versa; and words of the masculine gender include the feminine and the neuter.
51
Section captions are parts of the Code. 52
Footnotes
Annotation: Construction and effect of UCC Art. 3, dealing with commercial paper,
23 ALR3d 932.
What constitutes unconditional promise to pay under Uniform Commercial Code

3-104(1)(b), 88 ALR3d 1100.
Construction and application of UCC 3-403(2) dealing with personal liability of

authorized representative who signs negotiable instrument in his own name, 97
ALR3d 798.
Who is holder of instrument for "value" under UCC 3-303, 97 ALR3d 1114.
What constitutes taking instrument in good faith, and without notice of infirmities or
defenses, to support holder-in-due-course status, under UCC 3-302, 36 ALR4th 212.
Fraud in the inducement and fraud in the factum as defenses under UCC 3-305
against holder in due course, 78 ALR3d 1020.
Payee's right of recovery, in conversion under UCC 3-419(1)(c), for money paid on
unauthorized indorsement, 23 ALR4th 855.
Footnote 40. 6.

This provision governs construction of the entire Uniform Commercial Code. Cincinnati
Ins. Co. v First Nat'l Bank, 63 Ohio St 2d 220, 17 Ohio Ops 3d 136, 407 NE2d 519, 29
UCCRS 1581.
Definition "Aggrieved party" means a party entitled to resort to a remedy. UCC

1-201(2).
Definition "Action" in the sense of a judicial proceeding includes recoupment,

counterclaim, setoff, suit in equity, and any other proceedings in which rights are
determined. UCC 1-201(1).
Footnote 47. Utah State Nat'l Bank v Smith, 180 Cal 1, 179 P 160.
Footnote 48. Charles Nelson Co. v Morton, 106 Cal App 144, 288 P 845.
Footnote 49. People's Finance & Thrift Co. v Shaw-Leahy Co., 214 Cal 108, 3 P2d 1012.
B. Negotiability And Nonnegotiability [20-51]
Research References
15 USCA 1631
UCC 1-201; UCC 3-104 through 3-105, 3-110, 3-121, 3-202, 3-206, 3-411, 3-413,
3-415, 3-501, 3-503, 3-507, 3-801, 3-805 [1952]; UCC 3-102 through 3-104, 3-106,
3-118, 3-206, 3-409, 3-412, 3-415, 3-419, 3-502 [1990 Rev]; UCC 4-104, 4-106 [1990
Rev]; UCC 7-104
ALR Digests: Bills and Notes 52-67
ALR Index: Accommodation Party or Paper; Bills and Notes; Certificates of Deposit;
Checks and Drafts; Uniform Commercial Code
6 Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 1 General Provisions
1:28; 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:5-3:8; 3:30

3B Am Jur Legal Forms 2d, Bills and Notes 41:29, 41:71, 41:91, 41:92; 19 Am Jur
253:2211-253:2263, 253:2452, 253:2593
6A Anderson, Uniform Commercial Code 3d 3-101:19-3-101:24; 3-103:1-3-103:5;
3-104:5-3-104:15; 3-104:16-3-104:22
1. In General [20-25]
20 Negotiability; generally
View Entire Section

The provisions of Article 3 of the Uniform Commercial Code deal with "instruments,"
which is defined as meaning negotiable instruments. 53 "Negotiability" is a technical
term derived from the usage of merchants in transferring bills of exchange and
promissory notes. 54 The function of negotiability is to separate the negotiable
instrument from the underlying transaction out of which it arose. 55
Negotiability is the most vital and distinctive characteristic of a negotiable instrument;

the term imports a quality of easy or simple transferability 56 by any possessor. 57 In
fact, negotiability is a characteristic of such importance to commercial paper that any
doubt is resolved against negotiability. 58
The quality of negotiability enables the holder to sue in his or her own name, 59 and to
take free of many claims or equities and defenses which could be asserted against the
person transferring the instrument. 60
The term "negotiable" signifies that a paper possesses the quality and requisites of
negotiability, 61 which are fixed at the time of the execution of the instrument and exist
prior to the performance of any necessary ceremony of the process of negotiation. 62
For the same reason, though custom may be important in assisting courts to interpret
statutes to determine whether a particular instrument is negotiable, custom never
overcomes positive provisions of statutes which preclude negotiability. 63
Because under the law the character of an instrument as negotiable or nonnegotiable must
be determined from the form of the instrument itself, 64 that character is not determined
by a mere stipulation of the parties that the instrument will or will not be negotiable. 65
And, obviously, mere belief that instruments are negotiable cannot alter their terms so as
to render them negotiable when in fact they are nonnegotiable under the statutes. 66
Footnotes
Forms: Complaints, petition, or declarationRequisites of negotiability of draft. 6A

Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments
3:5-3:8.
Footnote 54. Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988.
Footnote 55. Persky v Bank of America Nat'l Ass'n, 261 NY 212, 185 NE 77.
The principle of negotiability is in the instrument's having a circulating credit and its
being transferable by indorsement and delivery, or by delivery merely. Manhattan Sav.
Inst. v New York Nat'l Exch. Bank, 170 NY 58, 62 NE 1079.
Footnote 57. Manhattan Sav. Inst. v New York Nat'l Exch. Bank, 170 NY 58, 62 NE
1079.
Footnote 58. Jefferson v Mitchell Select Furniture Co. (Civ App) 56 Ala App 259, 321
So 2d 216, 18 UCCRS 431; Geiger Finance Co. v Graham, 123 Ga App 771, 182 SE2d
521, 9 UCCRS 598; Pacific Finance Loans v Goodwin (Cuyahoga Co) 41 Ohio App 2d
141, 70 Ohio Ops 2d 265, 324 NE2d 578, 16 UCCRS 750.
Footnote 60. Shakespear v Smith, 77 Cal 638, 20 P 294; Manhattan Sav. Inst. v New
York Nat'l Exch. Bank, 170 NY 58, 62 NE 1079.
As to availability of particular defenses, see 546 et seq.
1079.
As to the definition of negotiable instrument, see 23.
As to what constitutes "negotiation," see 212, 214.
Footnote 62. Pitman v Walker, 187 Cal 667, 203 P 739.
Footnote 63. American Nat'l Bank v A. G. Sommerville, Inc., 191 Cal 364, 216 P 376.
Footnote 64. UCC 3-104(1) [1952]; UCC 3-104(1) [1990 Rev], setting out the
general formal requirements of negotiable instruments.
Footnote 65. American Nat'l Bank v A. G. Sommerville, Inc., 191 Cal 364, 216 P 376;
Hollywood State Bank v Wilde, 70 Cal App 2d 103, 160 P2d 846.
Footnote 66. Kohn v Sacramento E., G. & R. Co., 168 Cal 1, 141 P 626.
21 --Assignability distinguished
View Entire Section

Negotiability is limited to the special class of contracts known as negotiable instruments,

67 while assignability applies to contractual rights and chooses in action in general, as
well as to any right of property or interest therein. 68
A draft, note, or other commercial paper, whether it is negotiable or not, may be

transferred by assignment, 69 but there is a difference in regard to the rights of a
transferee of a negotiable instrument where there is a negotiation and where there is
merely an assignment without negotiation. 70 The assignor can convey no greater title
than he or she has, and one who takes by assignment simply steps into the shoes of the
assignor and takes subject to all the infirmities, equities, and defenses which could have
been set up against the assignor at the time of the assignment or which exist before notice
of the transfer. 71 Under Article 3, this rule applies where a negotiable instrument is
assigned. 72 However, a person taking through a holder in due course is afforded the
rights and the protection accorded a holder in due course, even where the person taking
does so by assignment. 73 On the other hand, where negotiable commercial paper is
negotiated, a person taking the paper as a holder in due course may acquire a better title
or rights than the original party had. 74
Footnotes
Footnote 68. 6 Am Jur 2d, Assignments 7, 8.
Footnote 69. Edgar v Haines, 109 Ohio St 159, 141 NE 837, 38 ALR 795.
Footnote 70. 202, 206 et seq.
Footnote 71. Holly Hill Acres, Ltd. v Charter Bank of Gainesville (Fla App D2) 314 So
2d 209, 17 UCCRS 144.
Footnote 72. 247.
Footnote 73. 253, 254.
Footnote 74. 260.
As to what constitutes negotiation, see 212, 214.
22 --Continuance or termination of negotiability
View Entire Section


The Uniform Negotiable Instruments Act specifically provided for the continuance and
termination of the negotiable quality of an instrument negotiable in its origin, and such an
instrument continued to be negotiable until restrictively indorsed or discharged by
payment, or otherwise. 75 No similar provision is included in Article 3 of the Uniform
Commercial Code. 76 Under the Code, no restrictive indorsement prevents further
transfer or negotiation of the instrument and the placing of a restrictive indorsement on
an instrument thus does not terminate negotiability. 77
Maturity of an instrument and its consequent dishonor does not destroy its negotiability,
particularly in the limited or nontechnical sense 78 and particularly under the Uniform
Commercial Code, which does away with the absolute concept of pre-Code law under
which an indorsee taking a note after maturity could not be a holder in due course. 79
Footnotes
Footnote 75. Uniform Negotiable Instruments Act 47 (superseded by UCC Article 3).
As to Uniform Negotiable Instruments Act generally, see 4.
Footnote 76. Official Comment 1 to UCC 3-206 [1952], stating that by omitting such a
provision, there is avoided any implication that a discharge is effective against a holder in
due course.
For a discussion of restrictive indorsements see 230.
Footnote 78. St. John v Roberts, 31 NY 441; Lessen v Lindsey, 238 App Div 262, 264
NYS 391.
Footnote 79. Goff v Morgan County Nat'l Bank, 144 Fla 671, 198 So 484.
For a discussion of the Code rule, see 290.
23 Negotiable instruments
View Entire Section

"Negotiable instrument" means an unconditional promise or order to pay a fixed amount

of money, with or without interest or other charges described in the promise or order, if it
(a) is payable to bearer or order at the time it is issued or first comes into the possession
of a holder, (b) is payable on demand or at a definite time, and (c) does not state any
other undertaking or instruction by the person promising or ordering payment to do any
act in addition to the payment of money, but it may contain (1) an undertaking or power
to give, maintain, or collect collateral to secure payment, (2) an authorization or power to
the holder to confess judgment or realize on or dispose of collateral, or (3) a waiver of the
benefit of any law intended for the advantage or protection of an obligor. 80
Observation: The pre-1990 version of Article 3 provides that for a writing to be a

negotiable instrument, it must (1) be signed by the maker or drawer, (2) contain an
unconditional promise to pay a sum certain in money and no other promise, order,
obligation, or power given by the make or drawer except as authorized by the UCC, (3)
be payable on demand and at a definite time, and (4) be payable to order or to bearer.
81 The provisions in both the 1990 version and the pre-1990 version of Article 3
setting out the requisites of negotiability was specifically intended to be an expansion
of the rules for negotiability that existed under the Uniform Negotiable Instruments
Law. 82
The instruments to which the Uniform Commercial Code definition of negotiability

applies are drafts, checks, certificates of deposit, and notes. 83 In light of the Code
definitions, the term "negotiable instrument" is limited to a signed writing that orders or
promises payment of money. 84 The negotiability of an instrument is determined from
the four corners of the instrument at the time it is issued without reference to extrinsic
facts. 85
Practice guide: The Uniform Commercial Code does not expressly state that it is not
necessary that an instrument follow the language of the statute, as did the former
Uniform Negotiable Instruments Act. 86 The omission of such a provision in the
Code does not mean that an instrument to be negotiable must follow the statutory
language, or that one term may not be recognized as clearly the equivalent of another;
it does mean, however, that either the statutory language or a clear equivalent must be
found in the instrument, and that in doubtful cases the decision should be against
negotiability. 87
Practice guide: Negotiability is a question of law, and a court does not need to find
any facts to determine whether the instrument before it is a negotiable instrument. The
parties' stipulation regarding negotiability is not binding on any court. 88
An instrument that is negotiable in its origin should retain to the end the character given
to it and written into its face. 89 This does not mean, however, that an instrument
negotiable in its origin may not be limited and modified by a subsequent contract
between the parties so as to affect the rights of subsequent holders, to the extent that they
take the paper with notice of the specific limitation. 90
Footnotes
Footnote 80. UCC 3-104(a) [1952].
As to the requirement that the promise or order be unconditional, see 91 et seq.
As to the requirement that the promise or order be paid a fixed amount of money, see
98 et seq.
As to the requirement that the instrument be payable to bearer or order, see 88, 89.
As to the requirement that the instrument be payable on demand or at a definite time, see
105, 106.
As to the requirement that the instrument not contain any undertaking or instruction other
than those specified, see 112, 116.
Annotation: Negotiability of instrument providing for variable rate of interest under

UCC 3-106, 69 ALR4th 1127.
Effect on negotiability of instrument, under terms of UCC 3-104(1), of statements

expressly limiting negotiability or transferability, 58 ALR4th 632.
Forms: Complaints, petition, or declarationAllegationRequisites of negotiability.

6A Am Jur Pl & Pr Forms (Rev), Commercial Code, Negotiable Instruments
3:5-3:8.
Footnote 81. UCC 3-104(1) [1952].
Footnote 82. Ameritrust Co., N.A. v White (CA11 Ga) 73 F3d 1553, 9 FLW Fed C 818.
Footnote 83. UCC 3-104(2) [1952]; UCC 3-104(e)-(j) [1990 Rev].
Footnote 85. Bankers Trust v 236 Beltway Inv. (ED Va) 865 F Supp 1186, 26 UCCRS2d
776; Partney v Reed (Mo App) 889 SW2d 896, 25 UCCRS2d 154.
Footnote 86. Uniform Negotiable Instruments Act 1 (superseded by UCC Art 3).
Footnote 88. Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. v Bailey (CD Cal)

710 F Supp 737, 9 UCCRS2d 145; Drabkin v Capital Bank, N.A. (BC DC Dist Col) 156
BR 102, 5 Fourth Cir & Dist Col Bankr Ct Rep 537, 21 UCCRS2d 135; Cartwright v
MBank Corpus Christi, N.A. (Tex App Corpus Christi) 865 SW2d 546, writ den (May 4,
1994) and rehg of writ of error overr (Jul 28, 1994) (decided under prior law).
24 Extent of negotiability
View Entire Section

While it has been said that there is no middle term between negotiable and
nonnegotiable, 91 the courts sometimes use the term "quasi-negotiable." 92 An
instrument may possess some, but not all, of the elements of negotiability, or be
negotiable in a limited sense rather than in the full, exact, or true sense. 93
The judicial basis for negotiability of documents other than those expressly recognized as
negotiable by statute, or the basis of quasi-negotiability, is contract or, more frequently,
estoppel, based on the familiar equitable doctrine that where one of two innocent persons
is to suffer, the sufferer should be the one whose confidence put into the hands of the
wrongdoer the means of doing the wrong. 94
Footnotes
1079.
Footnote 92. Hulburt v Walker, 258 NY 8, 179 NE 34.
Footnote 94. In re Goodchild, 160 Misc 738, 290 NYS 683.
25 Nonnegotiable instruments
View Entire Section

A nonnegotiable instrument is an instrument which does not meet the requirements laid
down in the Uniform Commercial Code to qualify an instrument as negotiable; thus, a
note or draft that does not contain an unconditional covenant to pay a sum certain in
money is not a negotiable instrument. 95 Likewise, a note or draft that is not payable to
order or to bearer, or that is not payable on demand or at a definite time, is not a
negotiable instrument. 96
Caution: There is an exception to the rule that an instrument must be payable to

bearer or to order to be negotiable. An order that meets the requirements of the Code
for negotiability except the requirement that it be payable to bearer or to order and that
otherwise falls within the Code's definition of a "check" is a negotiable instrument and
a check. 97
Comment: Under the pre-1990 version of Article 3, a check that is not payable to
order or to bearer is governed by Article 3, but there can be no holder in due course of
such a check; 98 but under the 1990 version, such a check is governed by Article 3
and there can be a holder in due course. 99
No instrument which does not meet the requirements for negotiability may be made
negotiable by agreement of the parties. 1 Moreover, a writing that does not meet the
requirements of the Code cannot be made a negotiable instrument within Article 3 by
contract or by conduct. 2

Comment: An order or promise may fail to meet the statutory requirements for
negotiability but be similar to a negotiable instrument in many respects. Nothing in
Article 3 is intended to mean that a court could not arrive at a result similar to the
result that would follow if the writing were a negotiable instrument and it may be
appropriate for a court to apply one or more of the provisions of Article 3 by analogy,
taking into account the expectations of the parties and the differences between the
writing and an instrument governed by Article 3. 3
A promise or order other than a check is not a negotiable instrument if, at the time it is
issued or first comes into possession of a holder, it contains a conspicuous statement,
however expressed, to the effect that the promise or order is not negotiable or is not a
negotiable instrument governed by Article 3. 4
Comment: The Code allows exclusion from Article 3 of a writing that would
otherwise be an instrument by a statement to the effect that the writing is not
negotiable or is not governed by Article 3. For example, a promissory note can be
stamped with the legend NOT NEGOTIABLE. The effect under the Code is not only
to negate the possibility of a holder in due course, but to prevent the writing from being
a negotiable instrument for any purpose. The pertinent provision does apply, however,
to a check. 5
Under the pre-1990 version of Article 3, except for the provisions applicable to a holder
in due course, all of Article 3 is applicable to a nonnegotiable instrument whose terms do
not preclude transfer. 6 Furthermore, as used in other Articles of the Code and as the
context may require, the terms "draft," "check," "certificate of deposit," and "note" may
refer to instruments which are not negotiable within Article 3 as well as to instruments
which are so negotiable. 7 Thus, under the pre-1990 version, the term "negotiable
instrument" is used as a technical term of art and, as so used, refers to a particular type of
instrument which meets all the requirements as to form of a negotiable instrument, except
that it is not payable to order or bearer. 8 The pre-1990 version of Article 3 applies to a
nonnegotiable instrument whose terms do not preclude transfer, except those peculiar to a
holder in due course. 9 The 1990 version of Article 3 applies only to negotiable
instruments. 10
Footnotes
Footnote 95. First Bank of Marianna v Havana Canning Co., 142 Fla 554, 195 So 188.
A nonrecourse clause, which insulates the maker from personal liability on a note,
renders the note conditional and destroys its negotiability. United Nat'l Bank v Airport
Plaza Ltd. Partnership (Fla App D3) 537 So 2d 608, 13 FLW 2601, review den (Fla) 547
So 2d 1209.
Annotation: Provision in draft or note directing payment "on acceptance" as affecting

negotiability, 19 ALR4th 1268.
Footnote 96. Plotch v Gregory (Fla App D4) 463 So 2d 432, 10 FLW 314.

Footnote 98. UCC 3-805 [1952].
Footnote 2. Official Comment 2 to UCC 3-104 [1952 and 1990 Rev].
Footnote 3. Official Comment 2 to UCC 3-104 [1952 and 1990 Rev.]
Footnote 4. UCC 3-104(d) [1990 Rev].
Annotation: Effect on negotiability of instrument, under terms of UCC 3-104(1), of

statements expressly limiting negotiability or transferability, 58 ALR4th 632.
Footnote 6. UCC 3-805 [1952].
Footnote 7. UCC 3-104(3) [1952].
For a definition of negotiable instrument, see 23.
Footnote 9. UCC 3-805 [1952].
2. Particular Instruments or Types of Instruments as Negotiable [26-51]
a. In General [26-38]
26 Generally; commercial paper
View Entire Section

The Uniform Commercial Code uses the term commercial paper when referring to
negotiable instruments 11 of a particular kind, that is, drafts, checks, certificates of
deposit, and notes as defined by Article 3 provisions. 12
However, the term "commercial paper," long antedates the Uniform Commercial Code as
a business and legal term in common use, and in such usage, was deemed synonymous
with "negotiable paper" 13 or "bills and notes," 14 and was applied to nonnegotiable as
well as negotiable instruments. 15
Some instruments which constituted negotiable instruments and commercial paper under
the prior law, specifically bearer bonds and certain notes, are excluded from the term
"commercial paper" and covered by the term "investment securities," which brings them
under a distinct and separate article of the Code. 16
Footnotes
Forms: Complaints, petition, or declarationAllegationRequisites of negotiability.

6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments, Forms 3:5-3:8.
Terms used in negotiable instruments; Types of negotiable instruments. 19 Am Jur

253:2211-253:2263.
Footnote 13. Hall v Bank of Blasdell, 306 NY 336, 118 NE2d 464.
Footnote 14. Gramatan Nat'l Bank & Trust Co. v Mikolajczak (Sup) 142 NYS2d 564.
Footnote 15. Chase Nat'l Bank v Faurot, 149 NY 532, 44 NE 164.
As to investment securities, see 15A Am Jur 2d, Commercial Code 73-121.
27 Accommodation paper
View Entire Section

While the term "accommodation paper" is not defined in the Uniform Commercial Code,
Article 3 of the Code defines the term "accommodation party," as one who signs an
instrument in any capacity for the purpose of lending his or her name to another party to
the instrument. 17 Article 3 also deals with the contract of an accommodation party and
his or her liabilities. 18
The accommodation party usually expects that not he or she, but the accommodated
party, will provide payment of the paper when it falls due. 19 The obligation of the
accommodation party is that of a surety on the instrument. 20 Accommodation paper
creates no obligation upon delivery to the accommodated party, but only when it is
delivered by the latter to a holder for value. 21 When the instrument is taken for value
before it is due, the accommodation party is liable in the capacity in which he or she has
signed, but such party's obligation is terminated at the time limit unless in the meantime
the obligation of the principal has become effective. 22
Accommodation paper is distinguished from other paper, which in contradistinction is

called "business paper." 23
Footnotes
Footnote 17. UCC 3-415(1) [1952]; UCC 3-419 [1990 Rev].
Footnote 18. UCC 3-415 [1952]; UCC 3-419 [1990 Rev].
Footnote 19. Callery v Lyons, 292 NY 15, 53 NE2d 376.
Footnote 20. 483.
As to liability of accommodated party to accommodation party, see 482.
Footnote 21. 483.
Footnote 22. 483.
Footnote 23. Jacobus v Jamestown Mantel Co., 211 NY 154, 105 NE 210.
28 Securities
View Entire Section

In the Uniform Commercial Code a "security" and a "negotiable instrument" have

different definitions, although one instrument may be both. 24 The formal requisites of
negotiability go to matters of form exclusively; 25 the definition of "security," on the
other hand, looks principally to the manner in which an instrument is used. 26 It is
functional rather than formal. 27
Article 8 of the Uniform Commercial Code, designated "Investment Securities," 28 is

essentially a negotiable instruments law dealing with securities. 29
Footnotes
3-102 [1990 Rev], stating that an instrument which qualifies as a negotiable instrument
under Article 3 may also qualify as a security under Article 8, and in this circumstance,
Article 8, not Article 3, governs.

Law Reviews: Kornegay, Bank loans as securities: A legal and financial economic
analysis of the treatment of marketable bank assets under the securities acts, 40 UCLA
LR 799 (1993).
Footnote 25. 20.
Footnote 28. UCC 8-101 to 8-406, discussed in 15A Am Jur 2d, Commercial Code
73-121.
29 Security agreements
View Entire Section

Negotiable instruments are often secured by collateral security agreements which are
generally regarded as nonnegotiable instruments. 30 Secured transactions are governed
by Article 9 of the Uniform Commercial Code; the provisions of Article 3 of the Uniform
Commercial Code dealing with commercial paper are subject to the provisions of Article
9. 31 A retail installment contract and security agreement combined in one instrument
is generally not held to be a negotiable instrument. 32 Similarly, a purchase-money
security agreement is not a negotiable instrument because it contains number of promises
in addition to "an unconditional promise or order to pay a sum certain." 33
Footnotes
Footnote 30. In re Hatfield Constr. Co. (BC MD Ga) 10 UCCRS 907.
Footnote 31. UCC 3-102(b) [1952]; UCC 3-103(2) [1990 Rev].
As to secured transactions generally, see 68A Am Jur 2d, Secured Transactions 1 et

seq.
Footnote 32. Jefferson v Mitchell Select Furniture Co. (Civ App) 56 Ala App 259, 321
So 2d 216, 18 UCCRS 431; Wickware v National Mortg. Corp. (Okla) 570 P2d 330, 22
UCCRS 720.
Footnote 33. Gregory Poole Equip. Co. v Murray, 105 NC App 642, 414 SE2d 563, 18
UCCRS2d 1301.

30 Documents of title
View Entire Section

A document of title is "commodity paper," as distinguished from "money paper." 34

Basically, a "document of title" is a document purporting to be issued by or addressed to
a bailee and purporting to cover goods in the bailee's possession, and evidencing that the
person in possession of the document is entitled to receive, hold, and dispose of the
document and the goods it covers. 35 Documents of title are not covered by Article 3
of the Uniform Commercial Code dealing with commercial paper, but rather by a
separate Article 7 of such Code. 36
Observation: Documents of title are specifically excluded from coverage in the

pre-1990 version of Article 3; 37 however, the 1990 version omits the reference to
"documents of title" as superfluous because these documents contain no promise to pay
money. 38
A document of title is negotiable under Article 7 if, by its terms, the goods are to be
delivered to bearer or to the order of a named person, 39 or, where recognized in
overseas trade, if it runs to a named person or assigns; any other document is
nonnegotiable. 40
Footnotes
Footnote 35. UCC 1-201(15), discussed in 15A Am Jur 2d, Commercial Code 40.
Forms: Instruction to jury"Document of title" defined. 6 Am Jur Pl & Pr Forms

(Rev), Commercial Code : Article 1General Provisions 1:28.
Footnote 36. 15A Am Jur 2d, Commercial Code 38-72.
Footnote 37. UCC 3-103(1) [1952].
Footnote 39. UCC 7-104(1)(a), discussed in 15A Am Jur 2d, Commercial Code 57.
Footnote 40. UCC 7-104(1)(b), discussed in 15A Am Jur 2d, Commercial Code 57.
31 Money
View Entire Section

Article 3 of the Uniform Commercial Code does not apply to money. 41 As used in the
Code, "money" means a medium of exchange authorized or adopted by a domestic or
foreign government as part of its currency. 42 Money is not covered by Article 3 even
though the money may be in the form of a bank note which meets the requirements of
negotiability. 43 Federal Reserve Notes fall within the Code definition of money, and
therefore Article 3 of the Code does not apply to them. 44
Footnotes
Annotation: What constitutes "money" within meaning of Uniform Commercial Code,

40 ALR4th 346.
32 Money orders
View Entire Section

"Money orders" are sold both by banks and non-banks and vary in form and their form
determines how they are treated in Article 3 of the Uniform Commercial Code; the most
common form of money order sold by banks is that of an ordinary check drawn by the
purchaser except that the amount is machine impressed; that kind of money order is a
check under Article 3. 45 The definition of "check" expressly states that an instrument
may be a check even though it is described on its face by another term, such as "money
order." 46 If a money order falls within the definition of a teller's check, the rules
applicable to teller's checks apply. 47
A bank money order issued by an authorized officer of a bank and directed to another,
evidencing the fact that the payee may demand and receive on indorsement and
presentation to the bank the amount stated on the face of the instrument, is considered a
form of cashier's check; it is paid from the bank's funds, and liability for payment rests
solely on the issuing bank. 48 However, a personal money order sold by a bank to a
purchaser is the same as a personal check furnished by the bank for use by its
checking-account customers and is not an obligation of the bank itself, since no bank
official's signature appears anywhere thereon. 49 The drawee bank's liability does not
arise under a personal money order until the instrument has been accepted for payment.
50
Caution: While some states have held that money orders are not primary obligations
of the bank because of the lack of a bank official's signature, at least one state has held
that the ultimate liability for payment of a money order rests with the issuing bank
anyway. 51
A writing, to be a negotiable instrument, must be signed. 52 Thus, where a bank issues

money orders to its selling agent but does not require an authorizing signature on the
money orders before it becomes obligated to pay, the money orders are not negotiable
instruments. 53 But, where money orders contain a preprinted signature located on each
instrument indicating an intent that the signature operate as the signature of the "maker or
drawer," and direct a holder to "pay the sum of (blank) to the order of (blank)" which
establishes an "unconditional promise or order to pay," the money orders are negotiable
instruments. 54
Postal money orders are subject to federal law; 55 they are issued by the United States
government in the exercise of a governmental function and are not negotiable
instruments. 56
Footnotes
As to the definition of bank money order, generally, see 10 Am Jur 2d, Banks 545.
Footnote 46. UCC 3-104(f) [1990 Rev].
Footnote 48. Home Bank of Guntersville v Perpetual Federal Sav. & Loan Asso. (Ala)
547 So 2d 840, 10 UCCRS2d 879; Thompson Poultry, Inc. v First Nat'l Bank, 199 Neb 8,
255 NW2d 856, 22 UCCRS 436; State ex rel. Babcock v Perkins, 165 Ohio St 185, 59
Ohio Ops 258, 134 NE2d 839.
Footnote 49. Graybar Electric Co. v Brookline Trust Co. (Mass App Div) 39 UCCRS
1721; Berler v Barclays Bank of New York (1st Dept) 82 App Div 2d 437, 442 NYS2d
54, 32 UCCRS 210, app dismd 55 NY2d 645, 446 NYS2d 265, 430 NE2d 1318.
Footnote 50. Adam Int'l Trading, Ltd. v Manufacturers Hanover Trust Co. (1st Dept) 150
App Div 2d 294, 542 NYS2d 1, 9 UCCRS2d 1255, app dismd without op 74 NY2d 844,
546 NYS2d 560, 545 NE2d 874.
Footnote 51. Center Video Indus. Co. v Roadway Package Sys. (CA7 Ill) 90 F3d 185, 29
UCCRS2d 1239.
Footnote 52. 23.
Footnote 53. Central Bank v Kaiperm Santa Clara Fed. Credit Union (6th Dist) 191 Cal
App 3d 186, 236 Cal Rptr 262, 3 UCCRS2d 1003.

Footnote 54. Triffin v Dillabough, 448 Pa Super 72, 670 A2d 684, 29 UCCRS2d 499, app
gr (Pa) 679 A2d 230.
Footnote 56. Computer Works, Inc. v CNA Ins. Cos. (Colo App) 757 P2d 167; Rose
Check Cashing Service, Inc. v Chemical Bank New York Trust Co., 43 Misc 2d 679,
252 NYS2d 100.
33 Certificates of deposit
View Entire Section

The Uniform Commercial Code defines a "certificate of deposit" as an instrument

containing an acknowledgment by a bank that a sum of money has been received by the
bank and a promise by the bank to repay the sum of money. 57
The pre-1990 version of Article 3 treats certificates of deposit and promissory notes as
separate types of instruments, 58 but the 1990 version expressly provides that a
certificate of deposit is a note of the bank. 59 This provision accords with prior case law
holding that a certificate of deposit, notwithstanding its name and the phraseology in
which the consideration is expressed, must be regarded and treated as a promissory note
on demand. 60 Accordingly, certificates of deposit are placed on the same footing as
promissory notes 61 so far as negotiability is concerned 62 and with respect to the
rights and liabilities of indorsers 63 and purchasers after maturity. 64
A certificate of deposit may be negotiable or nonnegotiable. 65 An agreement between

the parties that a certificate of deposit be nonnegotiable, when clearly and unambiguously
shown on the instrument, is valid and effective; thus, the fact that a certificate of deposit
is clearly marked in two places as nonnegotiable is sufficient to make the certificate, by
its term, nonnegotiable, notwithstanding that the certificate was payable to "order." 66
A certificate of deposit is not negotiable where by its terms it is assignable only by
registration on the books of the bank. 67
A certificate of deposit should be distinguished from a bank passbook, which is merely in

the nature of a receipt and is prima facie evidence of the receipt of a deposit by the bank;
while a passbook may be transferred or assigned and may be the subject of a pledge, it is
not a negotiable instrument, either by itself or in connection with an order signed by the
depositor directing payment to a third person or bearer, nor can it be made so by contract.
68
Footnotes
Footnote 57. UCC 3-104(2)(c) [1952]; UCC 3-104(j) [1990 Rev].
Annotation: Admissibility of extrinsic evidence to explain or contradict bank deposit

slips, deposit entries in passbooks, certificates of deposit, or similar instruments, 42
ALR2d 600.
Forms: Complaints, petition, or declarationBy transferee of certificate of deposit

against issuerTo recover damages. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Code : Article 3Negotiable Instruments 3:30.
Form drafting guideChecklistMatters to be considered when drafting a certificate of

deposit. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
3Negotiable Instruments 253:2216.
Certificate of depositGeneral form. 19 Am Jur Legal Forms 2d, Uniform

Commercial Code: Article 3Negotiable Instruments 253:2241 et seq.
Footnote 58. UCC 3-104(2)(c), 3-104(2)(d) [1952].
Footnote 59. UCC 3-104(j) [1990 Rev].
Footnote 60. Brummagim v Tallant, 29 Cal 503.
Footnote 61. Brown v Mercantile Bank of Poplar Bluff (Mo App) 820 SW2d 327;
Munger v Albany City Nat'l Bank, 85 NY 580; Dallas/Fort Worth Airport Bank v Dallas
Bank & Trust Co. (Tex App Dallas) 667 SW2d 572, 38 UCCRS 902 (decided under 1952
version).
Footnote 62. McCully v Cooper, 114 Cal 258, 46 P 82; First Wisconsin Nat'l Bank v
Midland Nat'l Bank, 76 Wis 2d 662, 251 NW2d 829, 21 UCCRS 871.
Footnote 63. Mills v Barney, 22 Cal 240.
Footnote 64. Coye v Palmer, 16 Cal 158.
Footnote 65. Yahn & McDonnell, Inc. v Farmers Bank of Delaware (DC Del) 538 F
Supp 712, 33 UCCRS 1387, vacated on other grounds (CA3 Del) 708 F2d 104, 35
UCCRS 1533; Drabkin v Capital Bank, N.A. (BC DC Dist Col) 156 BR 102, 5 Fourth
Cir & Dist Col Bankr Ct Rep 537, 21 UCCRS2d 135; In re Estate of Fenton (5th Dist)
109 Ill App 3d 57, 64 Ill Dec 670, 440 NE2d 222; Succession of Amos (La App 3d Cir)
422 So 2d 605; Estate of Isaacson v Isaacson (Miss) 508 So 2d 1131, 4 UCCRS2d 103;
Holloway v Wachovia Bank & Trust Co., N.A., 333 NC 94, 423 SE2d 752, 19 UCCRS2d
1086; Continental Bankers Life Ins. Co. v Bank of Alamo (Tenn) 578 SW2d 625, 26
UCCRS 1170; Southview Corp. v Kleberg First Nat'l Bank (Tex Civ App Corpus Christi)
512 SW2d 817, 15 UCCRS 408; Miller v Merchants Bank, 138 Vt 235, 415 A2d 196, 29
UCCRS 634; First Wisconsin Nat'l Bank v Midland Nat'l Bank, 76 Wis 2d 662, 251
NW2d 829, 21 UCCRS 871.
Footnote 66. Amarillo Nat'l Bank v Dilday (Tex App Amarillo) 693 SW2d 38, 41
UCCRS 1326, 58 ALR4th 623 (decided under the pre-1990 version of Article 3).
Law Reviews: Del Duca & Del Duca, Nonnegotiable certificate of depositEffect of
"nonnegotiable" and "nontransferable" legend on face of the instrumentInstruments or
general intangible collateral? 26 UCCLJ 371 (Spring 1994).

Footnote 67. Holloway v Wachovia Bank & Trust Co., N.A., 333 NC 94, 423 SE2d 752,
19 UCCRS2d 1086.
Footnote 68. 10 Am Jur 2d, Banks 347, 354.
As to other aspects of certificates of deposit, see 10 Am Jur 2d, Banks 455-468.
34 Bonds
View Entire Section

For purposes of Article 3 of the Uniform Commercial Code, a bond is a debt 69 or

obligation, 70 a written instrument by which the signer acknowledges a debt 71 or
binds himself or herself 72 or promises 73 to pay a specified sum of money. 74
Accordingly, there is no essential distinction between such a bond and a note. 75
However, a distinction is drawn by the Uniform Commercial Code between a negotiable
"note," which is treated as commercial paper, and a "security," which is treated as a
negotiable "investment security"; namely, the latter is an instrument that is of a type in
which securities exchanges or markets commonly deal, or which is commonly recognized
as a medium for investment, and which meets certain other requirements as to form and
nature. 76
"Debenture" is a term as broad and indefinite as "bond," and in fact the former includes
the latter; a debenture is a written acknowledgment of debt, 77 a promise to pay, or a
promissory note. 78 Any instrument which formally acknowledges a debt and
promises payment, including any written bond secured or unsecured, is a debenture;
however, for all practical purposes a debenture is simply an unsecured promissory note
running for a number of years. 79
Bonds are negotiable instruments when they meet the formal requirements of a
negotiable instrument. 80 While the law permits a negotiable bond to contain references
to a deed of trust or mortgage by which the bond is secured for the determination of the
rights and remedies of the holder in or under such collateral document, where such
reference makes the matter or manner of payment or maturity dependent on the terms and
conditions of such other document, the bond thereupon loses its identity as a negotiable
instrument. 81 Thus, a bond which provides that upon default in payment of the bond or
the interest as stated in a separate mortgage or deed or trust, then the bond, principal and
interest, will become due and payable in the manner provided in such mortgage or deed
or trust, is not a negotiable instrument. 82 Similarly, a debenture which does not specify
the exact due date and which is therefore not payable on demand is not a negotiable
instrument. 83
Footnotes
Footnote 69. Zimmermann v Timmermann, 193 NY 486, 86 NE 540, reh den 194 NY
564, 87 NE 1130; Cass v Realty Sec. Co., 148 App Div 96, 132 NYS 1074, affd 206 NY
649, 99 NE 1105.
Footnote 70. Carson, Pirie Scott & Co. v Duffy-Powers, Inc. (DC NY) 9 F Supp 199.
Footnote 71. East River Sav. Bank v Samuels, 284 NY 470, 31 NE2d 906, 138 ALR
149.
Footnote 72. Hurd v Kelly, 78 NY 588; Central Sav. Bank v Ritchey Realty Corp., 239
App Div 689, 268 NYS 700.
Footnote 73. Continental Casualty Co. v Aetna Casualty & Surety Co., 251 App Div 467,
296 NYS 833.
Footnote 74. Central Sav. Bank v Ritchey Realty Corp., 239 App Div 689, 268 NYS 700.
Footnote 75. Hoag v Greenwich, 133 NY 152, 30 NE 842.
Footnote 76. 28.
Footnote 77. People ex rel. S. Cohn & Co. v Miller, 180 NY 16, 72 NE 525.
Footnote 78. General Motors Acceptance Corp. v Higgins (CA2 NY) 161 F2d 593, 47-1
USTC 9252, 35 AFTR 1267, cert den 332 US 810, 92 L Ed 388, 68 S Ct 112.
Footnote 79. General Motors Acceptance Corp. v Higgins (CA2 NY) 161 F2d 593, 47-1
USTC 9252, 35 AFTR 1267, cert den 332 US 810, 92 L Ed 388, 68 S Ct 112.
Footnote 80. Enoch v Brandon, 249 NY 263, 164 NE 45.
Footnote 81. Davidge v Lake Placid Co., 151 Misc 542, 271 NYS 714, revd on other
grounds 152 Misc 307, 273 NYS 522.
Footnote 82. Davidge v Lake Placid Co., 151 Misc 542, 271 NYS 714, revd on other
grounds 152 Misc 307, 273 NYS 522.
Footnote 83. Stoerger v Ivesdale Co-op Grain Co. (4th Dist) 15 Ill App 3d 313, 304
NE2d 300, 13 UCCRS 914.
35 Warrants of municipality or other public body
View Entire Section

Warrants are orders issued by an officer of a political subdivision whose duty it is to pass
on claims to the treasurer to pay a specified sum from the treasury for the persons and
purposes specified. 84 Warrants were formerly regarded as nonnegotiable instruments,
because of the limitation as to the particular fund. 85 Though they were negotiable in
form and transferable by delivery in so far as to authorize the holder to demand payment
and to maintain an action on them in his or her own name, a bona fide purchaser took
them subject to all legal and equitable defenses. 86 The above rule would appear to have
been superseded to some extent by a provision of the Uniform Commercial Code (UCC)
permitting an instrument to be negotiable notwithstanding that payment may be limited to
resort to a particular fund or source. 87 This provision permits warrants of governmental
agencies or units, for example, municipal warrants, to be negotiable if they are in proper
form; 88 normally, however, such warrants lack the words "order" or "bearer," or are
marked "Not Negotiable," or are payable only in serial order, which makes them
conditional and therefore not negotiable. 89
Caution: A few states have held that warrants have always been nonnegotiable
under state law and that the adoption of the UCC was not intended to change that fact.
90
Footnotes
Footnote 84. District of Columbia v Cornell, 130 US 655, 32 L Ed 1041, 9 S Ct 694;

Wyatt v State, 257 Ala 90, 57 So 2d 366; State v Family Bank (Fla) 623 So 2d 474, 18
FLW S409, 20 UCCRS2d 1273.
Footnote 85. Martin v San Francisco, 16 Cal 285.
Footnote 86. Bank of Santa Cruz County v Bartlett, 78 Cal 301, 20 P 682.
Footnote 87. UCC 3-105(1)(g) [1952]; UCC 3-106(b)(ii) [1990 Rev], providing that a
promise or order is not made conditional because of such a limitation.
Footnote 88. National Bank v Univentures 1231 (Alaska) 824 P2d 1377, 17 UCCRS2d
482 (holding that a state treasury warrant is a negotiable instrument as long as it meets
the test of negotiability in UCC 3-102 [1952 and 1990 Rev], without regard to the fact
that the warrant does not fit within one of the categories of instruments listed under UCC
3-102(2), i.e., drafts, checks, certificates of deposit, and notes); St. James Bank & Trust
Co. v Board of Comm'rs (La App 4th Cir) 354 So 2d 233 (holding that an unconditional
promise to pay contained in a warrant issued by a governmental levee district was not
made conditional by the fact that the instrument was limited to payment for a particular
fund or proceeds of a particular source).
Footnote 89. Official Comment 6 to UCC 3-105 [1952], referring to UCC 3-105(1)(g)
[1952], which was similar to UCC 3-106(b)(2) [1990 Rev] but applicable only to
governmental instruments.
Footnote 90. People v Norwood (2nd Dist) 26 Cal App 3d 148, 103 Cal Rptr 7, 11
UCCRS 118; State v Family Bank (Fla) 623 So 2d 474, 18 FLW S409, 20 UCCRS2d
1273.
36 Letters of credit

View Entire Section
A letter of credit is not in itself a negotiable instrument 91 although a draft presented

under it may be. 92
Footnotes
Footnote 91. Consolidated Aluminum Corp. v Bank of Virginia (CA4 Md) 704 F2d 136,
1 UCCRS2d 193; Shaffer v Brooklyn Park Garden Apartments, 311 Minn 452, 250
NW2d 172, 20 UCCRS 1269; Heritage Housing Corp. v Ferguson (Tex App Dallas) 651
SW2d 272, 37 UCCRS 158.
Footnote 92. Scarsdale Nat'l Bank & Trust Co. v Toronto-Dominion Bank (SD NY) 533
F Supp 378, 33 UCCRS 996; Consolidated Aluminum Corp. v Bank of Virginia (CA4
Md) 704 F2d 136, 1 UCCRS2d 193; Shaffer v Brooklyn Park Garden Apartments, 311
Minn 452, 250 NW2d 172, 20 UCCRS 1269; Heritage Housing Corp. v Ferguson (Tex
App Dallas) 651 SW2d 272, 37 UCCRS 158.
37 Mortgages; conditional sales contracts; land contracts
View Entire Section

Conditional sales contracts are not negotiable instruments. 93
Similarly, a mortgage is not itself a negotiable instrument even though it may secure a
negotiable instrument, 94 because it does not contain an unconditional promise or order
to pay a sum certain. 95
Observation: While a mortgage itself is not negotiable, a mortgage given to secure a

negotiable instrument, when in the hands of a holder in due course, shares the same
immunity as to defenses as the note itself. 96
An agreement for the sale of a commercial establishment is not a negotiable instrument

because it is not payable to order or to bearer. 97
Footnotes
Footnote 93. Universal C. I. T. Credit Corp. v Hudgens, 234 Ark 668, 356 SW2d 658;
Enterprises, Inc. v Becker, 36 Conn Supp 213, 416 A2d 183; Commerce Acceptance of
Oklahoma City, Inc. v Henderson (Okla) 446 P2d 297; Northwestern Bank v Neal, 271
SC 544, 248 SE2d 585, 25 UCCRS 487; General Motors Acceptance Corp. v Deweese
(Tenn App) 1 UCCRS 204.
Footnote 94. Baily v Smith, 14 Ohio St 396.
As to mortgages generally, see 54A, 55 Am Jur 2d, Mortgages 1 et seq.
Footnote 95. Mox v Jordan, 186 Mich App 42, 463 NW2d 114, 13 UCCRS2d 770.
Footnote 96. Lassiter v Resolution Trust Corp. (Fla App D5) 610 So 2d 531, 17 FLW
D2710.
Footnote 97. Mauricio v Mendez (Tex App San Antonio) 723 SW2d 296, 4 UCCRS2d
1106 (holding that although the writing could be considered a nonnegotiable note since it
contained an unconditional promise to pay at least a certain sum of money each month,
defendant's liability on the instrument was governed by the law of contracts, not the law
of negotiable instruments).
38 Miscellaneous
View Entire Section

Among the miscellaneous papers which do not constitute negotiable instruments are
airline tickets, 98 credit card charge slips, 99 applications for credit cards, 1 retail
installment contracts and security agreements combined into one agreement, 2 leases, 3
guaranty agreements, 4 indemnity agreements, 5 state lottery tickets, 6 and a pawn
ticket issued in the name of the pawner. 7 Likewise, a retail installment contract for
improvements on a home is not a negotiable instrument where it does not contain an
unconditional promise to pay a sum certain in money without any other promise or
obligation. 8 Also, warehouse receipts are not negotiable instruments because they do
not evidence an unconditional promise to the pay money. 9
Footnotes
Footnote 98. Swiss Air Transport Co. v Benn (Civ Ct) 121 Misc 2d 129, 467 NYS2d
341, 37 UCCRS 404, revd on other grounds (Sup App T) 128 Misc 2d 657, 494 NYS2d
781.
Footnote 99. Lincoln First Bank, N.A. v Carlson, 103 Misc 2d 467, 426 NYS2d 433;
First Nat'l Bank v Fulk (Hancock Co) 57 Ohio App 3d 44, 566 NE2d 1270.
Footnote 1. Burris v Jacobson, Inc. (Fla App D5) 417 So 2d 787, 34 UCCRS 939.
Footnote 2. Pacific Finance Loans v Goodwin (Cuyahoga Co) 41 Ohio App 2d 141, 70
Ohio Ops 2d 265, 324 NE2d 578, 16 UCCRS 750; Wickware v National Mortg. Corp.
(Okla) 570 P2d 330, 22 UCCRS 720.
Footnote 3. Ford Motor Credit Co. v Sullivan, 170 Ga App 718, 318 SE2d 188; Northern
Ohio Tractor, Inc. v Richardson (Summit Co) 8 Ohio App 3d 171, 8 Ohio BR 231, 456
NE2d 824.
Footnote 4. Federal Deposit Ins. Corp. v Coleman (Tex) 795 SW2d 706, 11 UCCRS2d
1075, reh overr (Oct 24, 1990) and (criticized on other grounds in Bishop v First
Interstate Bank (Tex App Houston (14th Dist)) 1996 Tex App LEXIS 3021); Gregoire v
Lowndes Bank, 176 W Va 296, 342 SE2d 264, 1 UCCRS2d 152.
Footnote 5. McWilliams v Gilbert (Tex App Houston (1st Dist)) 715 SW2d 761
(criticized on other grounds by Herd Corp. v Triple "J" Invest., Inc. (Tex App Houston
(14th Dist)) LEXIS slip op).
Footnote 6. Ramirez v Bureau of State Lottery, 186 Mich App 275, 463 NW2d 245, 13
UCCRS2d 827, app den 439 Mich 861, 475 NW2d 819.
Footnote 7. Shepps v Kachel, 24 Misc 2d 124, 203 NYS2d 983.
Footnote 8. Insurance Agency Managers v Gonzales (Tex Civ App Houston (1st Dist))
578 SW2d 803, 25 UCCRS 754.
Footnote 9. Plains Cotton Coop. v Julien Co. (BC WD Tenn) 141 BR 359, 18 UCCRS2d
871.
b. Drafts and Bills of Exchange [39-43]
39 Generally
View Entire Section

A bill of exchange is a signed written order drawn by one person on another to pay a
third a certain sum of money, absolutely and in all events. 10 A bill of exchange, if in
proper form, is negotiable under the Uniform Commercial Code, 11 but it is not essential
to the character of a bill of exchange that it be negotiable. 12
The term "draft" is another and less ancient term for bill of exchange. 13 It is the term
preferred by the drafters of the Uniform Commercial Code, although the Code equates
the two instruments. 14 A draft in the law of negotiable instruments as enunciated by
the Code is an unconditional order to pay a fixed sum of money, on demand at a definite
time, to order or to bearer, that is signed by the drawer. 15
The term "bill of exchange" was equated with "draft" in the prior version of Article 3,
and, while this term was removed in the 1990 revision, it is still recognized that "bill of
exchange" is generally understood to be a synonym for "draft." 16 The term "draft"
includes a check, although not all drafts are checks. 17 The payor bank has no
obligation to a holder or indorsee until the draft is accepted by it, and acceptance must be
in writing. 18
If an instrument falls within the definition of both "note" and "draft," a person entitled to
enforce the instrument may treat it as either. 19
Observation: The pre-1990 version of Article 3 contained rules dealing with the
rights and liabilities of parties to a draft drawn in a set; 20 however, the 1990 version
of Article 3 does not contain a comparable provision.
Footnotes
Footnote 10. Garden Check Cashing Service, Inc. v First Nat'l City Bank (1st Dept) 25
App Div 2d 137, 267 NYS2d 698, 3 UCCRS 355, affd 18 NY2d 941, 277 NYS2d 141,
223 NE2d 566, 4 UCCRS 322; Haines v Tharp, 15 Ohio 130; Travis Bank & Trust v
State (Tex App Austin) 660 SW2d 851, 38 UCCRS 300 (decided under prior law).
Footnote 11. UCC 3-104 [1952 and 1990 Rev], stating the elements of a negotiable
instrument.
Footnote 12. Newman v Frost, 52 NY 422.
Footnote 13. Risley v Phenix Bank of New York, 83 NY 318, affd 111 US 125, 28 L Ed
374, 4 S Ct 322.
Footnote 14. UCC 3-104(2)(a) [1952].
Footnote 15. UCC 3-104(2)(a) [1952]; UCC 3-104(a), (b), (e) [1990 Rev].
Forms: Complaint, petition, or declarationAllegationRequisites of negotiability of

draft. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:5 et seq.
ChecklistMatters to be considered when drafting a bill of exchange or a draft. 19 Am

Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable Instruments
253:2214.
DraftGeneral Form. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
3Negotiable Instruments 253:2231-253:2234.
A check is a draft which is payable on demand. Universal Premium Acceptance Corp. v

York Bank & Trust Co. (ED Pa) 866 F Supp 182, 25 UCCRS2d 17, revd on other
grounds, remanded on other grounds (CA3 Pa) 69 F3d 695, 28 UCCRS2d 1, motion den
(ED Pa) 1996 US Dist LEXIS 10899; Farmers Cooperative Livestock Market, Inc. v
Second Nat'l Bank (Ky) 427 SW2d 247, 5 UCCRS 88; Lawyers Sur. Corp. v Royal
Chevrolet, Inc. (Tex App Texarkana) 847 SW2d 624, writ den (Jun 30, 1993) and rehg of
writ of error overr (Oct 6, 1993).

Footnote 18. Bank of America v Security Pacific Nat'l Bank (5th Dist) 23 Cal App 3d
638, 100 Cal Rptr 438, 10 UCCRS 434.
Footnote 19. 43.
Footnote 20. UCC 3-801 [1952].
40 Trade acceptances
View Entire Section

A trade acceptance is a draft drawn by the seller on the purchaser of goods sold, and
accepted by such purchaser. 21 Its purpose is to make the book account liquid and to
permit the seller to raise money on it before it is due under the terms of the sale; it is
ordinarily turned into cash by the seller through indorsement and discount, and the
situation is substantially the same as if the buyer had given the seller a promissory note.
22 A trade acceptance in usual form is a negotiable instrument. 23 The mere fact
that a trade acceptance contains matter other than an order for the payment of money
does not necessarily render the instrument nonnegotiable unless by the other matter the
obligation of the instrument is rendered conditional. 24
A trade acceptance conforming to the requirements of the Federal Reserve Act is a bill of
exchange, and the obligations of the parties are identical with the obligations of parties to
other bills. 25
Footnotes
Footnote 21. National Bank of North America v Beinhorn (NY Sup) 10 UCCRS 847.
Footnote 22. State Trading Corp. v Jordan, 146 Pa Super 166, 22 A2d 30; Legal Discount
Corp. v Martin Hardware Co., 199 Wash 476, 91 P2d 1010, 129 ALR 420.
Forms: Form drafting guideChecklistMatters to be considered in drafting a trade

acceptance. 3B Am Jur Legal Forms 2d, Bills and Notes 41:91.
Form drafting guideChecklistMatters to be considered when drafting a trade

acceptance. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
Trade acceptance. 3B Am Jur Legal Forms 2d, Bills and Notes 41:92.
Footnote 23. Federal Factors, Inc. v Wellbanke, 241 Ark 44, 406 SW2d 712, 3 UCCRS
813; Atterbury v Bank of Washington Heights, 241 NY 231, 149 NE 841; National Bank
of North America v Beinhorn (NY Sup) 10 UCCRS 847.
Footnote 24. First Nat'l Bank v Blackman, 249 NY 322, 164 NE 113, reh den 250 NY
537, 166 NE 315.
Footnote 25. Stafford v Hill, 53 Cal App 337, 200 P 33.
41 Inland or foreign drafts or bills
View Entire Section

Under prior law there was a distinction between "inland" and "foreign" bills, primarily
because only a foreign bill required protest. 26 The Uniform Commercial Code does
not use these terms, but the pre-1990 version of Article 3 provides specifically that drafts
drawn or payable outside the United States must be protested upon dishonor. 27 Under
the 1990 version of Article 3, protest is no longer mandatory and must be requested by
the holder. 28 However, the Official Comment notes that presentment may be a
requirement for liability on international drafts governed by foreign law which Article 3
cannot affect. 29
Footnotes
Footnote 26. Amsinck v Rogers, 189 NY 252, 82 NE 134.
Forms: Foreign bill of exchange. 19 Am Jur Legal Forms 2d, Uniform Commercial
Code: Article 3Negotiable Instruments 253:2235.
Footnote 27. UCC 3-501(3) [1952].
Footnote 28. Official Comment to UCC 3-505 [1990 Rev].
42 Other types of drafts
View Entire Section

A bank draft is merely an instrument of one bank drawing upon its deposits with another
bank. 30
A sight draft is forwarded in commercial transactions in order to insure that payment will
occur on or before the delivery of goods; it is a document written by the seller to be paid
to the order of the seller, with the buyer as the drawee; it is not, therefore, an ordinary
draft which is drawn and tendered by the drawee. 31 A sight draft is a draft which is

payable on demand. 32
A documentary draft is a draft to be presented for acceptance or payment if specified

documents, certificated securities or instructions for uncertificated securities, or other
certificates, statements, or the like are to be received by the drawee or other payor before
acceptance or payment of the draft. 33
Some insurance companies follow the practice of issuing drafts in which the drawer
draws on itself and makes the draft payable at or through a bank. These instruments are
treated as drafts. 34
A "payable through" draft must be clearly indicated as such by the word(s) "through" or
"payable through" appearing before the name of the collecting bank through which the
draft is payable. 35 However, an instrument which states that it is "payable through" a
bank does not of itself authorize the bank to pay the instrument out of the drawer's
account. 36
Footnotes
Footnote 30. Perry v West, 110 NH 351, 266 A2d 849, 7 UCCRS 1157.
Footnote 31. McCollum Aviation, Inc. v CIM Associates, Inc. (SD Fla) 446 F Supp 511,
26 UCCRS 1072.
Forms: DraftSight draftTo order of payee. 19 Am Jur Legal Forms 2d, Uniform
Commercial Code: Article 3Negotiable Instruments 253:2232.
Footnote 32. Temple-Eastex, Inc. v Addison Bank (Tex) 672 SW2d 793, 38 UCCRS 971,
rehg of cause overr (Jul 18, 1984).
Footnote 33. UCC 4-104(a)(6).
A check with accompanying documents which are to be delivered when payment is made
is a documentary draft. Wiley v Peoples Bank & Trust Co. (CA5 Miss) 438 F2d 513, 8
UCCRS 887.
Annotation: Banks: what is "documentary draft" under UCC 4-104(1)(f), 65

ALR4th 1095.
Footnote 35. Aetna Casualty & Sur. Co. v Fennessey, 37 Mass App 668, 642 NE2d 1050,
25 UCCRS2d 477, review den 419 Mass 1102, 646 NE2d 409.
Footnote 36. People v Burke (1st Dist) 38 Cal App 3d 708, 113 Cal Rptr 553, 14 UCCRS
976.
43 Option to treat draft on drawer as either a draft or a note

View Entire Section
If a negotiable instrument falls within the definition of both "note" and "draft," a person
entitled to enforce the instrument may treat it as either. 37
Observation: Under the pre-1990 version of Article 3, where there is doubt whether
an instrument was a draft or a note, the holder can treat it as either, 38 and this is true
not only where the instrument is ambiguously phrased, but also in any case where the
form of the instrument left its character as a draft or a note in doubt. 39
Footnotes
Footnote 37. UCC 3-104(e) [1990 Rev].
Footnote 38. UCC 3-118(a) [1952].
c. Notes [44-46]
44 Promissory notes
View Entire Section

In the law of commercial paper, a note is a written promise to pay a sum certain in
money. 40 Under Article 3 of the Uniform Commercial Code, a note is a promise to
pay, 41 whereas a draft is an order to pay. 42
Promissory notes in proper form are negotiable instruments and are governed by Article 3
of the Uniform Commercial Code (UCC); however, the quality of negotiability does not
necessarily attach to promissory notes, and a promissory note may be either negotiable or
nonnegotiable. 43
A negotiable note must be signed by the maker and must contain an unconditional
promise to pay a fixed amount of money, with or without interest or other charges
described in the promise, and be payable on demand or at a definite time and to order or
to bearer; further with specified exceptions, it may not state any other undertaking or
instruction by the person promising payment to do any act in addition to the payment of
money. 44
The form of a promissory note may be varied at the pleasure of the individual executing
it, provided the instrument is in legal effect a written promise to pay money absolutely
and at all events, and interferes with no statutory regulation; the sum or amount need not
necessarily be expressed in words; if expressed in figures, it has the same effect. 45
However, the form of a note drawn up by a creditor for signature by the debtor may be
affected by the Federal Truth in Lending Act, 46 under which each creditor covered by
the act must, in accordance with the applicable federal regulations, clearly and
conspicuously disclose certain required information to each person to whom the creditor
extends consumer credit. 47
Under the pre-1990 version of Article 3, a note that is nonnegotiable only because it is
not drawn to order or bearer will nevertheless be governed by Article 3 of the UCC,
except that there can be no holder in due course. 48 The 1990 version of Article 3 deals
exclusively with negotiable instruments and does not contain a provision comparable to
UCC 3-805 of the pre-1990 version. 49
Observation: The Uniform Commercial Code omits a provision of the Uniform

Negotiable Instruments Act, which was said to be merely declaratory of the common
law, that where a note is drawn to the maker's own order it is not complete until
indorsed by the maker; 50 however, this omission does not appear to make a
substantive change in the law, because the Code, after permitting a note to be drawn
payable to the order of the maker, 51 generally provides that there can be no
negotiation of an order instrument to a subsequent holder without the necessary
indorsement of the payee. 52
Footnotes
Footnote 40. Edlund v Bounds (Tex App Dallas) 842 SW2d 719, writ den (Jan 13, 1993).
Forms: Promissory notes. 3B Am Jur Legal Forms 2d, Bills and Notes 41:21 et
seq.
Form drafting guideChecklistMatters to be considered when drafting a promissory

note. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable
Instruments 253:2217.
Forms of promissory notesGeneral form. 19 Am Jur Legal Forms 2d, Uniform

Commercial Code: Article 3Negotiable Instruments 253:2251-253:2263.
Footnote 41. UCC 3-104(2)(d) [1952]; UCC 3-104(e) [1990 Rev].
Footnote 42. 39.
Footnote 43. Kendall v Parker, 103 Cal 319, 37 P 401; Smith v McKeller (La App 1st
Cir) 638 So 2d 1192; Gibson v Harl (Mo App) 857 SW2d 260; In re Taylor's Estate, 251
NY 257, 167 NE 434; Chrismer v Chrismer (Preble Co) 103 Ohio App 23, 3 Ohio Ops 2d
116, 144 NE2d 494.
A designation in a note that it is payable to "[plaintiff] or order" is sufficient to meet the

requirement that it be payable to order. Lakhaney v Anzelone (SD NY) 788 F Supp 160,
18 UCCRS2d 191.

A note specifying a variable interest rate contained a promise to pay sum certain and thus
was a negotiable instrument where the variable interest rate was tied to a readily
ascertainable commercial or financial index by way of a specific formula such that the
interest owed could be readily calculated. Federal Deposit Ins. Corp. v Hershiser
Signature Properties (ED Mich) 777 F Supp 539, 16 UCCRS2d 702.
A note is not negotiable where, in stating its terms, it incorporates terms of a deed of
trust, because under UCC 3-105(2)(a) [1952] or UCC 3-106(a)(ii) [1990 Rev], a
promise is not unconditional if the instrument states that it is subject to or governed by
another agreement. Resolution Trust Corp. v 1601 Partners, Ltd. (ND Tex) 796 F Supp
238, 19 UCCRS2d 147.
A note is not negotiable where it is payable to a specific person rather than to order or to
bearer. Spidell v Jenkins (App) 111 Idaho 857, 727 P2d 1285, 3 UCCRS2d 161.
A note executed in connection with a contract for the sale of real estate is negotiable.
Gainok v Featherson (App) 131 Ariz 421, 641 P2d 909, 33 UCCRS 1012.
Footnote 44. UCC 3-104(1) [1952], adding requirement that note be signed by the
maker or drawer); UCC 3-104(a) [1990 Rev].
Footnote 45. Strickland v Holbrooke, 75 Cal 268, 17 P 204.
Footnote 46. 15 USCA 1601 et seq.
Footnote 47. 15 USCA 1631(a).
Footnote 48. UCC 3-805 [1952].
Footnote 50. Yonkers Nat'l Bank v Mitchell, 156 App Div 318, 141 NYS 128, app dismd
209 NY 558, 103 NE 1135.
Footnote 51. UCC 3-110(1)(a) [1952].
Footnote 52. UCC 3-202(1) [1952].
45 Other types of notes
View Entire Section

A conditional sales note is a note which, over one signature of the obligor, combines the
provisions of a promissory note with those of a conditional sales contract. 53
Interest coupons attached to a note or bond to evidence the interest maturing at stated
intervals over the term of the principal debt are usually executed in a form which
constitutes them separate promissory notes distinct from the obligations to which they are
attached. 54 Therefore, coupons payable to bearer and attached to and representing
installments of interest accruing upon bonds are in legal effect promissory notes, and
possess all the attributes of negotiable paper; such coupons may be detached and
negotiated separately by simple delivery, and sued on separately from the bond after the
bond itself has been paid and satisfied, as well as before; coupons once detached and
negotiated cease to be mere incidents of the bond, and become independent claims. 55
However, if a note in bearer or registered form comes within the definition of "security"
in Uniform Commercial Code Article 8, it is governed by that Article and not by Article
3. 56
Footnotes
Footnote 53. Abingdon Bank & Trust Co. v Shipplett-Moloney Co., 316 Ill App 79, 43
NE2d 857.
As to collaterally secured notes, see 113.
Forms: Promissory notePayable in installmentsSecured by collateral. 3B Am Jur

Legal Forms 2d, Bills and Notes 41:32.
Purchase money security. 3B Am Jur Legal Forms 2d, Bills and Notes 41:71.
Secured time note. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
3Negotiable Instruments 253:2253-253:2254.
Footnote 54. Evertson v National Bank of Newport, 66 NY 14.
Footnote 55. Trustees of Internal Imp. Fund v Lewis, 34 Fla 424, 16 So 325; Hibbs v
Brown, 190 NY 167, 82 NE 1108; Gellens v 11 West 42nd Street, Inc., 259 App Div 435,
19 NYS2d 525, reh and app den 259 App Div 1002, 20 NYS2d 985.
46 Drafts distinguished
View Entire Section

Although drafts or checks and notes have many similarities and perform substantially like
functions in many commercial transactions, the basic difference between the two classes
of paper is that a draft or check is an order to pay money, 57 whereas a note is a promise
or undertaking to pay money. 58 Thus, there are differences in that the maker of a note
is primarily liable, 59 whereas the drawer of a draft or check is only secondarily liable
60 and has a right to countermand the order or stop payment under certain
circumstances. 61
Comment: Under Alternative A of UCC 3-121 [1952], a note or acceptance which
states that it is payable at a bank is the equivalent of a draft drawn on the bank payable
when it falls due out of any funds of the maker or acceptor in current account or
otherwise available for such payment. Under Alternative B of UCC 3-121, a note or
acceptance which states that it is payable at a bank is not of itself an order or
authorization to the bank to pay it. 62
Another important difference between a note and a check is that a check is a

representation by the maker that there is money in the bank to cover it and that the bank
will pay the amount called for; one who gives a demand note makes no such
representation. 63 Furthermore, in modern business, checks are universally accepted as
money while promissory notes are not. 64
But when a draft is accepted by the drawee or payor, that is, the person on whom the
order is drawn, it becomes in effect a promissory note of the drawee or payor; the
acceptance is the drawee's signed agreement to pay the draft as presented. 65 The
acceptor is obliged to pay the draft. 66
Footnotes
Footnote 57. UCC 3-104(2)(a) [1952]; UCC 3-103(a)(6), 3-104(e), 3-104(f) [1990
Rev].
Footnote 58. UCC 3-104(2)(d) [1952]; UCC 3-103(a)(9), 3-104(e) [1990 Rev].
Footnote 59. 444.
Footnote 60. 451.
Footnote 61. 456.
Footnote 63. De St. Germain v Watson, 95 Cal App 2d 862, 214 P2d 99.
Footnote 65. Schirone v Hochheiser & Weisberg, Inc., 237 App Div 723, 262 NYS 763,
affd 263 NY 624, 189 NE 728.
Footnote 66. UCC 3-413(1) [1952]; UCC 3-412 [1990 Rev], discussed in 447,
450.
d. Checks [47-51]
47 Generally

View Entire Section
The term "check" means a draft, other than a documentary draft, payable on demand and
drawn on a bank or a cashier's check or teller's check; an instrument may be a check even
though it is described on its face by another term, such as "money order." 67 A check is
a negotiable instrument where it conforms with the requirements set forth in Article 3 of
the Uniform Commercial Code. 68 An order that meets all the requirements of a
negotiable instrument except that it is not payable to bearer or to order at the time it is
issued or first comes into possession of a holder, and that otherwise falls within the
definition of a check, is a negotiable instrument and a check. 69
Comment: Under the pre-1990 version of Article 3, as the context may require, the
term "check" may refer to an instrument which is not negotiable within the meaning of
Article 3 as well as to instruments which are negotiable. 70
The term "check" has been more fully defined by the courts as a written order upon a
bank or banking house, purporting to be drawn upon a deposit of funds for the payment
of a certain stated sum of money, to a certain person therein named, or to such person or
his or her order, or to bearer, and payable instantly on demand. 71 A check has a value
of its own and does not need to be deposited in order to have value. 72
A check which bears an unauthorized signature is not a negotiable instrument and the
payee cannot be a holder or a holder in due course. 73 A forged check passes no interest
to the bank payee. 74
A check need not be presented for acceptance because it requires no acceptance as

distinct from prompt payment. 75 In modern business, a check is universally accepted as
money. 76
Observation: The term "check" includes a share draft drawn on a credit union
payable through a bank because a credit union is a bank as defined in the UCC. 77
A check may be either a demand for payment or a request for credit, depending on
whether the drawer has money deposited in the bank on which it is drawn; in either case,
it is the written instrument on which the payment of the sum mentioned in the instrument
is founded and which is the basis of any suit growing out of the payment of that money or
a refusal to pay. 78
A check contains an implied promise that the maker has credit in the named bank and
that the bank will pay the amount called for; that the maker will repay the money to the
bank if the bank pays without the maker having the necessary credit; and that if the bank
fails to pay, the drawer will pay the amount named to the owner. 79 Thus, in one sense,
a check is a contract, and is governed by contract law. 80
Comment: Checks are payment instruments rather than credit instruments. 81

Footnotes
Footnote 67. UCC 3-104(2)(a) [1952]; UCC 3-104(f) [1990 Rev].
Footnote 68. UCC 3-104 [1952 and 1990 Rev].
Forms: Complaint, petition, or declarationAllegationsRequisites of negotiability of

check. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Commercial
Paper, Form 3:7.
Footnote 70. UCC 3-104(3) [1952].
Footnote 71. Wilson v Lewis (1st Dist) 106 Cal App 3d 802, 165 Cal Rptr 396, 29
UCCRS 1305.
Footnote 72. United States v Li (ND Ill) 856 F Supp 411, motion gr, motion for new trial
denied (ND Ill) 856 F Supp 421, affd (CA7 Ill) 55 F3d 325, 130 CCH LC 11362, 42
Fed Rules Evid Serv 174.
Footnote 73. Danning v Bank of America (2nd Dist) 151 Cal App 3d 961, 199 Cal Rptr
163, 37 UCCRS 1616 (disapproved on other grounds by In re Marriage of Arceneaux, 51
Cal 3d 1130, 275 Cal Rptr 797, 800 P2d 1227, 90 CDOS 9056, 90 Daily Journal DAR
14189).
Footnote 74. Federal Land Bank v Hardin-Mapes Coal Corp. (Ky) 817 SW2d 225, 16
UCCRS2d 707.
Footnote 75. Security Commercial & Sav. Bank v Southern Trust & Commerce Bank, 74
Cal App 734, 241 P 945.
Footnote 77. Official Comment 4 to UCC 3-104 [1990 Rev], referring to the definition
in UCC 4-104 [1990 Rev].
Credit union share drafts function exactly like bank checks; there is no appreciable
difference between them. McDowell v Dallas Teachers Credit Union (Tex App Dallas)
772 SW2d 183, 9 UCCRS2d 996 (decided under the pre-1990 version of Article 3).
Footnote 78. Du Brutz v Bank of Visalia, 4 Cal App 201, 87 P 467, transfer den by sup ct
as reported in 4 Cal App 206, 87 P 469.
Footnote 79. Torrance Nat'l Bank v Enesco Federal Credit Union (2nd Dist) 134 Cal App
2d 316, 285 P2d 737, related proceeding (CA9 Cal) 251 F2d 666.
Footnote 80. Reeb v Interchange Resources, 13 Ariz App 16, 473 P2d 818, vacated on
other grounds 106 Ariz 458, 478 P2d 82; People v Harris (5th Dist) 39 Cal App 3d 965,
114 Cal Rptr 892; Bailey v Polote, 152 Ga App 255, 262 SE2d 551 (holding that a check
executed and delivered to the payee is considered a written contract by the drawer in

favor of the payee that the drawer's bank will pay the stated amount to the payee upon
presentment); Kleinman v Chase Nat'l Bank, 124 Misc 173, 207 NYS 191; Lagonda Nat'l
Bank v Portner, 46 Ohio St 381, 21 NE 634.
48 Cashier's checks, teller's checks, certified checks
View Entire Section

A "cashier's check" is a draft with respect to which the drawer and drawee are the same
bank or branches of the same bank, 82 and a cashier's check is a "check" for purposes of
Article 3 of the Uniform Commercial Code. 83
Caution: At least one court has specifically held that Article 3 does not apply to
cashier's checks. 84
A cashier's check differs from an ordinary check or draft in that it is the primary
obligation of the bank which issues it, being drawn by the bank upon itself and accepted
by the act of issuance. 85 It establishes a debtor/creditor relationship between the
issuing bank and the payee. 86
Comment: The pre-1990 version of Article 3, UCC 3-118(a), states that a draft
drawn on the drawer is effective as a note, and treats a cashier's check as a note.
Although it is technically more correct to treat a cashier's check as a promise by the
issuing bank to pay rather than an order to pay, a cashier's check is in the form of a
check and it is normally referred to as a check. Thus, the 1990 version of Article 3
follows banking practice in referring to a cashier's check as both a draft and a check
rather than a note 87
A "teller's check" is a draft drawn by a bank on another bank or payable at or through a

bank. 88
Comment: A teller's check is always drawn by a bank and is usually drawn on

another bank. In some cases a teller's check is drawn on a nonbank but is made
payable at or through a bank. Article 3 treats both types of teller's check identically. 89
A "certified check" is a check accepted by the bank on which it is drawn; such

acceptance may be by the drawee's signed agreement to pay the draft or by a writing on
the check which indicates that it is certified. 90
Footnotes
Footnote 82. UCC 3-104(g) [1990 Rev].

Footnote 83. Feltman v BankAtlantic (In re Allied Respiratory Care Servs.) (BC SD Fla)
182 BR 589, 26 UCCRS2d 901, 9 FLW Fed B 18; Crosby v Lewis (Fla App D5) 523 So
2d 1154, 13 FLW 186, 5 UCCRS2d 1249; Lassen v First Bank Eden Prairie (Minn App)
514 NW2d 831, 23 UCCRS2d 482, review den (Minn) 1994 Minn LEXIS 534.
Forms: Indemnification agreementFor issuance of replacement cashier's check. 19

Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable
Footnote 84. Stringfellow v First Am. Nat'l Bank (Tenn) 878 SW2d 940, 24 UCCRS2d
1173.
Footnote 85. In re Toone (BC DC Mass) 140 BR 605, 22 BCD 1490, 19 UCCRS2d 144;
Center Video Indus. Co. v Roadway Package Sys. (CA7 Ill) 90 F3d 185, 29 UCCRS2d
1239; Hall-Mark Elecs. Corp. v Sims (In re Lee) (BAP9 Cal) 179 BR 149, 95 CDOS
2727, 27 BCD 1, 33 CBC2d 1360, 26 UCCRS2d 386, affd (CA9) 108 F3d 239, 97 CDOS
1591, 97 Daily Journal DAR 3065, 30 BCD 628, CCH Bankr L Rptr 77289 (noting,
however, that acceptance does not operate as an assignment of funds in the hands of the
drawee); Sochaczewski v Wilmington Sav. Fund Soc. (Del Super Ct) 508 A2d 895, 2
UCCRS2d 181; Crosby v Lewis (Fla App D5) 523 So 2d 1154, 13 FLW 186, 5
UCCRS2d 1249; Clark v Hawkeye Federal Sav. Bank (Iowa App) 423 NW2d 891, 6
UCCRS2d 1525; Abilities, Inc. v Citibank, N. A. (2d Dept) 87 App Div 2d 831, 449
NYS2d 242, 33 UCCRS 1428; Community Nat'l Bank v Channelview Bank (Tex App
Houston (1st Dist)) 814 SW2d 424, 15 UCCRS2d 1252, 130D motion filed (Oct 17,
1991).
Footnote 86. Myers v First Nat'l Bank (3d Dept) 42 App Div 2d 657, 345 NYS2d 204,
13 UCCRS 122.
Footnote 88. UCC 3-104(h) [1990 Rev].
Forms: Certification of checkCertification stamp. 19 Am Jur Legal Forms 2d,

Uniform Commercial Code: Article 3Negotiable Instruments 253:2450.
49 Traveler's checks
View Entire Section

Traveler's checks are issued both by banks and by nonbanks. 91 The Uniform
Commercial Code defines a traveler's check as an instrument that (1) is payable on
demand, (2) is drawn on or payable at or through a bank, (3) is designated by the term
"traveler's check" or by a substantially similar term, and (4) requires, as a condition to
payment, a countersignature by a person whose specimen signature appears on the
instrument. 92 Traveler's checks constitute complete purchases and sales of credit, and
have the characteristics of cashier's checks where issued by a bank. 93
Although the definition of negotiable instrument requires an unconditional promise or

order to pay, 94 if a promise or order requires, as a condition of payment, a
countersignature by a person whose specimen signature appears on the promise or order,
the condition does not make the promise or order conditional for purposes of the
definition of a negotiable instrument. 95
Traveler's checks become negotiable instruments at the time the purchaser first signs, and
the countersignature is not needed for negotiability. 96
Traveler's checks may be in the form of a draft or a note. 97 Regardless of whether they
are drafts or notes, this type of paper, now in wide commercial use, is valid and effectual
for all purposes in the hands of a holder in due course; any other method of treating such
paper in the channels of trade and commerce would interfere with the normal flow of
business transactions. 98
The requirement that an instrument, to be a traveler's check, be drawn on or payable at or

through a bank may be satisfied without words on the instrument that identify a bank as
drawee or paying agent so long as the instrument bears an appropriate routing number
that identifies a bank as paying agent. 99
Although the absence of a date on a traveler's check does not render it incomplete and
unenforceable, the absence of the name of the payee does make the instrument legally
incomplete. 1
The procedure for issuance and use of a traveler's check is as follows:
(1) The issuer prints the check, customarily in one of several standard denominations,
and offers it for sale;
(2) The purchaser buys the instrument and signs it in the presence of the issuer or its
agent;
(3) Sometimes the purchaser must pay a commission and sometimes not;
(4) In either case, there is consideration for the transaction running to the issuer, as it gets
the use of the purchaser's cash while waiting for the ultimate recipient of the check to
redeem it with the issuer;
(5) The nature of the agreement between the issuer and the purchaser is that the issuer
will replace the check if it is lost or stolen, thus providing a safety net to the purchaser
that is unavailable with cash;
(6) To use the check, the purchaser need only countersign it in the presence of the person
to whom the purchaser is tendering it (referred to as the "acceptor");
(7) This offers some protection against the thief who would find it difficult to forge the
purchaser's signature while under observation;
(8) The "acceptor" then redeems the check with the issuer and receives cash equaling the
face value of the check. 2
Practice guide: To obtain a replacement for a lost or stolen traveler's check, the
purchaser (claimant) must first file a police report, a measure designed to ensure the
good-faith nature of the claim. Secondly, the claimant must prove that he or she
purchased the lost or stolen check, usually done by producing a "sales advice." A
"sales advice" is a form of receipt given to the customer at the time of purchase; it
provides the customer with a record of the serial number and denomination of each
check purchased and also provides instructions on what to do should the check be lost
or stolen. Finally, the claimant must attest, in a report of loss, to the fact that the
claimant signed the check once, that is, at the time of purchase. 3
Footnotes
Footnote 92. UCC 3-104(i) [1990 Rev].
Footnote 93. Rose Check Cashing Service, Inc. v Chemical Bank New York Trust Co.,
43 Misc 2d 679, 252 NYS2d 100.
Annotation: Rights of one who acquires lost or stolen traveler's checks, 42 ALR3d
846.
Forms: Traveler's check. 3B Am Jur Legal Forms 2d, Bills and Notes 41:93.
Footnote 94. UCC 3-104(1)(b) [1952]; UCC 3-104(a) [1990 Rev].
Footnote 96. Xanthopoulos v Thomas Cook, Inc. (SD NY) 629 F Supp 164, 42 UCCRS
883.
Footnote 98. Transcontinental & Western Air, Inc. v Bank of America Nat'l Trust & Sav.
Asso., 46 Cal App 2d 708, 116 P2d 791.
Footnote 1. Gray v American Express Co., 34 NC App 714, 239 SE2d 621, 23 UCCRS
362.
Footnote 2. Thomas C. Cook, Inc. v Rowhanian (Tex App El Paso) 774 SW2d 679, 10
UCCRS2d 883, writ den (Nov 8, 1989) (decided under pre-1990 version of Article 3).
Footnote 3. Thomas C. Cook, Inc. v Rowhanian (Tex App El Paso) 774 SW2d 679, 10
UCCRS2d 883, writ den (Nov 8, 1989) (decided under pre-1990 version of Article 3).

50 Checks distinguished from other drafts
View Entire Section

The features which distinguish checks from other drafts are that checks are always drawn
upon a bank or banker and that they are payable instantly on demand and not at a
specified future time. 4 Also, checks are always supposed to be drawn upon a previous
deposit of funds, 5 and the delivery of a check impliedly represents that there are funds
in the hands of the drawee which are subject to its payment. 6 On the other hand, a draft
or bill of exchange is not always or necessarily drawn upon actual funds in the hands of
the drawee, but very frequently is drawn in anticipation of funds or upon a previously
arranged credit. 7
The Uniform Commercial Code does not generally distinguish between checks and other
drafts. 8 With regard to discharge of a drawer by delay in presentment, no distinction is
made between a draft and a check. 9 However, certain provisions of the Uniform
Commercial Code do differentiate between a check and a draft; under one such provision,
where a holder of a check procures its certification (acceptance), the drawer and all prior
indorsers are discharged. 10 Another difference is that the Code provides a rule of
thumb as to a reasonable time within which to present an uncertified check drawn and
payable within the United States and which is not a draft drawn by a bank. 11
Comment: This provision is omitted from the 1990 version of Article 3 as

inconsistent with practice which seldom involves face-to-face dealings. 12
Footnotes
Footnote 4. Bowen v Newell, 8 NY 190; Dubler v Toscana Straw Goods Corp., 142 Misc
369, 254 NYS 464.
Footnote 5. In re Bank of United States, 243 App Div 287, 277 NYS 96; Rose Check
Cashing Service, Inc. v Chemical Bank New York Trust Co., 43 Misc 2d 679, 252
NYS2d 100; Stewart v Smith, 17 Ohio St 82.
Footnote 6. Fleig v Sleet, 43 Ohio St 53, 1 NE 24.
Footnote 7. Morrison v Bailey, 5 Ohio St 13.
Footnote 8. UCC 3-104(2)(b) [1952]; UCC 3-104(f) [1990 Rev], defining a check as
a draft drawn on a bank and payable on demand.
Footnote 9. UCC 3-507 [1952]; UCC 3-502 [1990 Rev], discussed in 322.
Footnote 10. UCC 3-411(1) [1952], UCC 3-415(d) [1990 Rev], discussed in 10 Am

Jur 2d, Banks 600.
Footnote 11. UCC 3-503(2) [1952], discussed in 322.
51 Checks payable in the future
View Entire Section

Although the requirement that a check must be payable on demand 13 is essential, 14

the fact that a check is postdated does not make it any the less a check, because it is
payable on or at any time after the day of its date. 15 It is not a representation that
funds are available when the check is given, but rather is in the nature of a promise to
discharge a present obligation at a future date. 16 Its effect is the same as if it had not
been issued until its date. 17
Even if a postdated check technically may not be called a check because it is not payable
on demand, it is at least a draft. 18 Accordingly, a postdated check may be transferred
before the day of its date with like effect as if transferred on that day, and where it is so
transferred and is received by a third person for value in good faith, without notice of any
infirmity, the third person is protected in the same manner as any other holder in due
course. 19
Footnotes
Footnote 13. 47.
Footnote 14. Torrance Nat'l Bank v Enesco Federal Credit Union (2nd Dist) 134 Cal App
2d 316, 285 P2d 737, related proceeding (CA9 Cal) 251 F2d 666.
Footnote 15. Carnival Leisure Indus. v Aubin (SD Tex) 830 F Supp 371, 22 UCCRS2d
228, revd on other grounds (CA5 Tex) 53 F3d 716; In re Paralelo 42 Corp. (BC SD Fla)
18 BR 433, 33 UCCRS 600; Wright v Bank of America Nat'l Trust & Sav. Asso. (2nd
Dist) 176 Cal App 2d 176, 1 Cal Rptr 202, 76 ALR2d 1293; Bowen v Newell, 8 NY 190.
Footnote 16. Azzarello v Richards, 198 Misc 723, 99 NYS2d 597; Howells, Inc. v Nelson
(Utah) 565 P2d 1147.
Footnote 17. State v De Nicola, 163 Ohio St 140, 56 Ohio Ops 185, 126 NE2d 62.
Footnote 18. Allied Color Corp. v Manufacturers Hanover Trust Co. (SD NY) 484 F
Supp 881, 28 UCCRS 456; In re J.I.C. Installations, Inc. (BC SD NY) 109 BR 43;
Morrison v Shanwick Int'l Corp. (App) 167 Ariz 39, 804 P2d 768, 69 Ariz Adv Rep 64;
People v Bercovitz, 163 Cal 636, 126 P 479; Torrance Nat'l Bank v Enesco Federal
Credit Union (2nd Dist) 134 Cal App 2d 316, 285 P2d 737, related proceeding (CA9 Cal)
251 F2d 666.
Footnote 19. American Nat'l Bank v Wheeler, 45 Cal App 118, 187 P 128.
II. FORM, PROVISIONS, INTERPRETATION, AND GENERAL

OPERATION [52-140]
A. In General [52-59]
Research References
UCC 1-201; UCC 3-104, 3-701, 3-801 [1952]; UCC 3-104 [1990]
ALR Digests: Bills and Notes 10-31
ALR Index: Bills and Notes; Checks and Drafts; Uniform Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 5
3B Am Jur Legal Forms 2d, Bills and Notes 41:12, 41:21; 19 Am Jur Legal Forms
2d, Uniform Commercial Code: Article 3Negotiable Instruments 253:2213,
253:2214, 253:2217, 253:2232
52 Generally; negotiability determined by form
View Entire Section

Negotiability is a matter of form and what the law implies from such form. 20
Negotiability or nonnegotiability of an instrument is determined from the face of the
instrument itself, and the intent of the parties is irrelevant. 21 An instrument is
not negotiable unless the holder can ascertain all of its essential terms from its face. 22
"Face" in this connection includes the back as well as the front of the instrument. 23
Negotiability of an instrument is determined by the presence or absence of the legal
elements of negotiability and not by an express provision that the writing is negotiable.
24
Negotiable paper must be simple, certain, unconditional, and subject to no contingencies.

25
The negotiability of a draft or a note may be restrained by special words in the body of
the instrument itself, 26 as where payment is restricted to a particular person 27 or
transfer of rights is restricted to a transfer on the books of the issuer. 28 The addition of
other terms involves the risk of impairment of negotiability, although there are many
terms which customarily and safely are added to particular types of instruments. 29
Footnotes
Footnote 20. State Bank v Central Mercantile Bank, 248 NY 428, 162 NE 475, 59 ALR
1473.
Footnote 21. A.I. Trade Fin. v Altos Hornos De Vizcaya, S.A. (SD NY) 840 F Supp 271,
22 UCCRS2d 790, affd sub nom A.I. Trade Fin. v Laminaciones de Lesaca, S.A. (CA2
NY) 41 F3d 830, 25 UCCRS2d 461, 42 ALR5th 771; Bankers Trust v 236 Beltway Inv.
(ED Va) 865 F Supp 1186, 26 UCCRS2d 776; Drabkin v Capital Bank, N.A. (BC DC
Dist Col) 156 BR 102, 5 Fourth Cir & Dist Col Bankr Ct Rep 537, 21 UCCRS2d 135;
Drabkin v Capital Bank, N.A. (BC DC Dist Col) 156 BR 102, 5 Fourth Cir & Dist Col
Bankr Ct Rep 537, 21 UCCRS2d 135; Holsonback v First State Bank (Ala Civ App) 394
So 2d 381, 30 UCCRS 222, cert den (Ala) 394 So 2d 384; Barnett Bank of Palm Beach
County, N.A. v Regency Highland Condominium Asso. (Fla App D4) 452 So 2d 587, 38
UCCRS 1289, review dismd (Fla) 458 So 2d 273; Home Center Supply, Inc. v
Certainteed Corp., 59 Md App 495, 476 A2d 724, 38 UCCRS 1300; Partney v Reed (Mo
App) 889 SW2d 896, 25 UCCRS2d 154; Engine Parts v Citizens Bank, 92 NM 37, 582
P2d 809, 23 UCCRS 1248; Enoch v Brandon, 249 NY 263, 164 NE 45; Society Bank,
N.A. v Kellar (Montgomery Co) 63 Ohio App 3d 583, 579 NE2d 717; Calfo v D.C.
Stewart Co. (Utah) 717 P2d 697, 30 Utah Adv Rep 8, 1 UCCRS2d 789 (superseded by
statute on other grounds as stated in Workman v Nagle Constr. (Utah App) 802 P2d 749,
149 Utah Adv Rep 44).
Official Comment 3 to UCC 3-109 [1952] and Official Comment 5 to UCC 3-119
[1952] in effect point out that the terms of an instrument must be read from the
instrument itself.
The conditional or unconditional character of the promise or order is to be determined by

what is expressed in the instrument itself. Official Comment 1 to UCC 3-105 [1952].
As to whether an indorsement may change character, see 225.
23 ALR3d 932 ( 38 superseded by Construction and effect of "padded payroll" rule of
UCC 3-405, 45 ALR5th 389, and 22-26.7 superseded by What constitutes
"dealing" under UCC 3-305(2), providing that holder in due course takes instrument
free from all defenses of any party to instrument with whom holder has not dealt, 42
ALR5th 137, and 3 superseded by What constitutes unconditional promise to pay
under Uniform Commercial Code 3-104(1)(b), 88 ALR3d 1100, and 11 superseded
by Construction and application of UCC 3-403(2) dealing with personal liability of
ALR3d 798, and 23 superseded by Who is holder of instrument for "value" under
UCC 3-303, 97 ALR3d 1114, and 24, 25 superseded by What constitutes taking
instrument in good faith, and without notice of infirmities or defenses, to support
holder-in-due-course status, under UCC 3-302, 36 ALR4th 212, and 29 superseded
by Fraud in the inducement and fraud in the factum as defenses under UCC 3-305
against holder in due course, 78 ALR3d 1020, and 32(b), 35 superseded by
Commercial paper: what amounts to "negligence contributing to alteration or
unauthorized signature" under UCC 3-406, 67 ALR3d 144, and 34(d) superseded
by Payee's right of recovery, in conversion under UCC 3-419(1)(c), for money paid
on unauthorized indorsement, 23 ALR4th 855).
Footnote 22. Comment 8 to UCC 3-105 [1952]; Official Comment 1 to UCC 3-106
[1990 Rev].

Footnote 23. Martin v Grunig, 282 App Div 710, 122 NYS2d 75.
Footnote 24. Holsonback v First State Bank (Ala Civ App) 394 So 2d 381, 30 UCCRS
222, cert den (Ala) 394 So 2d 384; Enoch v Brandon, 249 NY 263, 164 NE 45;
Cartwright v MBank Corpus Christi, N.A. (Tex App Corpus Christi) 865 SW2d 546, writ
den (May 4, 1994) and rehg of writ of error overr (Jul 28, 1994) (holding that a
stipulation regarding negotiability is not binding on the court); First Fed. Sav. & Loan
Ass'n v Gump & Ayers Real Estate (Utah App) 771 P2d 1096, 105 Utah Adv Rep 27, 8
UCCRS2d 720, 9 UCCRS2d 139, petition for certiorari filed (Utah) 107 Utah Adv Rep
81 and cert den (Utah) 776 P2d 916, 110 Utah Adv Rep 61.
Footnote 25. Mason v Flowers, 91 Fla 224, 107 So 334.
Footnote 26. Zander v New York Sec. & Trust Co., 178 NY 208, 70 NE 449.
Footnote 27. 89.
Footnote 28. Zander v New York Sec. & Trust Co., 178 NY 208, 70 NE 449.
Footnote 29. 112.
53 Essentials of a negotiable instrument
View Entire Section

Article 3 of the Uniform Commercial Code sets forth the essentials of a negotiable
instrument. 30 Under the 1990 version of the Code, "negotiable instrument" means an
unconditional promise or order to pay a fixed amount of money, with or without interest
or other charges described in the promise or order, if it (a) is payable to bearer or order at
the time it is issued or first comes into the possession of a holder, (b) is payable on
demand or at a definite time, and (c) does not state any other undertaking or instruction
by the person promising or ordering payment to do any act in addition to the payment of
money, but it may contain (1) an undertaking or power to give, maintain, or collect
collateral to secure payment, (2) an authorization or power to the holder to confess
judgment or realize on or dispose of collateral, or (3) a waiver of the benefit of any law
intended for the advantage or protection of an obligor. 31 Under the pre-1990 version
of Article 3, in order for a writing to be a negotiable instrument, it must (1) be signed by
the maker or drawer, (2) contain an unconditional promise to pay a sum certain in money
and no other promise, order, obligation, or power given by the make or drawer except as
authorized by the UCC, (3) be payable on demand and at a definite time, and (4) be
payable to order or to bearer. 32
Under these provisions, a writing which complies with the foregoing requirements is (1)
a draft or bill of exchange if it is an order; (2) a check if it is a draft drawn on a bank and
payable on demand; (3) a certificate of deposit if it is an acknowledgment by a bank of
receipt of money with an engagement to repay it; (4) a note if it is a promise other than a
certificate of deposit. 33
The Code provision leaves open the possibility that some writings may be made
negotiable by other statutes, by judicial decision, or by developing commercial practice.
34 However, if an instrument contains, in addition to any unconditional promise or
order to pay a sum certain, any additional promise, order, or obligation, except such as
are otherwise generally permitted by Article 3, the instrument is not a negotiable
instrument and the concept of a holder in due course does not apply to such instrument.
35 The prohibition of additional promises refers only to promises of the maker. 36 This
section of the Code also states that as used in other articles of the Code, and as the
context may require, the terms "draft," "check," "certificate of deposit," and "note" may
refer to instruments which are not negotiable within this article as well as to instruments
which are so negotiable. 37
An instrument is negotiable or nonnegotiable for purposes of Article 3 of the Uniform

Commercial Code depending upon whether it does or does not conform with the
requirements stated in that article. 38 However, certain statutes require negotiable notes
given for a certain consideration to recite such consideration and render them subject to
defenses notwithstanding Article 3 of the Code. 39
The requisites of negotiability for commercial paper rest exclusively on matters of form,
and if an instrument which is negotiable in form under Article 3 also qualifies, because of
the manner of its use, as a "security" under Article 8, the latter and not Article 3 applies.
40
As a basic requirement, in order for an instrument to constitute negotiable paper, either

the language of the provision providing for the form of negotiable instruments 41 or a
clear equivalent must be found, and in doubtful cases, the decision should be against
negotiability. 42
Footnotes
Absent an indication that a date for payment was intended but mistakenly omitted from a
note, the note will be presumed to be payable on demand. Lakhaney v Anzelone (SD
NY) 788 F Supp 160, 18 UCCRS2d 191.
For discussion of particular instruments, such as drafts, notes, and the like, as constituting
commercial paper, see 26 et seq.

Provision in draft or note directing payment "on acceptance" as affecting negotiability,

19 ALR4th 1268.

3-104(1)(b), 88 ALR3d 1100.

Footnote 31. 23.
Footnote 32. 23.
Footnote 33. UCC 3-104(2) [1952]; UCC 3-103(e), (f), (j) [1990 Rev].
Footnote 34. Comment 1 to UCC 3-104 [1952].
Footnote 35. Lyons Sav. & Loan Asso. v Geode Co. (ND Ill) 641 F Supp 1313, later
proceeding (ND Ill) 1989 US Dist LEXIS 5738; Geiger Finance Co. v Graham, 123 Ga
App 771, 182 SE2d 521, 9 UCCRS 598; Ford v Darwin (Tex App Dallas) 767 SW2d
851, 10 UCCRS2d 426, writ den (Sep 6, 1989).
Footnote 36. Universal C. I. T. Credit Corp. v Ingel, 347 Mass 119, 196 NE2d 847, 2
UCCRS 82, 3 UCCRS 303.
Footnote 37. UCC 3-104(3) [1952].
Footnote 39. 144.
Footnote 41. UCC 3-104 [1952 and 1990 Rev].
As to nonnegotiable instruments generally, see 25.
Forms: Form drafting guidechecklistmatters to be considered in drafting promissory

notes. 3B Am Jur Legal Forms 2d, Bills and Notes 41:21.
Form drafting guideChecklistMatters to be considered when drafting bills of

exchange, drafts, and promissory notes. 19 Am Jur Legal Forms 2d, Uniform
Commercial Code: Article 3Negotiable Instruments 253:2213, 253:2214,
253:2217.
54 Writing as requisite
View Entire Section

Article 3 of the Uniform Commercial Code provides that only a writing may constitute a
negotiable instrument. 43 It is also specified that the four particular classes of
instruments, that is, drafts, checks, certificates of deposit, and notes, must be in writing.
44 The terms "written" or "writing" include printing, typewriting, or any other
intentional reduction to tangible form. 45
The negotiable character of an instrument must be determined by what is expressed in the
instrument itself; 46 and generally the parol evidence rule operates to confine the
liability of parties to commercial paper to the terms which appear in the contract. 47
Footnotes
Footnote 43. UCC 3-104(1) [1952] (stating that "[a]ny writing to be a negotiable
instrument" within Article 3 must meet certain requirements listed); Official Comment 1
to UCC 3-104 [1990 Rev] (stating that the term "negotiable instrument" is limited to a
signed writing that orders or promises payment of money).
Footnote 44. UCC 3-104(2) [1952].
Footnote 46. 52.
55 Sufficiency of form
View Entire Section

A writing must embody certain essential characteristics to constitute one of the various
types of instruments which are classed as commercial paper 48 and, if it is to be
negotiable within Article 3 of the Uniform Commercial Code, it must meet certain
statutory requisites; 49 but these requirements may be expressed in a letter as well as in
more formal documents. 50 While the instrument is not required to follow the language
of the Code provision setting forth the essential requirements of a negotiable instrument,
51 in order that it may constitute negotiable paper, either the language of that provision
or a clear equivalent must be found, 52 and in doubtful cases the decision should be
against negotiability. 53 Moreover, in order to be negotiable, the instrument must
contain no promise, order, obligation, or power given by the maker or drawer except as
authorized by Article 3 of the Code. 54
Footnotes
Footnote 49. 53.
Footnote 50. Equitable Trust Co. v Taylor, 146 App Div 424, 131 NYS 475.
Footnote 51. UCC 3-104 [1952 and 1990 Rev], discussed in 53.
Footnote 52. Official Comment 5 to UCC 3-104 [1952], which points out that the UCC
omits the former Uniform Negotiable Instruments Act provision that the instrument need
not follow the language of the Act if it clearly indicated an intent to conform to it. The
UCC draftsmen justify the omission on the ground that the Uniform Negotiable
Instruments Act provision served no useful purpose and encouraged bad drafting and
liberality in holding questionable paper negotiable. However, the omission is not
intended to mean that the instrument must follow the language of the UCC provision.
Forms: Form drafting guide. 3B Am Jur Legal Forms 2d, Bills and Notes 41:12.
Form drafting guideChecklistMatters to be considered in drafting promissory notes.

3B Am Jur Legal Forms 2d, Bills and Notes 41:21.
Form drafting guideChecklistMatters to be considered when drafting a bill of

exchange or a draft. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
Form drafting guideChecklistMatters to be considered when drafting a promissory

note. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable
Footnote 53. 53.
As to the construction and interpretation of instruments, generally, see 126, 131.
Footnote 54. 53.
56 Contract, conduct, or estoppel as rendering instrument negotiable
View Entire Section

An order or promise that is excluded from Article 3 because it does not meet the
requirements of a negotiable instrument may nevertheless be similar to a negotiable
instrument in many respects. 55 Although such a writing cannot be made a negotiable
instrument within the meaning of Article 3 by contract or conduct of its parties, nothing
in the section of the UCC establishing the requirements for negotiability 56 is intended
to mean that in a particular case the court may not arrive at a result similar to the result
that would follow if the writing were a negotiable instrument. 57 For example, a court
might find that the obligor with respect to a promise that does not meet the requirements
of negotiability is precluded from asserting a defense against a bona fide purchaser. 58
The preclusion would be based upon estoppel or ordinary principles of contract law,
rather than the law of negotiable instruments. 59
Footnotes


Validity, in contract for installment sale of consumer goods, or commercial paper given
in connection therewith, of provision waiving, as against assignee, defenses good
against seller, 39 ALR3d 518.
57 Duplicate or substitute instrument where original lost or destroyed
View Entire Section

A "duplicate" instrument is one which is issued as a substitute for and to take the place of
an original. 60 A carbon copy is not a duplicate and cannot meet the statutory
requirements of negotiability if it does not bear an original signature. 61
If an instrument is lost, destroyed, or mutilated, a duplicate or substitute instrument may

be executed voluntarily or through judicial action. 62 Where a draft is lost and a
duplicate issued, the effect of the word "Duplicate" written across the draft is to make it
merely a substitute for, and to take the place of, the original draft without creating any
new liability, and the defendant may show that the duplicate was issued to the plaintiff
under an agreement that defendant would not be held responsible for any laches which
had been committed. 63
Footnotes
Footnote 60. Benton v Martin, 52 NY 570.
Footnote 61. Chrismer v Chrismer (Preble Co) 103 Ohio App 23, 3 Ohio Ops 2d 116, 144
NE2d 494.
Footnote 62. Harvey v Guaranty Trust Co., 134 Misc 417, 236 NYS 37, affd 229 App
Div 774, 242 NYS 905, affd 256 NY 526, 177 NE 125 (stating that if an obligor chooses
to issue a duplicate without protection of a judicial decree he or she is not absolved from
liability to one otherwise entitled to enforce the original).
As to substitutes in the form of renewals, see 201.

For a general discussion of lost or destroyed instruments, see 52 Am Jur 2d, Lost and
Destroyed Instruments.
Annotation: Statute excluding testimony of one person because of death of another as

applied to testimony in respect of lost or destroyed instrument, 18 ALR3d 606.
Forms: Complaint, petition, or declarationAgainst makerTo compel re-execution of

lost or destroyed note. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 5.
Footnote 63. Benton v Martin, 40 NY 345.
58 Drafts in a set
View Entire Section

It has been a practice of long standing for the drawer of a draft, particularly a draft used
in international trade, to make and deliver to the payee a draft in several parts, usually
designated a set of the same draft. 64 This practice was designed to avoid delays and
inconvenience which might otherwise arise from possible loss or miscarriage of the
paper, and also to enable the holder to use different methods to transmit the same
instrument. 65
Although the 1990 version of Article 3 does not contain a reference to drafts in a set, the
1952 version provides that where a draft is drawn in a set of parts, each of which is
numbered and expressed to be an order only if no other part has been honored, the whole
of the parts constitutes one draft but a taker of any part may become holder in due course
of the draft. 66 Drafts in a set customarily contain such language as "Pay [name] this
first of exchange (second unpaid)," with equivalent language in the second part; a part
also commonly bears conspicuous indication of its number. At least the first factor is
necessary to notify the holder of his rights, and is therefore necessary in order to make
this provision of Article 3 applicable. 67
Any person who negotiates, indorses, or accepts a single part of a draft drawn in a set
thereby becomes liable to any holder in due course of that part as if it were the whole set,
but as between holders in due course to whom different parts have been negotiated the
holder whose title first accrues has all rights to the draft and its proceeds. 68 As against
the drawee, the first presented part of a draft drawn in a set is the part entitled to
payment, or if a time draft, to acceptance and payment; acceptance of any subsequently
presented part renders the drawee liable thereon. 69 Payment of a subsequently
presented part of a draft payable at sight has the same effect as payment of a check over a
stop-payment order. 70 Except as provided above, payment or other discharge of any
part of a draft in a set discharges the whole draft. 71
Footnotes

Footnote 64. Bank of Pittsburgh v Neal, 63 US 96, 22 How 96, 16 L Ed 323.
Footnote 65. Downes & Co. v Church, 38 US 205, 13 Pet 205, 10 L Ed 127.
Footnote 66. UCC 3-801(1) [1952].
Footnote 68. UCC 3-801(2) [1952].
Footnote 69. UCC 3-801(3) [1952].
Footnote 70. UCC 3-801(3) [1952].
Footnote 71. UCC 3-801(4) [1952].
59 Letter of advice of international sight draft
View Entire Section

To decrease the risk of forgery and its effect under the European rule in regard to forgery
of an indorsement, 72 the practice in international trade is to send a letter of advice that
an international sight draft has been drawn and will be forthcoming. 73 Under the 1952
version of Article 3, a "letter of advice" is a drawer's communication to the drawee that a
described draft has been drawn. 74 If such letter is not sent, unless otherwise agreed
and except where a draft is drawn under a credit issued by the drawee, the drawee is
under no duty to pay the draft, but if it does so and the draft is genuine, the drawee may
debit the drawer's account. 75
When a bank receives from another bank a letter of advice of an international sight draft,
the drawee bank, unless otherwise agreed, may immediately debit the drawer's account
and stop the running of interest pro tanto; such a debit and any resulting credit to any
account covering an outstanding draft leaves the drawer full power to stop payment or
otherwise dispose of the amount and creates no trust or interest in favor of the holder. 76
Footnotes
Footnote 72. See Official Comment 1 to UCC 3-701 [1952], noting that the European
rule is that a bank paying a check in good faith and in ordinary course can charge its
depositor's account notwithstanding forgery of a necessary indorsement.
Footnote 74. UCC 3-701(1) [1952]; the 1990 version omits reference to letters of
advice.

Forms: Sight draft to order of payee. 19 Am Jur Legal Forms 2d, Uniform
Footnote 75. UCC 3-701(3) [1952].
Footnote 76. UCC 3-701(2) [1952].
The above provision clears up for American courts the meaning of another international
practice: that of charging the drawer's account on receipt of the letter of advice; this
practice involves no conception of trust or the like; the debit has to do with the payment
of interest only. Official Comment 2 to UCC 3-701 [1952].
B. Execution of Instrument [60-68]
Research References
UCC 1-201; UCC 3-104, 3-114, 3-401 through 3-404 [1952]; UCC 3-113, 3-204,
3-401 through 3-403 [1990]
ALR Digests: Bills and Notes 25-27, 59; Principal and Agent 4, 19, 104; Signature
1-3
ALR Index: Agents and Agency; Bills and Notes; Checks and Drafts; Uniform
Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, 7; 6A Am Jur Pl & Pr Forms (Rev),
Commercial Code : Article 3Negotiable Instruments 3:49, 3:50, 3:147-3:149,
3:155-3:157, 3:161, 3:165, 3:166
19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable
Instruments 253:2437
6A Anderson, Uniform Commercial Code 3d [Rev] 3-401:4, 3-402:6, 3-403:4
1. Signature [60-65]
60 Generally
View Entire Section

Any writing to be a negotiable instrument within Article 3 of the Uniform Commercial

Code must be signed by the maker or drawer. 77 The 1952 version of Article 3
provides that no person is liable on an instrument unless his or her signature appears
thereon. 78 Under the 1990 version of Article 3, a person is not liable on an
instrument unless: (1) that person signed it; or (2) the person is represented by an agent
or representative who signed the instrument and, under the provision of the Uniform
Commercial Code governing signatures by representatives, 79 the signature is binding
on the person represented. 80
Comment: It is not necessary that the name of the obligor appear on the instrument,
so long as there is a signature that binds the obligor. 81
Distinction: A traveler's check, by the form in which it is issued, requires not only a
drawer's signature, but also both signature and countersignature by the purchaser. 82
Liability may, of course, arise apart from the instrument itself, such as liability on the
underlying obligation, for breach of any agreement to sign, or in tort for
misrepresentation, or even on an oral guaranty of payment satisfying the statute of frauds.
83
The provision of UCC 3-401 that no person is liable on an instrument unless his or her
signature appears thereon is not intended to prevent an estoppel to deny that the party has
signed, as where the instrument is purchased in good faith reliance upon the person's
assurance that a forged signature is genuine. 84 Also, the rule of nonliability of a
nonsigner applies only with respect to liability for payment of an instrument; a nonsigner
who has been an intermediate nonindorsing holder of a bearer instrument may have
warranty liability, although such a person does not have liability for payment of the
paper. 85
Footnotes
Footnote 77. UCC 3-104(1)(a) [1952]; Official Comment 1 to UCC 3-104 [1990],
stating that the term "negotiable instrument" is limited to a signed writing that orders or
promises payment of money.
Forms: AnswerDenial of execution of note. 5 Am Jur Pl & Pr Forms (Rev), Bills and
Notes 7.
Complaint, petition, or declarationAllegationDefendant signed instrument. 6A Am

Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments
3:147.
AnswerDefenseDefendant did not sign instrument. 6A Am Jur Pl & Pr Forms (Rev),

Commercial Code : Article 3Negotiable Instruments 3:148.
Instruction to juryLiability of party signing instrument. 6A Am Jur Pl & Pr Forms

(Rev), Commercial Code : Article 3Negotiable Instruments 3:149.
Footnote 78. UCC 3-401(1) [1952].
As to the defense of forged or unauthorized signature, see 294, 586, 587 et seq.
23 ALR3d 932, 8[a]-[c].
Footnote 79. UCC 3-402 [1990].
Footnote 80. UCC 3-401(a) [1990].
Issuance of a personal money order with the bank's name printed thereon evidences the
bank's intent to bound thereby. Sequoyah State Bank v Union Nat'l Bank, 274 Ark 1, 621

SW2d 683, 32 UCCRS 213; Center Video Indus. Co. v Roadway Package Sys. (CA7 Ill)
90 F3d 185, 29 UCCRS2d 1239 (stating that ultimate liability for payment of a money
order rests with the issuing bank); Mirabile v Udoh, 92 Misc 2d 168, 399 NYS2d 869,
23 UCCRS 101.
As to the signing of an instrument by an agent or representative, see 63.
Footnote 82. 49.
Even if absence of their signatures would prevent joint venturers, pursuant to UCC
3-401(1), from being liable on note, it would not preclude their liability for the
underlying indebtedness assumed when they agreed to buy land. 626 Joint Venture v
Spinks (Tex App Austin) 873 SW2d 73.
Footnote 85. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-401:4.
61 Manner or form
View Entire Section

Article 3 of the Uniform Commercial Code provides that a signature is made by use of
any name, including any trade or assumed name, upon an instrument, or by any word or
mark or symbol used in lieu of a written signature. 86
The signature may be made manually, or by means of a device or machine. 87
Definition: "Signed" includes any symbol executed or adopted by a party with

present intention to authenticate a writing. 88
Comment: Any trade name or assumed name may be used, however false or
fictitious, which is adopted for the purpose; parol evidence is admissible to identify the
signer, and when he or she is identified, the signature is effective. However, the
provisions of UCC 3-401 are not intended to affect any statute or rule of law
requiring a signature or mark to be witnessed or any signature to be otherwise
authenticated, or requiring any form of proof. 89
Footnotes
Footnote 86. UCC 3-401(2) [1952]; UCC 3-401(b)(ii) [1990].

The indorsement by its president of several notes executed by a company constituted the
signature of the company where there was no question of the president's authority, or any
reason to doubt his intention to effect a transfer of the notes. Security Pacific Nat'l Bank
v Chess (2nd Dist) 58 Cal App 3d 555, 129 Cal Rptr 852, 19 UCCRS 544.
Plaintiff's printed name at the top of a check did not constitute his signature because there
was a written signature (a forged signature of plaintiff's secretary) at the appropriate
place on the bottom of the check. Littky & Mallon v Michigan Nat'l Bank, 94 Mich App
29, 287 NW2d 359, 28 UCCRS 715.
Footnote 87. UCC 3-401(b)(i) [1990]; Official Comment 2 to UCC 3-401 [1952],
further pointing out that it may be made by mark or even by thumbprint.
A corporate check with a facsimile signature on its face was a valid instrument where the
facsimile signature was authorized by a corporate resolution, a certified copy of which
was furnished to the bank. Phoenix Die Casting Co. v Manufacturers & Traders Trust
Co., 50 Misc 2d 152, 269 NYS2d 890, 3 UCCRS 519.
A bank's use of a check-writer imprint of its name on a personal money order it issued
satisfied the signature requirement of UCC 3-401(1). Interfirst Bank Carrollton v
Northpark Nat'l Bank (Tex App El Paso) 671 SW2d 100, 38 UCCRS 1684.
Forms: Corporate resolutionAuthorizationFacsimile signatures. 19 Am Jur Legal

Forms 2d, Uniform Commercial Code: Article 3Negotiable Instruments 253:2437.
A party cannot be deemed to have "signed" an instrument by pre-printing its name on it

because there is obviously no present intention. First Nat'l Bank v Ford Motor Credit Co.
(DC Colo) 748 F Supp 1464, 13 UCCRS2d 810.
A "present intention to authenticate" a check on the part of a bank requires the signature
of a bank official to indicate certification. Menke v Board of Education (Iowa) 211
NW2d 601, 13 UCCRS 675.
62 Place of signatures on instrument
View Entire Section

There is a customary place for the signature of parties to an instrument according to

whether they are makers or drawers on the one hand or indorsers on the other hand.
Normally, a maker 90 or drawer signs in the lower right-hand corner on the face of the
instrument, 91 while an indorser signs on the back. 92 An acceptor of a draft normally
signs across the face of the draft. 93 However, it is the purpose of signing, as
determined from the instrument itself, 94 rather than the mere location of a signature,
which establishes the character of the signer's liability on the instrument, and one may be
liable as a maker even though he or she signs on the back of the instrument for want of
room on the front. 95
A signature need not be subscribed but may appear in the body of the instrument, as in
the case of "I, John Doe, promise to pay ____________----," without any other signature.
96
Unless the instrument clearly indicates that a signature is made in some other capacity, it
is an indorsement. 97
Observation: Notwithstanding the foregoing provision, courts have noted that by

long established practice, judicially noticed or otherwise established, a signature in the
lower right hand corner of an instrument indicates an intent to sign as the maker of a
note or the drawer of a draft. 98
Footnotes
Footnote 90. Seronick v Levy, 26 Mass App 367, 527 NE2d 746, review den 403 Mass
1104, 530 NE2d 797.
Footnote 91. Official Comment to UCC 3-402 [1952], stating that such a signature
indicates an intent to sign as maker or drawer.
Footnote 92. 220.
Footnote 93. 384.
Footnote 95. Olansky v Berlin, 37 Misc 775, 76 NYS 945.
Footnote 96. Official Code Comment 2 to UCC 3-401 [1990].
Footnote 97. UCC 3-402 [1952]; UCC 3-204(a) [1990].
Footnote 98. Ritzau v Warm Springs West (CA9 Idaho) 589 F2d 1370, 26 UCCRS 94;
Bostwick Banking Co. v Arnold, 227 Ga 18, 178 SE2d 890, 8 UCCRS 869, conformed to
123 Ga App 189, 179 SE2d 780; Seronick v Levy, 26 Mass App 367, 527 NE2d 746,
review den 403 Mass 1104, 530 NE2d 797; Huron County Banking Co., N.A. v Knallay
(Huron Co) 22 Ohio App 3d 110, 22 Ohio BR 311, 489 NE2d 1049, 2 UCCRS2d 197;
Roark v Hicks, 234 Va 470, 362 SE2d 711, 5 UCCRS2d 640.
63 Signature by agent or representative
View Entire Section

The 1952 version of Article 3 of the Uniform Commercial Code provides that a signature
may be made by an agent or other representative, and his or her authority to make it, may
be established as in other cases of representation; no particular form of appointment is
necessary to establish such authority. 99
Definition: The term "representative" includes an agent, an officer of a corporation

or association, and a trustee, executor, or administrator of an estate, or any other person
empowered to act for another. 1
It is the form of the signature on a note, and not other printed information appearing on
the face of the note, that governs the capacity in which the signer executed the note and
the resulting liability thereunder. 2 The power to sign an instrument on behalf of
another, so as to bind such other, may rest on express, implied, or apparent authority. 3
The 1990 version of Article 3 provides that if a person acting or purporting to act as a
representative signs an instrument by affixing either his or her name or that of the person
represented, the represented person is bound by the signature to the same extent as that
person would be bound on a simple contract; if it is concluded that the represented person
is bound, the signature of the representative is the authorized signature of the represented
person, who is liable on the instrument whether or not identified in the instrument. 4 If a
representative signs his or her name to an instrument and the signature is an authorized
signature of the represented person, and if the form of the signature shows
unambiguously that the signature is made on behalf of the represented person who is
identified in the instrument, the representative is not liable on the instrument. 5 In order
to come within this rule, it is not necessary that the correct legal name of the principal
appear in the instrument. 6
Comment: There are many ways in which there can be ambiguity about a signature,
but if the form of the signature unambiguously shows that it is made on behalf of an
identified represented person the agent is not liable, as where an instrument is signed
"P, by A, Treasurer." The requirement of the 1990 version of Article 3 that the
represented person be identified in the instrument is intended to reject the decision
under the 1952 version of Article 3 which required that the instrument state the legal
name of the represented person. 7
Except as otherwise provided by statute, 8 if the form of the signature does not show
unambiguously that the signature is made in a representative capacity, or if the
represented person is not identified in the instrument, the representative is liable on the
instrument to a holder in due course that took the instrument without notice that the
representative was not intended to be liable on the instrument. With respect to any other
person, the representative is liable on the instrument unless the representative proves that
the original parties did not intend the representative to be liable on the instrument. 9
Thus, where the intent of the signing is ambiguous, a person who claims to have signed a
negotiable instrument only in a representative capacity may be held personally liable. 10
Observation: In each of the following cases, John Doe is liable on the instrument to
a holder in due course without notice that Doe was not intended to be liable, since
Doe's signature does not unambiguously show that Doe was signing as agent for an
identified principal: Case No. 1. Doe signs "John Doe" without indicating in the note
that Doe is signing as agent. The note does not identify Richard Roe as the represented
person. Case No. 2. Doe signs "John Doe, Agent" but the note does not identify
Richard Roe as the represented person. Case No. 3. The name "Richard Roe" is
written on the note and immediately below that name Doe signs "John Doe" without
indicating that Doe signed as agent. 11
Caution: While parol evidence is admissible in litigation between the immediate

parties to supply either the identity of the principal or the signer's agency, such
evidence is not admissible to show intent for the purpose of relieving liability when the
litigation does not involve the immediate parties, as where an assignee of a note brings
an action against its maker. 12
Footnotes
Footnote 99. UCC 3-403(1) [1952].
As to liability of parties arising from the acts of agents or representatives, see 491,
492 et seq.
For a general discussion of the authority of an agent, see 3 Am Jur 2d, Agency 71 et
seq.
Annotation: Construction and application of UCC 3-403(2) dealing with personal

liability of authorized representative who signs negotiable instrument in his own name,
97 ALR3d 798.
Construction and effect of UCC Art. 3, dealing with commercial paper, 23 ALR3d
932, 8[b], [c].
Personal liability of one who signs or indorses without qualification commercial paper
of corporation, 82 ALR2d 424.
Authority of agent to indorse and transfer commercial paper, 37 ALR2d 453.
Forms: Complaint, petition, or declarationAgainst makerInstrument signed by

agent. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:155.
Instruction to juryAuthority of agent or representative to sign for principal. 6A Am

3:157.
AnswerDefenseSignature of partner not authorized to bind firm. 6 Am Jur Pl & Pr

Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:165.
AnswerDefenseSignature executed in representative capacity. 6A Am Jur Pl & Pr


Footnote 2. Avery v Whitworth, 202 Ga App 508, 414 SE2d 725, 103-14 Fulton County
D R 19, 17 UCCRS2d 818.
Footnote 3. Littky & Mallon v Michigan Nat'l Bank, 94 Mich App 29, 287 NW2d 359,
28 UCCRS 715.
Footnote 4. UCC 3-402(a) [1990].
Footnote 5. UCC 3-402(b)(1) [1990].
A signature is not unauthorized if made with actual authority. Kelly v Central Bank &
Trust Co. (Colo App) 794 P2d 1037, 12 UCCRS2d 1089.
Footnote 8. UCC 3-402(c) [1990].
Footnote 9. UCC 3-402(b)(2) [1990].
Footnote 10. Wyandot, Inc. v Gracey Street Popcorn Co., 208 Conn 248, 544 A2d 180, 6
UCCRS2d 482; Florida Medical Ctr. v McCoy (Fla App D4) 657 So 2d 1248, 20 FLW
D1596.
Footnote 12. Empire of America Federal Sav. Bank v Brady (SD Fla) 776 F Supp 1571,
17 UCCRS2d 1191.
64 --Signing of checks
View Entire Section

If a representative signs the name of the represented person as drawer of a check without
indication of the representative status and the check is payable from an account of the
represented person who is identified on the check, the signer is not liable on the check if
the signature is an authorized signature of the represented person. 13
Observation: The foregoing provision states that if the check identifies the
represented person the agent who signs on the signature line does not have to indicate
agency status. Virtually all checks used today are in personalized form and identify the
person on whose account the check is drawn. In this case, nobody is deceived into
thinking that the person signing the check is meant to be liable. 14

Footnotes
Footnote 13. UCC 3-402(c) [1990].
Annotation: Power and authority of president of business corporation to execute

commercial paper, 96 ALR2d 549.
65 Effect of unauthorized signature
View Entire Section

Unless otherwise provided in Article 3 of the Uniform Commercial Code (UCC)

governing negotiable instruments, 15 or in Article 4 governing bank deposits and
collections, 16 an unauthorized signature is ineffective except as the signature of the
unauthorized signer in favor of a person who in good faith pays the instrument or takes it
for value; an unauthorized signature may be ratified for all purposes of Article 3,
however. 17 Ratification is a retroactive adoption of the unauthorized signature by the
person whose name is signed and may be found from conduct as well as from express
statements; for example, it may be found from the retention of benefits received in the
transaction with knowledge of the unauthorized signature. Although the forger is not an
agent, ratification is governed by the rules and principles applicable to ratification of
unauthorized acts of an agent. 18
Comment: The except clause of the foregoing statutory provision states the
generally accepted rule that the unauthorized signature, while it is wholly inoperative
as that of the person whose name is signed, is effective to impose liability upon the
signer or to transfer any rights that the signer may have in the instrument. The signer's
liability is not in damages for breach of warranty of authority, but is full liability on the
instrument in the capacity in which the signer signed. It is, however, limited to parties
who take or pay the instrument in good faith; and one who knows that the signature is
unauthorized cannot recover from the signer on the instrument. 19
Observation: Whether a signature is authorized or unauthorized will be determined

according to the pre-UCC law of agency, because that law has not been displaced by
the UCC. 20
If the signature of more than one person is required to constitute the signature of an
organization, the signature of the organization is unauthorized if one of the required
signatures is lacking. 21
Definition: The term "organization" includes various governmental and commercial

entities, estates, trusts, business trusts, partnerships, and associations; two or more
persons having a common interest are also included in the term. 22

Footnotes
Footnote 15. UCC 3-101 et seq. [1952 and 1990].
Footnote 16. UCC 4-101 et seq.
Footnote 17. UCC 3-404 [1952], UCC 3-403(a) [1990].
Forms: Complaint, petition, or declarationAllegationRatification of unauthorized

signature. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:161.
Instruction to juryEffect of unauthorized signature. 6A Am Jur Pl & Pr Forms (Rev),

Footnote 21. UCC 3-403(b) [1990].
2. Date [66, 67]
66 Generally
View Entire Section

Date of issue is not an essential element of commercial paper, and omission of a date
does not generally render an instrument incomplete unless it is payable on a fixed time
after the date. 23 This position is made clear by a provision of Article 3 of the Uniform
Commercial Code that the negotiability of an instrument is not affected by the fact that it
is undated, antedated, or postdated. 24 However, if an instrument is delivered with a
blank space for the insertion of the date, the rules as to incomplete instruments apply. 25
The date which is placed upon an instrument is presumed to be correct. 26
Definition: "Presumption" or "presumed" means that the trier of fact must find the
existence of a fact presumed unless and until evidence is introduced which would
support a finding of its nonexistence. 27 However, this presumption is not conclusive
and may be overcome by parol evidence that the instrument was in fact made on

another date. 28 Also, when the date of a check is a disputed fact in a criminal
prosecution, it will not be presumed that the date is correct. 29
Footnotes
Footnote 23. 124.
Footnote 24. UCC 3-114(1) [1952], discussed in 67.
Observation: This provision was omitted from the 1990 version of Article 3 as
unnecessary.
Footnote 25. 117, 118 et seq.
Footnote 26. UCC 3-114(3) [1952].
Observation: This provision was omitted from the 1990 version of Article 3 as
unnecessary.
Footnote 28. Pazol v Citizens Nat'l Bank, 110 Ga App 319, 138 SE2d 442, 2 UCCRS
330.
Footnote 29. People v Tinsley, 58 NY2d 990, 461 NYS2d 1005, 448 NE2d 790.
67 Antedating or postdating
View Entire Section

The 1952 version of Article 3 of the Uniform Commercial Code provides that the
negotiability of an instrument is not affected by the fact that it is undated, antedated, or
postdated. 30
Illustration: The negotiability of a check was not affected by the fact that it was
drawn by the decedent in 1969 but postdated November 4, 1984. 31
The 1990 version of Article 3 provides that an instrument may be antedated or postdated,
and the date stated determines the time of payment if the instrument is payable at a fixed
period after date. 32 Except as otherwise provided by statute, 33 an instrument payable
on demand is not payable before the date of the instrument. 34
The rule that a demand instrument is not payable before the date of the instrument is
subject to UCC 4-401(c), which allows the payor bank to pay a postdated check unless
the drawer has notified the bank of the postdating pursuant to a procedure prescribed in
that section. 35 Any fraud or illegality in connection with such dating does not affect
negotiability although it may be a defense to the obligation the same as any other
defense. 36 It may be shown that a note was antedated in order to conceal the fact that
it was usurious. 37
Where interest-bearing paper is dated earlier than the actual date when money is loaned
on the basis of such paper, the act of antedating will be regarded as manifesting an
intention to exact usurious interest when there is no apparent reason why the paper was
backdated. 38 The statute of limitations runs from the date on an antedated demand
note. 39
Postdated checks are nonetheless checks and are subject to all the legal incidents
pertaining to bank checks, 40 whether they were postdated to suit the convenience of
the drawer or that of the drawee. 41 A postdated check is not, by reason of postdating,
an invalid instrument, 42 even though the date is subsequent to the death of the drawer.
43 One who gives a postdated check does not impliedly represent that funds are then
available to pay it, but merely that they will be available on the future date of the check; a
postdated check is in the nature of a promise to discharge a present obligation at a future
date and the implication is that the funds are not yet available, for otherwise the check
would not be postdated. 44 The payee of a postdated check becomes the owner of the
check on its delivery to him or her. 45
The fact that a check is postdated does not prevent one from becoming a holder in due
course. 46
When a postdated check is honored by the drawee bank, the payment takes effect as of
the date of the check. 47
Because a postdated check is a promise to pay at a future time, it cannot be the basis of
obtaining goods under false pretenses. 48
Footnotes
Footnote 30. UCC 3-114(1) [1952].
Footnote 31. Smith v Gentilotti, 371 Mass 839, 359 NE2d 953, 20 UCCRS 1222.
Footnote 32. UCC 3-113(a) [1990].
Footnote 33. UCC 4-401(c).
Footnote 34. UCC 3-113(a) [1990]; UCC 3-114(2) [1952].
Forms: Instruction to juryDate of instrumentEffect. 6A Am Jur Pl & Pr Forms

Complaint, petition, or declarationFor payment of noteUndated note. 6A Am Jur Pl

& Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:49.

As to payment generally, see 401.
As to defenses on the ground of illegality or fraud generally, see 569 et seq.
Footnote 37. Sud v Morris (Tex Civ App Beaumont) 492 SW2d 335.
Footnote 38. Copeland v Anderson, 15 Ariz App 60, 485 P2d 1177 (pre-Code).
Footnote 39. Cantonwine v Fehling (Wyo) 582 P2d 592, 24 UCCRS 904 (criticized on
other grounds by Stanbury v Larsen (Wyo) 803 P2d 349).
Footnote 40. Stewart v Smith, 17 Ohio St 82.
Annotation: Extent of bank's liability for paying postdated check, 31 ALR4th 329.
Footnote 41. Stewart v Smith, 17 Ohio St 82.
Footnote 42. How v Fulkerson, 22 Ariz App 467, 528 P2d 853, 15 UCCRS 1099 (holding
that the fact that a postdated check is given in acceptance of an offer to purchase does not
make the acceptance a qualified acceptance); Esecson v Bushnell (Colo App) 663 P2d
258, 35 UCCRS 888 (same).
Footnote 43. In re Samuels' Will (3d Dept) 15 App Div 2d 618, 223 NYS2d 147, amd on
other grounds (3d Dept) 15 App Div 2d 701, 224 NYS2d 272.
Footnote 44. Azzarello v Richards, 198 Misc 723, 99 NYS2d 597.
Footnote 45. People v Continental Casualty Co., 157 Misc 15, 282 NYS 202.
Footnote 46. Aryeh v Eastern International (1st Dept) 54 App Div 2d 850, 388 NYS2d
286, 20 UCCRS 961; Liles Bros. & Son v Wright (Tenn) 638 SW2d 383, 34 UCCRS
1174; Howells, Inc. v Nelson (Utah) 565 P2d 1147.
Footnote 47. Legacy, Ltd. v Channel Home Ctrs. (In re Channel Home Ctrs.) (CA3 NJ)
989 F2d 682, 24 BCD 162, 28 CBC2d 1010, CCH Bankr L Rptr 75198, 137 ALR Fed
627, reh, en banc, den (CA3) 1993 US App LEXIS 9913 and cert den 510 US 865, 126
L Ed 2d 143, 114 S Ct 184.
Footnote 48. State v McCutcheon (App) 284 SC 524, 327 SE2d 372.
3. Seal [68]
68 Generally

View Entire Section
The 1952 version of Article 3 of the Uniform Commercial Code provides that an
instrument otherwise negotiable is within Article 3 even though it is under a seal. 49
Thus the 1952 version of Article 3 places sealed instruments on the same footing as any
other commercial paper without affecting any other statutes or rules of law relating to
sealed instruments except so far as they are inconsistent. 50 Even under the prior law,
the presence of a seal did not affect the negotiable character of the paper, and this was
frequently held in regard to corporate paper. 51 A note is a note under seal when it
concludes with the recital "witness my hand and seal" and the signature of the maker is
followed by the letters L.S. 52
Footnotes
Footnote 49. UCC 3-113 [1952].
Observation: This provision was not retained in the 1990 version of Article 3.
Negotiable instruments under seal are exposed to the defenses of want or failure of
consideration. Bergren v Davis (DC Conn) 287 F Supp 52, 5 UCCRS 509.
Footnote 51. Evertson v National Bank of Newport, 66 NY 14.
Footnote 52. Hixon v Woodall, 246 Ga 758, 272 SE2d 727.
C. Parties to Instrument [69-87]
Research References
UCC 1-201, 1-301; UCC 3-102, 3-105, 3-110, 3-111, 3-116, 3-117, 3-120, 3-121
Alternative A, 3-121 Alternative B, 3-201 to 3-208, 3-405, 3-414-3-416 [1952]; UCC
3-103, 3-109, 3-110, 3-202 through 3-207, 3-404, 3-415, 3-419 [1990]; UCC 4-105,
4-106, 4-106 Alternative A, 4-106 Alternative B [1990]
ALR Digests: Bills and Notes 6, 8, 28, 29; Corporations 146, 147; Principal and
Agent 4, 19, 104
ALR Index: Accommodation Party or Paper; Agents and Agency; Banks and Banking;
Bills and Notes; Checks and Drafts; Uniform Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes 6; 6A Am Jur Pl & Pr Forms (Rev),
Commercial Code : Article 3Negotiable Instruments 3:33, 3:34, 3:36, 3:42,
3:56-3:60; 6 Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 4Bank Deposits
and Collections 4:30, 4:31
3B Am Jur Legal Forms 2d, Bills and Notes 41:115-41:117
7 Am Jur POF2d 283, Status as Accommodation Party 1-23; 25 Am Jur POF2d 165,

Bank's Liability for Payment of Check or Withdrawal on Less Than Required Number of
Signatures 6-27
6A Anderson, Uniform Commercial Code 3d [Rev] 3-103:6, 3-110:5, 3-110:6,
3:110:8, 3-110:13, 3-110:14, 3-404:7, 3-416:25, 3-419:6
1. In General [69-74]
69 Generally
View Entire Section

As used in Article 3 of the Uniform Commercial Code, the term "party" means a party to
an instrument. 53
The drawer of a draft of a bill of exchange is the party who signs or is identified in a draft
as the person ordering payment, 54 The drawee is the person ordered in a draft to make
payment; 55 an acceptor is a drawee who has accepted a draft. 56
Another frequent party to a draft transaction is the remitter who purchases the draft,
usually from a bank drawer, and designates the person who is to receive payment; the
term "remitter" is not defined in the Uniform Commercial Code, but the definition of
"issue" states that it is the first delivery of an instrument to a holder or remitter. 57 Also,
in discussing the instances where a payee may be a holder in due course, several
examples concern a person as "remitter" purchases a bank draft made payable to a third
person. 58
Observation: Where a check, draft, or other item on a bank is handled for collection
through the banking system, the drawee bank is often referred to as the "payor" bank.
59
The maker of a promissory note is one who signs a note or who is identified in the note as
the person undertaking to pay. 60
A payee is defined as a person to whom a payment is made or who is designated in a bill

or note as a person to whom payment is to be made. 61
There may also be additional parties to either instrument, namely, guarantors or sureties,
indorsers, including the payee, 62 or transferees or holders other than the payee. 63
Footnotes
Footnote 53. UCC 3-103(a)(8) [1990].
As to instruments within or without Article 3, see 31-51.

Footnote 54. UCC 3-103(a)(3) [1990].
As to drafts and bills of exchange, generally, see 39 et seq.
As to the liability of the drawer of a check being the same as the drawer of any other
draft, see 451.
Footnote 55. UCC 3-103(a)(2) [1990].
Footnote 56. UCC 3-103(a)(1) [1990].
Footnote 57. UCC 3-102(1)(a) [1952].
Footnote 58. Official Comment 2 to UCC 3.302 [1952].
Footnote 59.
Definition: Such is the terminology used in UCC Article 4 on bank deposits and
collections. UCC 4-105(c) defines "payor bank" as a bank that is the drawee of a
draft.
Footnote 60. UCC 1-301(a)(5).
As to promissory notes generally, see 44 et seq.
As to payees generally, see 75 et seq.
70 Identity of parties
View Entire Section

While a draft or a promissory note must have a certain number of parties, 64 two or
more of these parties may in some instances be identical; that is, they may be the same
person. The maker or drawer of an instrument frequently is also the payee. 65 The
drawee of a draft may be made the payee; 66 and the acceptor of a draft normally is its
drawee. 67
The drawer and the drawee may be the same person, since the order to pay may be
addressed to any person, including the person giving the instruction. 68
Observation: Where the drawer and the drawee are the same person, the instrument

is treated as a draft or check under the 1990 version of Article 3, rather than being
treated as a note as it was under the 1952 version. 69
Footnotes
Footnote 64. 69.
Footnote 65. 78.
Footnote 66. 77.
Footnote 67. 382.
Footnote 68. UCC 3-103(a)(6) [1990].
71 Payor or drawee description
View Entire Section

The 1952 version of Article 3 of the Uniform Commercial Code requires an order to pay
to specify the person who is to pay with reasonable certainty; 70 The 1952 version
provides that the order or direction to pay may be addressed to one or more persons
jointly or in the alternative, but not in succession. 71
Observation: This Code provision permitting alternative drawees is a change from

pre-Code law, which did not permit them, and recognizes the practice of the
corporations issuing dividend checks and of other drawers who for commercial
convenience name a number of drawees, usually in different parts of the country. 72
Drawees in succession are not permitted because the holder should not be required to
make more than one presentment, and upon the first dishonor should have recourse
against the drawer and indorsers. 73
Footnotes
Footnote 70. UCC 3-102(1)(b) [1952].
Observation: This provision was omitted from the 1990 version of Article 3.
Footnote 71. UCC 3-102(1)(b) [1952].

3-103 [1990].
72 Bank as drawee of instrument payable at bank
View Entire Section

The 1952 version of Article 3 of the Uniform Commercial Code does not aim at
uniformity in regard to instruments payable at a bank, but, recognizing the divergence of
the law and practice in the various states, provides two alternative provisions to govern
the situation. Alternative A conforms to the existing banking practice in northeastern
states that a note or acceptance made payable at a bank is treated as the equivalent of a
draft drawn on the bank. The bank is not only authorized but ordered to make payment
out of the account of the maker or acceptor when the instrument falls due, and it is
expected to do so without consulting the maker or acceptor. Alternative B conforms to
existing banking practice in western and southern states in which the phrase "payable at a
bank" merely designates a place of payment, as if the instrument were made payable at
the office of an attorney. The bank's only function is to notify the maker or acceptor that
the instrument has been presented and to ask for his or her instructions, and in the
absence of specific instructions it is not regarded as required or even authorized to pay.
74
Under Alternative A, a note or acceptance which states that it is payable at a bank is the
equivalent of a draft drawn on the bank, payable when it falls due out of any funds of the
maker or acceptor in a current account or otherwise available for such payment. 75
Accordingly, a note stated to be payable at a bank is the equivalent of a draft drawn on
the bank and the bank is not only authorized but ordered to make payment. 76
Under Alternative B, a note or acceptance which states that it is payable at a bank is not
of itself an order or authorization to the bank to pay it, 77 and is not equivalent to a
check. 78
Observation: Notwithstanding Alternative B, western and southern states have

consistently followed the practice of asking for instructions and treating a direction not
to pay as a revocation, equivalent to a direction to stop payment. 79
The 1990 version of the Uniform Commercial Code also contains two alternatives; under
Alternative A, if an item states that it is "payable at" a bank identified in the item, the
item is equivalent to a draft drawn on the bank. 80
Comment: Under Alternative A, the midnight deadline provisions of UCC 4-301

and 4-302 apply. 81
Under Alternative B, if an item states that it is "payable at" at a bank identified in the
item, (i) the item designates the bank as collecting bank and does not by itself authorize

the bank to pay the item, and (ii) the item may be presented for payment only by or
through the bank. 82
Comment: Under Alternative B, a "payable at" bank is in the same position as a

"payable through" bank. 83
Definition: A collecting bank is a bank, other than the payor bank, handling an item
for collection. 84
Caution: In order to make a draft payable "at" a bank, such direction must appear on
the draft itself and a statement in an accompanying letter has no effect. 85
Footnotes
The term "bank" means any person engaged in the business of banking. UCC 1-201(4).
For a list of adoptions of either alternative on a state-by-state basis, see 5A Anderson,

Uniform Commercial Code 3d 3-121:2.
Footnote 75. UCC 3-121 Alternative A [1952].
Footnote 76. Goldman v Goldman, 48 Misc 2d 985, 266 NYS2d 323; Hamby Co. v
Seminole State Bank (Tex) 652 SW2d 939, 36 UCCRS 602, rehg of cause overr (Tex) 26
Tex Sup Ct Jour 577 (rejecting contention that Alternative A applies only to notes or
acceptances payable from a current account in the bank).
Forms: Instruction to juryInstrument payable at bank as equivalent to draft drawn on

bank. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 4Bank Deposits
and Collections 4:31.
Footnote 77. UCC 3-121 Alternative B [1952].
Footnote 78. Don E. Williams Co. v Commissioner (CA7) 527 F2d 649, 76-1 USTC
9131, 18 UCCRS 1234, 37 AFTR 2d 76-430, affd 429 US 569, 51 L Ed 2d 48, 97 S Ct
850, 1 EBC 1201, 77-1 USTC 9221, 21 UCCRS 152, 39 AFTR 2d 77-743.
Footnote 80. UCC 4-106(b) Alternative A [1990].
Footnote 82. UCC 4-106(b) Alternative B [1990].
As to "payable through" banks, see 73.

Footnote 84. UCC 4-105(5) [1990].
Footnote 85. Engine Parts v Citizens Bank, 92 NM 37, 582 P2d 809, 23 UCCRS 1248;
Reynolds-Wilson Lumber Co. v Peoples Nat'l Bank (Okla) 699 P2d 146, 40 UCCRS
1319.
73 Bank's obligation when instrument is payable through bank
View Entire Section

Insurance, dividend, or payroll checks, and occasionally other types of instruments, are
sometimes made "payable through" a particular bank. 86 The bank so designated is not
the drawee of such an instrument, but is merely designated as a collecting bank through
which presentment is properly made to the drawee. 87 This is provided by the Uniform
Commercial Code, which declares that an instrument which states that it is payable
through a bank or the like designates that bank as a collecting bank to make presentment,
but does not of itself authorize the bank to pay the instrument. 88 The fact that the
draft is payable through a bank upon acceptance does not alter the duty of one who is
both the drawer and the drawee of the draft to make payment to the named payees therein
or other proper holders. 89
Observation: A "payable through" draft is used for a variety of reasons in that it

provides the drawer with greater control over payment than ordinary checks. 90
Caution: A "payable through" draft must be clearly indicated as such by the word(s)
"through" or "payable through" appearing before the name of the collecting bank
through which the draft is payable, and a statement in an accompanying letter has no
effect. 91
Footnotes
Forms: Instruction to juryInstrument payable through bank as designating that bank

as collecting bank. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
4Bank Deposits and Collections 4:30.
Footnote 88. UCC 3-120 [1952]; UCC 4-106(a) [1990] (further providing that the
item may be presented for payment only by or through the bank).
A draft drawn by drawer on itself as drawee, which is payable through drawer's bank,
does not call on that bank or even authorize it to pay the draft. Instead, under UCC
3-120 [1952], such an instrument merely designates the drawer's bank as a collecting

bank to present the draft to the drawer-drawee for payment. General Motors Acceptance
Corp. v General Acci. Fire & Life Assurance Corp. (4th Dept) 67 App Div 2d 316, 415
NYS2d 536, 26 UCCRS 97.
A draft containing the clause "at sight when approved pay to the order of" immediately
ahead of the space for the payee's name required the approval of the drawer, not the
approval of the bank through which the draft was made payable, since it would be
nonsensical to hinge payment on the approval of a bank not authorized to make it under
UCC 3-120 [1952]. Oneida Nat'l Bank & Trust Co. v Allstate Ins. Co., 76 Misc 2d
1062, 352 NYS2d 870, 14 UCCRS 730.
Footnote 89. Lee v Skidmore (Summit Co) 49 Ohio App 2d 347, 3 Ohio Ops 3d 420, 361
NE2d 499, 21 UCCRS 580.
Footnote 90. Harper v K & W Trucking Co. (Alaska) 725 P2d 1066, 2 UCCRS2d 556.
25 UCCRS2d 477, review den 419 Mass 1102, 646 NE2d 409; Engine Parts v Citizens
Bank, 92 NM 37, 582 P2d 809, 23 UCCRS 1248; Reynolds-Wilson Lumber Co. v
Peoples Nat'l Bank (Okla) 699 P2d 146, 40 UCCRS 1319.
74 Government as party
View Entire Section

Commercial paper issued by the government is usually governed by the same rules as
apply to other paper of the same type and the government has the same liability as any
other drawer or maker. 92 However, while a negotiable instrument must ordinarily
contain an unconditional promise or order to pay, 93 a promise or order otherwise
unconditional is not made conditional by the fact that the instrument is limited to
payment out of a particular fund or the proceeds of a particular source, if the instrument
is issued by a government or governmental agency or unit. 94
Footnotes
Footnote 92. United States v Bank of New York, Nat'l Banking Ass'n (2 NY) 219 F 648.
As to government bonds, notes, and other securities, see 64 Am Jur 2d, Public Securities
and Obligations 1 et seq.
Footnote 93. 91.
Footnote 94. UCC 3-105(1)(g) [1952].
2. Payees [75-83]
75 Identification of payee
View Entire Section

Every valid negotiable instrument which is not payable to the bearer must be payable to a
determinate payee. 95
Observation: However, the maker or drawer need not specify the payee if the maker
leaves a blank in the instrument for such purpose. The person in possession of the
instrument may then fill in the blank and specify the payee. 96
The 1952 version of Article 3 provides that the person to whom order paper is payable
must be specified therein with reasonable certainty. 97 The "reasonable certainty"
standard is not dependent on the subjective intent of the maker or drawer, and is not
affected by minor errors in name. 98
The 1990 version of Article 3 provides that the person to whom an instrument is initially
payable is determined by the intent of the person, whether or not authorized, who signs
the instrument. The instrument is payable to the person intended by the signer even if
that individual is identified by name or other identification which is not that of the
intended person. 99
Observation: The foregoing provision in the 1990 version states the general rule that
the person to whom an instrument is payable is determined by the intent of the person,
whether or not authorized, who signs the instrument. If X signs a check as drawer of a
check on X's account, the intent of X controls; if X, as President of Corporation, signs
a check as President in behalf of Corporation as drawer, the intent of X controls; if X
forges Y's signature as drawer of a check, the intent of X also controls. Y is referred to
as the drawer of the check because the signing of Y's name identifies Y as the drawer,
but since Y's signature was forged Y has no liability as drawer unless some other
provision of Article 3 or Article 4 makes Y liable. 1 Implicit in the statutory provision
concerning the identification of payees is the fact that parol evidence is admissible to
show the actual intent of the signer of an instrument, even though that evidence
contradicts the description or identification of the payee made in the instrument. 2
Caution: Parol evidence offered for the purpose of identifying a payee is

inadmissible if the instrument is unambiguous. 3
A person to whom an instrument is payable may be identified in any way, including by

name, identifying number, office, or account number. 4 If the signature of the issuer of
an instrument is made by automated means, such as by a check-writing machine, the
payee of the instrument is determined by the intent of the person who supplied the name
or identification of the payee, whether or not authorized to do so. 5
Where more than one person signs in the name of or on behalf of the issuer of an

instrument and all signers do not intend to name the same person as payee, the instrument
is payable to any person intended by one or more of the signers. 6 Thus, the intent of
any one of multiple signers may determine the identity of the payee, whether or not there
are cosigners who did not have the same intent. 7
If an instrument is payable to an account and the account number is identified only by

number, the instrument is payable to the person to whom the account is payable; but,
where the instrument is payable to an account identified by number and by the name of a
person, the instrument is payable to the named person whether or not that person is the
owner of the account identified by that number. 8
Comment: Where both a name and account number are used to identify a payee, the
name of the person controls, so that the named person will be entitled to negotiate the
check even if the account number specified is some other person's account. For
example, where a check is payable to "X Corporation Account No. 12345 in Bank of
Podunk," the check is payable to X Corporation and can be negotiated by X
Corporation even if Account No. 12345 is some other person's account or the check is
not deposited in that account. In other cases the payee is identified by an account
number and the name of the owner of the account is not stated. 9
Footnotes
Footnote 95. Cohen v Lincoln Sav. Bank, 275 NY 399, 10 NE2d 457, 112 ALR 1424.
As to payee of bearer paper, see 83.
Footnote 96. 123.
Footnote 97. UCC 3-110(1) [1952].
A note is valid which designates the payee by implication, as where the payee, though
not designated as such, is named as the one from whom the consideration flowed. De
Rouin v Hinphy (La App 4th Cir) 209 So 2d 352, cert den 252 La 465, 211 So 2d 330.
As to order paper generally, see 88.
Footnote 98. Hartford Acci. & Indem. Co. v American Express Co., 74 NY2d 153, 544
NYS2d 573, 542 NE2d 1090, 8 UCCRS2d 865.
Footnote 99. UCC 3-110(a) [1990].
Annotation: Admissibility of extrinsic evidence to identify person or persons intended

to be designated by the name in which a contract is made, 80 ALR2d 1137.
Footnote 3. Schwartz v Disneyland Vista Records (Fla App D4) 383 So 2d 1117, 29
UCCRS 1321, petition den (Fla) 392 So 2d 1378.

Footnote 4. UCC 3-110(c) [1990].
Footnote 5. UCC 3-110(b) [1990].
Footnote 6. UCC 3-110(a) [1990].
Footnote 8. UCC 3-110(c)(1) [1990].
76 Description as agent, fiduciary, or officer
View Entire Section

Under the 1952 version of Article 3 of the Uniform Commercial Code, an instrument
made payable to a named person with the addition of words describing such person as
agent or officer of a specified person is payable to his or her principal, but the agent or
officer may act as if he or she were the holder. 10
Comment: The intent of the provision is to include all such descriptions as "John
Doe, Treasurer of Town of Framingham," "John Doe, President of Home Telephone
Co.," "John Doe, Secretary of City Club," or "John Doe, Agent of Richard Roe." In all
such cases it is commercial understanding that the description is not added for mere
identification but for the purpose of making the instrument payable to the principal,
and that the agent or officer is named as payee only for convenience in enabling him or
her to cash the check. 11
An instrument made payable to a named person with the addition of words describing
him or her as any other fiduciary for a specified person or purpose is payable to the payee
and may be negotiated, discharged, or enforced by the payee. 12
Comment: The intent of this provision is to cover such descriptions as "John Doe,
Trustee of Smithers Trust," "John Doe, Administrator of the Estate of Richard Roe," or
"John Doe, Executor under Will of Richard Roe." The instrument is payable to the
individual named and he or she may negotiate, enforce, or discharge it; but he or she
remains subject to any liability for breach of duty as fiduciary. A subsequent holder is
on notice of the fiduciary position and under UCC 3-304, is not a holder in due
course if he or she takes with notice that the individual named has negotiated the
instrument in payment of or as security for his or her own debt or in any transaction for
his or her own benefit or otherwise in breach of duty. 13
Under this provision, a bank may negotiate a check payable to a fiduciary without
requiring deposit of the check in a fiduciary account and the fact that the check was not

so deposited may not, without more, be relied upon as establishing a wrongful payment
on the part of the bank. 14
If the instrument describes the payee in any other manner, it is payable to the payee
unconditionally and the additional words are without effect on subsequent parties. 15
Observation: Words of description which are to be treated as mere identification

include "John Doe, 1121 Main Street," "John Doe, Attorney," "Jane Doe, unremarried
widow," or such description of the payee as "Treasurer," "President," "Agent,"
"Trustee," "Executor," or "Administrator," which does not name the principal or the
beneficiary. 16
Comment: The purpose of 3-117 [1952] is to protect the payee in his or her right
to negotiate the instrument and the subsequent transferor from being misled; its
purpose is not to protect the drawer of the instrument. 17
Under the 1990 version of Article 3, where an instrument is payable to a person described
as an agent or similar representative of a named or identified person, the instrument is
payable to the represented person, the representative, or a successor of the representative.
18 This provision merely determines who can deal with the instrument as holder; it
does not determine ownership of the instrument or its proceeds. Under this provision, if
the instrument states that it is payable to Doe, president of X Corporation, either Doe or
X Corporation can be holder of the instrument. 19
Footnotes
Footnote 10. UCC 3-117(a) [1952].
Forms: Instruction to juryIdentification of person to whom instrument payable. 6A

3:36.
Footnote 12. UCC 3-117(b) [1952].
As to notice of fiduciary or agency relationships, generally, see 296.
Footnote 14. Bradford Trust Co. v Citibank, N.A., 60 NY2d 868, 470 NYS2d 361, 458
NE2d 820.
Footnote 15. UCC 3-117(c) [1952].
Footnote 17. Lisec v United Airlines, Inc. (1st Dist) 85 Cal App 3d 969, 149 Cal Rptr
847.

Footnote 18. UCC 3-110(c)(2)(ii) [1990].
As to the definition of "representative," see 63.
23 ALR3d 932, 14.5.
77 Permissible payees of order paper, generally
View Entire Section

Article 3 of the Uniform Commercial Code, in dealing with the payees of an instrument
payable to order, 20 provides a number of classifications of permissible payees. 21 The
instrument payable to order may be payable to the order of the maker or drawer; 22 or
the drawee; 23 a payee who is not maker, drawer, or drawee; 24 or two or more payees
together or in the alternative; 25 or an estate, trust, or fund; 26 or an office, or an
officer by his title as such; 27 or a partnership or unincorporated association. 28
Footnotes
Footnote 20. 75.
Footnote 21. UCC 3-110(1) [1952]; UCC 3-110(c), (d) [1990].
Footnote 22. UCC 3-110(1)(a) [1952], discussed in 78.
Footnote 23. UCC 3-110(1)(b) [1952].
A check which the drawer makes payable to the drawee conveys nothing to the drawee as
payee as to the disposition of the funds, and inquiry must be made elsewhere which must
take the form of securing instruction from the drawer's duly authorized agents.
Matteawan Mfg. Co. v Chemical Bank & Trust Co., 244 App Div 404, 279 NYS 495,
mod on other grounds 272 NY 411, 3 NE2d 845.
Footnote 24. UCC 3-110(1)(c) [1952].
Footnote 25. UCC 3-110(1)(d) [1952]; UCC 3-110(d) [1990], discussed in 79.
Footnote 26. UCC 3-110(1)(e) [1952]; UCC 3-110(c)(2)(i) [1990], (iii), discussed in
81.
Footnote 27. UCC 3-110(1)(f) [1952]; UCC 3-110(c)(2)(iv) [1990], discussed in

80.
Footnote 28. UCC 3-110(1)(g) [1952], discussed in 80.
78 Maker or drawer as payee
View Entire Section

Article 3 of the Uniform Commercial Code provides that an instrument may be payable
to the order of the maker or drawer. 29 When this is the case, an instrument is not
deemed issued until indorsed and delivered by the drawer-payee or the maker-payee. 30
A negotiable instrument drawn payable to the order of the drawer or maker is usually not
complete and without legal effect until assigned, indorsed, or negotiated. 31
Footnotes
Footnote 29. UCC 3-110(1)(a) [1952].
Footnote 30. 6A Anderson, Uniform Commercial Code 3d 3-110:8.
Footnote 31. Kistner v Peters, 223 Ill 607, 79 NE 311.
79 Two or more payees; alternative payees
View Entire Section

An instrument payable to order may be payable to the order of two or more payees
together or in the alternative. 32
An instrument payable to the order of two or more persons in the alternative is payable to
any one of them and may be negotiated, discharged, or enforced by any of them who has
possession of it. 33 If an instrument is ambiguous as to whether it is payable to the
persons alternatively, the instrument is payable to the persons alternatively. 34
Illustration: Where the designation of multiple payees of a check is ambiguous as to

whether it is payable jointly or alternatively, the defendant bank is not liable for paying
the check to one of the co-payees without the indorsement of a plaintiff who is another
of the payees. 35

Comment: In the case of ambiguity, persons dealing with the instrument should be
able to rely on the indorsement of a single payee. For example, an instrument payable
to X and/or Y is treated like an instrument payable to X or Y. 36
If an instrument is payable to two or more persons not alternatively, it is payable to all of

them and may be negotiated, discharged, or enforced only by all of them. 37 As a
result, when a note is made payable to two or more payees in the conjunctive, payment
made to only one of the payees does not discharge the maker's obligations under the note.
38
If the instrument is payable to "A/B" it is payable in the alternative to A or to B, 39 and

if the instrument is payable to "A and/or B," it is payable in the alternative to A or to B.
40
As between two or more payees, one who physically possesses the negotiable instrument
has presumptive evidence of title and ownership, however such a presumption is not final
or conclusive; rather the non-possessing payee making an adverse claim regarding the
instrument's ownership bears the burden of rebutting this presumption. 41
An instrument payable to "A and/ B" is ambiguous on its face regarding whether it is to
be paid in the alternative or jointly, and if such an instrument is paid on the indorsement
of one payee, the other payee will be deprived of his or her interest in the instrument, and
for this reason, the instrument will be deemed payable jointly. 42
Footnotes
Footnote 32. UCC 3-110(1)(d) [1952].
23 ALR3d 932, 15.
Footnote 33. UCC 3-116(a) [1952]; UCC 3-110(d) [1990].
Whether the conjunctive used is "or" or "and" is academic, since either one shows a joint
interest. In re Estate of Schroeder (Prob Ct) 75 Ohio L Abs 555, 144 NE2d 512.
For a discussion of the rights of alternative payees to transfer or negotiate the paper, see
205.
Forms: Complaint, petition, or declarationAllegationInstrument payable to alternate

payees. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:42.
Footnote 34. UCC 3-110(d) [1990].
Footnote 35. Bijlani v Nationsbank, N.A. (Fla Cir Ct) 25 UCCRS2d 1165.
Annotation: Bank's liability to nonsigning payee for payment of check drawn to joint
payees without obtaining indorsement by both, 47 ALR3d 537.

Practice References Proof that bank was negligent resulting in payment of checks
with less than required number of signatures. 25 Am Jur POF2d 165, Bank's Liability
for Payment of Check or Withdrawal on Less Than Required Number of Signatures
6-27.
3-110 [1990].
Footnote 37. UCC 3-116(b) [1952]; UCC 3-110(d) [1990].
For a discussion of the rights of joint payees to transfer or negotiate the paper, see 205.
Footnote 38. Concepcion v Tojeiro (Fla App D3) 457 So 2d 553, 9 FLW 2188, 39
UCCRS 210; General Motors Acceptance Corp. v Abington Casualty Ins. Co., 413 Mass
583, 602 NE2d 1085, 18 UCCRS2d 1151.
Footnote 39. Dynalectron Corp. v Equitable Trust Co. (CA4 Md) 704 F2d 737, 35
UCCRS 1548; In re General Microcomputer (BC ND Ind) 118 BR 96, 13 UCCRS2d 162;
Dynalectron Corp. v Union First Nat'l Bank (DC Dist Col) 488 F Supp 868, 29 UCCRS
131; Ryland Group, Inc. v Gwinnett County Bank, 151 Ga App 148, 259 SE2d 152, 27
UCCRS 717; Kinzig v First Fid. Bank, N.A. (Law Div) 277 NJ Super 255, 649 A2d 634,
25 UCCRS2d 125; L. B. Smith, Inc. v Bankers Trust Co. (4th Dept) 80 App Div 2d 496,
439 NYS2d 543, 31 UCCRS 596, affd 55 NY2d 942, 449 NYS2d 192, 434 NE2d 261;
Mumma v Rainier Nat'l Bank, 60 Wash App 937, 808 P2d 767, 14 UCCRS2d 1119,
review den 117 Wash 2d 1019, 818 P2d 1098.
3-110 [1990].
Footnote 41. Hattaway v Keefe, 191 Ga App 315, 381 SE2d 569, 10 UCCRS2d 143.
Footnote 42. C. H. Sanders Constr. Co. v Bankers Trust Co. (1st Dept) 123 App Div 2d
251, 506 NYS2d 58, 1 UCCRS2d 1563.
Forms: Complaint, petition, or declarationAllegationBy holder of noteIndorsers

jointly and severally liable. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Article 3Negotiable Instruments 3:56.
AnswerDefenseBy indorser of noteDenial of joint liability with prior indorser. 6A

3:57.
AnswerDefenseExtension of time without consent of accommodation indorser. 6A

3:58.
Instruction to juryDetermination of interest payable. 6A Am Jur Pl & Pr Forms

Instruction to juryEffect of contradictory terms in instrument. 6A Am Jur Pl & Pr


80 Office, officer, partnership, or association as payee
View Entire Section

Article 3 of the Uniform Commercial Code provides that an instrument may be payable
to the order of an office, or an officer by his or her title as such, in which case it is
payable to the principal, but the incumbent of the office or his or her successors may act
as if he, she, or they were the holders. 43
Observation: The foregoing provision makes no distinction between a public office

and a private office. 44
This provision permits an instrument to be made payable to the order of an office itself or
an officer by his or her title or function; 45 it merely determines who can deal with the
instrument as holder and does not determine ownership of the instrument or its proceeds.
46 An instrument may be drawn payable to the order of the "Consulate" of a named
country, or the "Treasurer" of a named club. 47 "Pay Treasurer of X Corporation" does
not mean pay bearer, even though there may be no such officer. 48
An instrument may be payable to the order of a partnership or unincorporated

association, in which case it is payable to the partnership or association and may be
indorsed or transferred by any person thereto authorized. 49 The purpose of this
provision is to make clear that instruments made payable to partnerships and various
forms of unincorporated associations, such as labor unions and business trusts, are not
bearer paper but order paper and may be indorsed or otherwise dealt with by any person
having authority from the partnership or association to whose order the instrument is
payable, as in the case of incorporated associations. 50
Footnotes
Footnote 43. UCC 3-110(1)(f) [1952]; UCC 3-110(c)(2)(iv) [1990].
Annotation: Authority of agent to indorse and transfer commercial paper, 37 ALR2d

453.

Footnote 49. UCC 3-110(1)(g) [1952].
Footnote 50. Official Comment 4 to UCC 3-110 [1952], also pointing out that the
provision overcomes vestigial theories relating to the lack of "legal entity" of
partnerships and various forms of unincorporated associations, such as labor unions and
business trusts.
81 Estate, trust, or fund as payee
View Entire Section

instrument may be payable to the order of an estate, trust, or fund, in which case it is
payable to the order of the representative 51 of such estate, trust, or fund, or his or her
successors. 52 The 1990 version of Article 3 provides that if an instrument is payable to
a trust, an estate, or a person described as a trustee or representative of a trust or estate,
the instrument is payable to the trustee, the representative, or a successor of either,
whether or not the beneficiary or estate is also named. 53 The 1990 version also
provides that where an instrument is payable to a fund or organization that is not a legal
entity, the instrument is payable to a representative of the members of the fund or
organization. 54
Observation: Any representative of a nonentity satisfies the requirements of the

foregoing statute and, since no provision is made for a successor to a representative,
only the person who is the representative when the issue of the proper payee arises can
be involved. 55
The intent is to make it clear that an instrument payable to the order of a payee, such as
"Tilden Trust" or "Community Fund," is an order instrument. So long as the payee can
be identified, it is not necessary that it be a legal entity. 56
This provision merely determines who can deal with the instrument as holder; it does not
determine ownership of the instrument or its proceeds. 57
Footnotes
Footnote 51. See UCC 1-201(35), defining the term "representative" includes an agent,
an officer of a corporation or association, and a trustee, executor, or administrator of an
estate, or any other person empowered to act for another.
Footnote 52. UCC 3-110(1)(e) [1952].
Footnote 53. UCC 3-110(c)(2)(i) [1990].

Footnote 54. UCC 3-110(c)(2)(iii) [1990].
82 Impostors; nominal or fictitious payees
View Entire Section

If an impostor, by use of the mails or otherwise, induces 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 of the instrument 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 person who, in good faith, pays the instrument
or takes it for value or for collection. 58 This rule applies only when the issuance of a
check has been accomplished through impersonation of the payee. 59
If a person whose intent determines to whom an instrument is payable does not intend the
person identified as the payee to have any interest in the instrument, or if the person
identified as the payee of an instrument is a fictitious person, then (1) any person in
possession of the instrument is its holder; and (2) an indorsement by any person in the
name of the payee stated in the instrument is effective as the indorsement of the
instrument or takes it for value or for collection. 60
Observation: The person to whom an instrument is initially payable is determined

by the intent of the person, whether or not authorized, who signs the instrument; the
instrument is payable to the person intended by the signer even if that individual is
identified by name or other identification which is not that of the intended person. If
the signature of the issuer of an instrument is made by automated means, such as by a
check-writing machine, the payee of the instrument is determined by the intent of the
person who supplied the name or identification of the payee, whether or not authorized
to do so. 61
If the intent of the person preparing the instrument is that the identified payee should not
in fact have any interest in the instrument, the payee is called a "nominal payee,"
although the Uniform Commercial Code does not employ that precise term. 62
Comment: If a check payable to an impostor, a payee not intended to have an

interest in the check, or to a fictitious payee is paid, the effect of UCC 3-404(a) and
3-404(b) is to place the loss on the drawer of the check rather than on the drawee or the
depositary bank that took the check for collection. 63
Under the 1952 version, 64 a check made out to a fictitious payee may be indorsed by

anyone. 65
Footnotes
Footnote 58. UCC 3-404(a) [1990].
UCC 3-405(1)(a) [1952] provides that an indorsement by any person in the name of a
named payee is effective if an impostor by use of the mails or otherwise has induced the
maker or drawer to issue the instrument to the impostor, or to his or her confederate in
the name of the payee.
Footnote 59. Title Ins. Co. v Comerica Bank - California (6th Dist) 27 Cal App 4th 800,
32 Cal Rptr 2d 735, 94 CDOS 6325, 94 Daily Journal DAR 11493, 24 UCCRS2d 584.
Footnote 60. UCC 3-405(b) [1952]; UCC 3-404(b) [1990].
Footnote 61. 75.
Footnote 64. UCC 3-405(1) [1952].
Footnote 65. United States v Johnson (CA9 Cal) 596 F2d 842 (criticized on other
grounds by United States v Bailey (CA7 Ill) 734 F2d 296).
83 Payee of bearer paper
View Entire Section

A negotiable instrument payable to bearer need not state a payee. 66
Definition: The term "bearer" is defined as the person in possession of an instrument

payable to bearer or indorsed in blank. 67
The payee of such an instrument may be described by stating that the instrument is
payable to the bearer or to the order of the bearer or by otherwise indicating that the
person in possession of the instrument is entitled to payment. 68 Another way to
describe the payee of a bearer instrument is for the instrument to state that it is payable to
or to the order of cash, or otherwise to indicate that it is not payable to an identified
person. 69
Comment: Language such as "order of bearer" usually results when a printed form is
used and the word "bearer" is filled in. 70

Instruments payable to such payees as "bills payable" or "one keg of nails" would be
bearer paper, but an instrument payable "to the order of ----," where a blank space is left
for the name of the payee, is not payable to bearer and is, instead, an incomplete
instrument. 71
Footnotes
Footnote 66. UCC 3-109(a)(2) [1990].
As to instruments as payable to order or to bearer, see 88 et seq.
Forms: Complaint, petition, or declarationAllegationNote payable to bearer. 5 Am

Jur Pl & Pr Forms (Rev), Bills and Notes 6.
Complaint, petition, or declarationAllegationDefendant's execution and delivery of

note payable to bearer. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Complaint, petition, or declarationBy owner of note payable to bearer against maker.

Instruments 3:33.
Footnote 68. UCC 3-111 [1952]; UCC 3-109(a)(1) [1990].
Footnote 69. UCC 3-111 [1952]; UCC 3-109(a)(3) [1990].
As to incomplete instruments, see 117, 118 et seq.
3. Guarantors, Accommodation Parties, and Indorsers [84-87]
84 Guarantors and sureties
View Entire Section

Under the 1952 version of Article 3 of the Uniform Commercial Code, the law of
suretyship applies with regard to negotiable instruments. 72 A surety, and this term
includes a guarantor, 73 is an accommodation party, and vice versa, under the 1952
version of the Code. 74
Observation: The difference, if any, between "guaranty" and "surety" has been
fused, at least for purposes of the UCC, by UCC 1-201(40), which provides that
"surety" includes "guarantor." 75
The 1990 version of Article 3 states that the 1952 version was confusing because the
obligation of a guarantor was covered both in the section relating to accommodation
parties and in a separate section relating to guarantors. 76 The latter section suggests
that a signature accompanied by words of guaranty created an obligation distinct from
that of an accommodation party. The 1990 version of Article 3 eliminates that confusion
by stating in the section relating to accommodation parties the obligation of a person who
uses words of guaranty. 77 Such persons are presumed to be accommodation parties,
who differ from other sureties in that their liability is on the instrument and they are
sureties for another party to it. 78
The Code does not require that the word "guaranty" be used in order to make a party a
guarantor. 79 Rather, it is a question of intention whether there is a guaranty of
commercial paper. 80
The matter of guaranty or suretyship may be involved with commercial paper in various
ways. A person may give a guaranty of an obligation of another for which obligation the
creditor takes or has taken a note or other instrument without involving the guarantor as a
party to the instrument itself; 81 or a contract of guaranty may be written out and signed
on the back of the instrument constituting the obligation which is guaranteed. 82 The
first type of contract, and all matters of guaranty or suretyship other than those directly
involving questions of the law of commercial paper, are treated elsewhere. 83 Article 3
is concerned with the liability of guarantors or sureties on the negotiable instrument 84
or on the technical nonnegotiable instrument. 85
Footnotes
Footnote 72. Official Comments 1-5 to UCC 3-415 [1952]; Official Comments 1, 3,
and 5 to UCC 3-606 [1952].
Footnote 74. 85.
Footnote 75. Niederer v Ferreira (2nd Dist) 189 Cal App 3d 1485, 234 Cal Rptr 779;
Kennedy v Thruway Service City, Inc., 133 Ga App 858, 212 SE2d 492; Commerce
Union Bank v Burger-In-A-Pouch, Inc. (Tenn) 657 SW2d 88, 37 UCCRS 192.
The word "surety" is a broad general classification; an accommodation party is under the
general classification of surety and a guarantor is also a surety. Philadelphia Bond &
Mortg. Co. v Highland Crest Homes, Inc., 235 Pa Super 252, 340 A2d 476, 17 UCCRS
158.
Footnote 76. Official Comment 4 to UCC 3-419 [1990]; referring to UCC 3-415,
3-416 [1952].

As to the liability of accommodation parties or guarantors, generally, see 472 et seq.
Footnote 78. 85.
Footnote 79. Womack v First State Bank, 21 Ark App 33, 728 SW2d 194.
Footnote 81. First Nat'l Bank v Jones, 219 NY 312, 114 NE 349; Shenkin v Grant, 3
Misc 2d 333, 152 NYS2d 996.
Footnote 82. Peoples Trust Co. v O'Neil, 273 NY 312, 7 NE2d 244.
Forms: GuarantyPayment of promissory note. 3B Am Jur Legal Forms 2d, Bills and
Notes 41:115-41:117.
Footnote 83. 38 Am Jur 2d, Guaranty 1 et seq.
For a general discussion of the distinction between the indorsement of a negotiable

instrument and a contract of suretyship or guaranty, see 38 Am Jur 2d, Guaranty 18.
85 Accommodation parties
View Entire Section

accommodation party is one who signs the instrument in any capacity for the purpose of
lending his or her name to another party to it. 86 The 1990 version of Article 3
provides that if an instrument is issued for value given for the benefit of a party to the
instrument ("accommodated party") and another party to the instrument
("accommodation party") signs the instrument for the purpose of incurring liability on the
instrument without being a direct beneficiary of the value given for the instrument, the
instrument is signed by the accommodation party "for accommodation." 87
Comment: An accommodation party is a person who signs an instrument to benefit

the accommodated party, either by signing at the time value is obtained by the
accommodated party or later, and who is not a direct beneficiary of the value obtained.
An accommodation party will usually be a comaker or anomalous indorser. For
example, if X cosigns a note of Corporation that is given for a loan to Corporation, X is
an accommodation party if no part of the loan was paid to X or for X's direct benefit.
This result occurs even though X may receive indirect benefit from the loan because X
is employed by Corporation or is a stockholder of Corporation, or even if X is the sole
stockholder so long as Corporation and X are recognized as separate entities. 88
The burden of proof is on the party claiming accommodation status to prove that no
benefits were received. 89 The essential characteristic of an accommodation party is
that he or she is a surety, 90 and has not signed gratuitously; the accommodation party
may be a paid surety or may receive other compensation from the party accommodated or
even from the payee. 91
An accommodation party may sign in any capacity, as maker, drawer, acceptor, or

indorser. 92
Except as provided otherwise by statute for guarantees of collection, 93 the

accommodation party is obliged to pay the instrument in the capacity in which he or she
signs; the obligation of the accommodation party may be enforced notwithstanding any
statute of frauds, and whether or not the accommodation party receives any consideration
for the accommodation. 94
Observation: The plaintiff's knowledge of a party's accommodation status is

significant where there is a question of impairment of collateral or discharge of the
accommodated party; in the absence of such factors, knowledge of the accommodation
status has no significance. 95
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. 96
The intention of the parties is an important factor in determining whether a signatory to

an instrument is an accommodation party. 97 Intent of the parties is a factual question.
98 Besides the intent of the parties, the two primary factors usually found to indicate
accommodation party status are (1) the accommodation party received no benefits from
the proceeds of the instrument, and (2) the accommodation party's signature was a
necessary element to the maker's receipt of the loan. 99
Footnotes
Footnote 86. UCC 3-415(1) [1952].
Annotation: Who is accommodation party under Uniform Commercial Code 3-415,

90 ALR3d 342.
Practice References Definition of accommodation party, and rights, liabilities, and

status of accommodation party. 7 Am Jur POF2d 283, Status As Accommodation
Party 1-5.
Identity of, and recourse against, accommodated party. 7 Am Jur POF2d 283, Status
as Accommodation Party 6, 7.
Proof that party signed negotiable instrument as accommodation party. 7 Am Jur

POF2d 283, Status as Accommodation Party 8-23.
Footnote 87. UCC 3-419(a) [1990].
As to accommodated parties, see 86.
Footnote 89. Willis v Willis (DC Dist Col) 30 UCCRS 1332, affd in part and revd in part
on other grounds (App DC) 211 US App DC 103, 655 F2d 1333, 32 UCCRS 202;
Hanson v Cheek, 251 Ark 897, 475 SW2d 526, 10 UCCRS 670; In re Estate of Wray v
Wray (Mo App) 842 SW2d 211; Marvin E. Jewell & Co. v Thomas, 231 Neb 1, 434
NW2d 532, 9 UCCRS2d 646; Federal Land Bank v Taggart, 31 Ohio St 3d 8, 31 Ohio
BR 6, 508 NE2d 152, 3 UCCRS2d 1836; Commerce Union Bank v Davis (Tenn App)
581 SW2d 142, 26 UCCRS 971; Bixenstine v Palacios (Tex App Corpus Christi) 805
SW2d 889; Utah Farm Prod. Credit Ass'n v Watts (Utah) 737 P2d 154, 54 Utah Adv Rep
4, 4 UCCRS2d 795.
Footnote 90. Crawford v Martin Engineering Co. (Ark App) 40 UCCRS 167; Greenberg,
Rhein & Margolis, Inc. v Norris-Faye Horton Enterprises, Inc., 218 Conn 162, 588 A2d
185, 14 UCCRS2d 500; Griswold v Whetsell, 157 Ga App 800, 278 SE2d 753, 33
UCCRS 317; Anna Nat'l Bank v Wingate (5th Dist) 63 Ill App 3d 676, 21 Ill Dec 84, 381
NE2d 19, 25 UCCRS 200; Chapman Drug Co. v Green (Ky App) 685 SW2d 204, 40
UCCRS 172; Chaisson v Daigle (La App 3d Cir) 499 So 2d 675, 3 UCCRS2d 1033; Rose
v Homsey, 347 Mass 259, 197 NE2d 603, 2 UCCRS 129; Marvin E. Jewell & Co. v
Thomas, 231 Neb 1, 434 NW2d 532, 9 UCCRS2d 646; Bank of New Jersey v Pulini, 194
NJ Super 163, 476 A2d 797, 38 UCCRS 1308; Artistic Greetings, Inc. v Sholom
Greeting Card Co. (3d Dept) 36 App Div 2d 68, 318 NYS2d 623, 8 UCCRS 1294; King
v Finnell (Okla) 603 P2d 754, 27 UCCRS 1048; Reimann v Hybertsen, 275 Or 235, 550
P2d 436, 19 UCCRS 889, mod on other grounds 276 Or 95, 553 P2d 1064; Reuter v
Citizens & Northern Bank, 410 Pa Super 199, 599 A2d 673, 16 UCCRS2d 787; Eikel v
Bristow Corp. (Tex Civ App Houston (1st Dist)) 529 SW2d 795, 18 UCCRS 165
(disapproved on other grounds by Qantel Business Systems, Inc. v Custom Controls Co.
(Tex) 761 SW2d 302); Warren v Washington Trust Bank, 19 Wash App 348, 575 P2d
1077, 23 UCCRS 966, mod on other grounds 92 Wash 2d 381, 598 P2d 701.
As to the liability of accommodation parties generally, see 472 et seq.
Footnote 92. UCC 3-419(b) [1990].
Footnote 93. UCC 3-419(d) [1990].
As to guarantees of payment or of collection, see 490.
Footnote 94. UCC 3-415(2) [1952]; UCC 3-419(b) [1990].
Footnote 96. UCC 3-419(c) [1990].

As to guarantors of negotiable instruments generally, see 487.
Footnote 97. Arnold v Texas, 498 US 838, 112 L Ed 2d 80, 111 S Ct 110; Catania v
Catania, 26 Conn App 359, 601 A2d 543, 18 UCCRS2d 826; Barylak v Jordan, 156 Ga
App 508, 274 SE2d 846; Airstream v CIT Fin. Servs., 111 Idaho 307, 723 P2d 851, 2
UCCRS2d 816; Holcomb State Bank v Adamson (2d Dist) 107 Ill App 3d 908, 63 Ill Dec
704, 438 NE2d 635, 34 UCCRS 940; Farmers State Bank v Cooper, 227 Kan 547, 608
P2d 929, 28 UCCRS 733; Ramsey v First Nat'l Bank & Trust Co. (Ky App) 683 SW2d
947, 40 UCCRS 1769; Ashland State Bank v Elkhorn Racquetball, 246 Neb 411, 520
NW2d 189, 24 UCCRS2d 968; Branch Banking & Trust Co. v Thompson, 107 NC App
53, 418 SE2d 694, 18 UCCRS2d 506, review den 332 NC 482, 421 SE2d 350; Huron
County Banking Co., N.A. v Knallay (Huron Co) 22 Ohio App 3d 110, 22 Ohio BR 311,
489 NE2d 1049, 2 UCCRS2d 197; Kerney v Kerney, 120 RI 209, 386 A2d 1100, 24
UCCRS 384; Dalton v George B. Hatley Co. (Tex App Austin) 634 SW2d 374, 34
UCCRS 213; Utah Farm Prod. Credit Ass'n v Watts (Utah) 737 P2d 154, 54 Utah Adv
Rep 4, 4 UCCRS2d 795; Narans v Paulsen (Wyo) 803 P2d 358.
Footnote 98. Catania v Catania, 26 Conn App 359, 601 A2d 543, 18 UCCRS2d 826;
Airstream v CIT Fin. Servs., 111 Idaho 307, 723 P2d 851, 2 UCCRS2d 816; Wohlhuter v
St. Charles Lumber & Fuel Co. (2d Dist) 25 Ill App 3d 812, 323 NE2d 134, 16 UCCRS
792, affd 62 Ill 2d 16, 338 NE2d 179, 18 UCCRS 174, 93 ALR3d 1278; Williams v
Lafayette Production Credit Asso. (Ind App) 508 NE2d 579, 4 UCCRS2d 1489; Campo v
Maloney, 122 NH 162, 442 A2d 997, 33 UCCRS 1712; Utah Farm Prod. Credit Ass'n v
Watts (Utah) 737 P2d 154, 54 Utah Adv Rep 4, 4 UCCRS2d 795.
Footnote 99. Bank South v Jones, 185 Ga App 125, 364 SE2d 281, 5 UCCRS2d 644;
Farmers State Bank v Cooper, 227 Kan 547, 608 P2d 929, 28 UCCRS 733; Ramsey v
First Nat'l Bank & Trust Co. (Ky App) 683 SW2d 947, 40 UCCRS 1769; Landmark KCI
Bank v Marshall (Mo App) 786 SW2d 132; Mooney v GR & Assocs. (Utah App) 746
P2d 1174, 72 Utah Adv Rep 43, 5 UCCRS2d 1419.
86 Accommodated parties
View Entire Section

An accommodated party is the party to the instrument to whom the accommodation party
lends his or her name, and is the principal for whom he or she is surety. 1 The
accommodation party is not liable to the party accommodated and, if he or she pays the
instrument, has the right of recourse against such accommodated party. 2 In some
instances it is not perfectly clear as to whether the party accommodated is the maker or
the payee of an instrument, 3 or some other party, 4 and the question may be one for a
jury to decide. 5
Under the Code, the accommodated party is a party to the instrument. 6 Thus, the maker
of a note is not an accommodation party if the person allegedly accommodated is not a
party to the paper. 7

Caution: In at least one jurisdiction, it is held that because the concept of an
accommodation party is given a broad interpretation, the concept may not necessarily
require the accommodated party to be an actual party to the note or instrument itself. 8
Footnotes
Footnote 1. Official Comments 1 and 4 to UCC 3-415 [1952].
Footnote 2. UCC 3-415(5) [1952]; UCC 3-419(e) [1990].
Footnote 3. Callery v Lyons, 292 NY 15, 53 NE2d 376 (holding that the payee was the
party accommodated); Wittemann v Sands, 238 NY 434, 144 NE 671, 37 ALR 1216
(holding that the maker and not the payee was properly found to have been the party
accommodated).
Footnote 4. Moynihan v McKeon, 16 Misc 343, 38 NYS 61.
Footnote 5. Wittemann v Sands, 238 NY 434, 144 NE 671, 37 ALR 1216.
Practice References Identity of, and recourse against, accommodated party. 7 Am

Jur POF2d 283, Status As Accommodation Party 6, 7.
Footnote 6. UCC 3-419(a) [1990].
Footnote 7. Bank of America v Superior Court of San Diego County (4th Dist) 4 Cal App
3d 435, 84 Cal Rptr 421, 7 UCCRS 713; First Nat'l Bank, N.A. v Burgess (App) 118
Idaho 627, 798 P2d 472, 13 UCCRS2d 440; McIntosh v White (Mo App) 447 SW2d 75,
7 UCCRS 208; Blakely v Schulz, 257 Or 527, 480 P2d 428, 8 UCCRS 1044; Bucks
County Bank & Trust Co. v De Groot, 226 Pa Super 419, 313 A2d 357, 14 UCCRS 155.
Footnote 8. Scott v Citizens Bank of Americus, 188 Ga App 618, 373 SE2d 633, 8
UCCRS2d 68.
87 Indorsers
View Entire Section

The provisions of Article 3 of the Uniform Commercial Code dealing with the transfer
and negotiation of instruments refer to the "indorsement" of an instrument by an indorser.
9
Definition: An "indorser" is one who makes an indorsement; 10 the term

"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 negotiating the instrument, restricting payment of the instrument, or

incurring the indorser's liability on the instrument. Regardless of the intent of the
signer, a signature and its accompanying words is an indorsement unless the
accompanying words, terms of the instrument, place of the signature, or other
circumstances unambiguously indicate that the signature was made for a purpose other
than indorsement. 11
An indorser bears some resemblance to a guarantor or surety, but his or her contract and
liability 12 are distinct from those of guarantors or sureties, 13 and generally the
liability of an indorser is secondary and conditional to a certain degree. 14
Footnotes
Footnote 9. UCC 3-201 to 3-208[1952]; UCC 3-202 through 3-207[1990].
Footnote 10. UCC 3-204(b) [1990].
Footnote 11. UCC 3-204(a) [1990].
Footnote 12. UCC 3-414 [1952] and UCC 3-415 [1990] (obligation of indorser).
Footnote 13. UCC 3-415 [1952] and UCC 3-419 [1990] (obligation of
accommodation parties and guarantors).
As to particular kinds of indorsements, see 226.
D. Payment to Order or to Bearer [88, 89]
Research References
UCC 3-104, 3-110, 3-111, 3-805[1952]; UCC 3-104, 3-109, [1990 Rev]
ALR Digests: Bills and Notes 22, 28, 57
ALR Index: Bills and Notes; Uniform Commercial Code
6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments
3:5 et seq.
88 Generally; words of negotiability
View Entire Section

In order to be a negotiable instrument within Article 3 of the Uniform Commercial Code

(UCC), a paper or instrument generally must be payable to order or to bearer 15 at the
time it is issued or comes into possession of a holder. 16 However, under the 1990
Revision of the UCC, a check which otherwise meets the requirements of negotiability is
negotiable even though it is not payable to order or bearer. 17
Comment: Words making a promise or order payable to bearer or to order are the
most distinguishing feature of a negotiable instrument, and such words are frequently
referred to as words of negotiability; the absence of such words precludes any
argument that contracts for the sale of goods or services, leases, or similar writings that
contain a promise to pay money might be negotiable instruments. 18
Under the pre-1990 version of the UCC, an instrument is payable to bearer when, by its
terms, it is payable to (1) bearer or order of bearer, (2) a specified person or bearer, or (3)
cash or the order of cash, or in any other manner which does not purport to designate a
specific payee. 19 An instrument is payable to order when, by its terms, it is payable to
the order or assigns of any person specified with reasonable certainty, or to a specified
person or his or her order, or when it is conspicuously designated on its face as
"exchange" or the like and names a payee. 20 An instrument which is not payable to
order is not made so payable by the inclusion of such words as "payable upon return of
this instrument properly indorsed." 21 If an instrument is made payable both to order
and to bearer, it is payable to order unless the bearer words are handwritten or
typewritten. 22
Under the 1990 Revision of the UCC, an instrument is payable to bearer if it:
(1) states that it is payable to bearer or to the order of bearer, or otherwise indicates that
the person in possession of the instrument is entitled to payment;
(2) does not state a payee; or
(3) states that it is payable to the order of cash or otherwise indicates that it is not payable
to an identified person. 23 If an unindorsed instrument states on its face that it is
payable to "bearer" or the last indorsement so states, the instrument is classified as a
bearer instrument. 24 An instrument that is not payable to bearer is payable to order if it
is payable to the order of an identified person, or to an identified person or order. 25
The fact that the payee may have ceased to exist does not mean that an instrument is not
payable to an identified person; thus, an instrument payable to a corporation which is no
longer in existence because of a forfeiture of its charter or dissolution is still classified as
an order instrument. 26
The order or bearer character of an instrument is to be determined each time that a party
signs or indorses the instrument. 27 Thus, a negotiable instrument payable to bearer
may become payable to order if it is specially indorsed, and an instrument which is
payable to order becomes payable to bearer when indorsed in blank. 28
Footnotes
Footnote 15. UCC 3-104(1)(d) [1952]; UCC 3-104(a)(1) [1990 Rev].
A sales contract is not a negotiable instrument, where the promise of the buyer is to pay a
specific person rather than to pay to order or bearer. Sunrizon Homes, Inc. v American
Guaranty Inv. Corp. (Okla) 782 P2d 103, 7 UCCRS2d 796.

Footnote 16. UCC 3-104(a)(1) [1990 Rev].
23 ALR3d 932 ( 38 superseded by Construction and effect of "padded payroll" rule of
UCC 3-405, 45 ALR5th 389, and 22-26.7 superseded by What constitutes
"dealing" under UCC 3-305(2), providing that holder in due course takes instrument
free from all defenses of any party to instrument with whom holder has not dealt, 42
ALR5th 137, and 3 superseded by What constitutes unconditional promise to pay
under Uniform Commercial Code 3-104(1)(b), 88 ALR3d 1100, and 11 superseded
by Construction and application of UCC 3-403(2) dealing with personal liability of
ALR3d 798, and 23 superseded by Who is holder of instrument for "value" under
UCC 3-303, 97 ALR3d 1114, and 24, 25 superseded by What constitutes taking
instrument in good faith, and without notice of infirmities or defenses, to support
holder-in-due-course status, under UCC 3-302, 36 ALR4th 212, and 29 superseded
by Fraud in the inducement and fraud in the factum as defenses under UCC 3-305
against holder in due course, 78 ALR3d 1020, and 32(b), 35 superseded by
Commercial paper: what amounts to "negligence contributing to alteration or
unauthorized signature" under UCC 3-406, 67 ALR3d 144, and 34(d) superseded
by Payee's right of recovery, in conversion under UCC 3-419(1)(c), for money paid
on unauthorized indorsement, 23 ALR4th 855).
Forms: Petitions alleging requisites of negotiability. 6A Am Jur Pl & Pr Forms (Rev),

Commercial Code : Article 3Negotiable Instruments 3:5 et seq.
Footnote 19. UCC 3-111 [1952].
Footnote 20. UCC 3-110(1) [1952].
Footnote 21. UCC 3-110(2) [1952].
Footnote 22. UCC 3-110(3) [1952].
Footnote 25. UCC 3-109(b) [1990 Rev].
89 Instruments not payable to order or to bearer

View Entire Section
Under the pre-1990 version of the Uniform Commercial Code (UCC), Article 3 applies to
any instrument whose terms do not preclude transfer and which is otherwise negotiable,
but which is not payable to order or to bearer. 29 For example, the indorser of an
instrument which is not payable to order or to bearer, but which otherwise meets the
requirements of negotiability specified by statute, 30 is accorded the same treatment as
an indorser of a negotiable instrument; he or she therefore is entitled to presentment, as
well as to notice of dishonor and protest. 31
Observation: An instrument which is not made payable to the order of anyone, as

where the blank for the name of the payee is simply not filled in, is not a bearer
instrument under the pre-1990 version of the UCC; rather, it is an incomplete
instrument which cannot be enforced until completed. 32
There can be no holder in due course of an instrument which is not payable to order or to
bearer, 33 as where a note is payable simply to a named payee; as a result, a transferee of
the instrument takes it subject to any valid claims and defenses which would be available
in an action on a simple contract. 34
Comment: With the exception of checks, the 1990 Revision of the UCC totally
excludes from Article 3 promises or orders that are not payable to bearer or order, and
thus does not include a provision similar to 3-805 of the pre-1990 version of the
UCC. 35
Footnotes
Footnote 29. UCC 3-805 [1952].
Section 3-805 of the UCC applies only to instruments which are nonnegotiable because
they are not payable to order or to bearer, and not to those which fail to meet other
requirements of negotiability such as the requirement that the instrument contain an
unconditional promise to pay. Citizens Nat'l Bank v Bornstein (Fla) 374 So 2d 6, 27
UCCRS 242 (decided under the 1952 UCC).
Footnote 31. In re Levine (BC SD NY) 24 BR 804, 35 UCCRS 898, revd on other
grounds, vacated on other grounds (SD NY) 32 BR 742, affd without op (CA2 NY) 732
F2d 141.
As to presentment, notice of dishonor, and protest, see 313 et seq.
Footnote 32. Davis v Davis (Ky App) 838 SW2d 415, 19 UCCRS2d 808.
As to the bearer nature of an instrument which does not state a payee under the 1990

Revision of the UCC, see 88.
As to incomplete instruments, see 117 et seq.
Footnote 33. UCC 3-805 [1952].
Footnote 34. Northerlin Co. v Rauch Constr. Corp. (NY Sup) 4 UCCRS 320 (involving
the defense of want of consideration).
Where promissory notes were made payable to the seller, and were not payable to order
or to bearer, they were not negotiable instruments; consequently, an assignee of the notes
was not a holder in due course and it was error for the trial court to refuse to consider
evidence in support of the maker's defenses. Locke v Aetna Acceptance Corp. (Fla App
D1) 309 So 2d 43, 16 UCCRS 1015.
A letter of credit is not payable to order or bearer, and is therefore not negotiable.
Shaffer v Brooklyn Park Garden Apartments, 311 Minn 452, 250 NW2d 172, 20 UCCRS
1269.
E. Promise or Order To Pay [90-97]
Research References
16 CFR Part 433
UCC 3-102 through 3-106 [1952]; UCC 3-103, 3-104, 3-106 [1990 Rev]
ALR Digest: Bills and Notes 62-64 ALR
Index: Bills and Notes; Uniform Commercial Code
3B Am Jur Legal Forms 2d, Bills and Notes 41:45; 19 Am Jur Legal Forms 2d,
Uniform Commercial Code: Article 3Negotiable Instruments 253:2281 et seq.,
253:2286-2288, 253:2291, 253:2293, 253:2295
90 What constitutes a promise or order; sufficiency of terms
View Entire Section

A promise is an undertaking to pay money which amounts to more than a mere

acknowledgment of the obligation. 36 An order is a direction to pay money, as
opposed to a mere authorization or request, which may be addressed to one or more
persons jointly or in the alternative. 37
Comment: An I.O.U. or other written acknowledgment of indebtedness is not a note,

unless there is also an undertaking to pay the obligation. 38
The written promise to pay, necessary to constitute a promissory note, need not be
expressed in any particular form of words; it is enough if, from the language used on the
face of the instrument, a written undertaking to pay the sum specified can be deduced. 39
Thus, an instrument may meet the statutory requirement that it contain a promise or order
to be negotiable, even though neither the word "promise" nor the word "order" is used. 40
A cashier's check, which is a draft drawn by the issuing bank upon itself, can be
characterized as a promissory note of the issuing bank since it constitutes an
unconditional promise by the bank to pay; in contrast, a depositor's check is an order by
the drawer directed to a bank other than the drawer to make payment to a designated
party. 41 But, a county warrant, in which the treasurer of the county states that he or she
will pay a sum to the order of the payee, is not an order directing the payment of money
and, therefore, is not a negotiable draft or check. 42
Footnotes
Where part of the language of a note indicated that it was a mere recognition of an
existing debt, but an overall examination of the instrument revealed that it constituted a
written promise by the maker to pay the payee, the note contained a promise which met
the statutory definition. Fejta v Werner Enterprises, Inc. (La App 4th Cir) 412 So 2d 155,
34 UCCRS 194, cert den (La) 415 So 2d 953.
A document stating "This is to certify that I have borrowed $15,000 to be returned within
10 days" does not fulfill the requirements of negotiability. Fazio v Loweth (2d Dept)
112 App Div 2d 135, 490 NYS2d 859 (criticized on other grounds by A.I. Trade Fin. v
Laminaciones de Lesaca, S.A. (CA2 NY) 41 F3d 830, 25 UCCRS2d 461, 42 ALR5th
771).
A savings account withdrawal slip is an order within the meaning of the Uniform
Commercial Code. Burgess v State (Tex App Houston (14th Dist)) 790 SW2d 856,
petition for discretionary review gr (Sep 12, 1990) and affd (Tex Crim) 816 SW2d 424.
3-103 [1990 Rev].
Footnote 39. Payne v Terry (Ky) 367 SW2d 277; De Rouin v Hinphy (La App 4th Cir)
209 So 2d 352, cert den 252 La 465, 211 So 2d 330.
No particular form of note is necessary, provided that minimum statutory requirements

are met. Spidell v Jenkins (App) 111 Idaho 857, 727 P2d 1285, 3 UCCRS2d 161.
Footnote 40. People v Dempster, 51 Mich App 612, 216 NW2d 81, 14 UCCRS 727, revd
on other grounds 396 Mich 700, 242 NW2d 381, 19 UCCRS 845, 84 ALR3d 562.
The words "promise to pay" are not essential in a certificate of deposit, where the
instrument acknowledges receipt of a deposit and states a maturity date at which the
obligation will become due. In re Cambridge Biotech Corp. (BC DC Mass) 178 BR 34,

26 BCD 976, 25 UCCRS2d 1076.
The phrase "note to be paid back within 12 months" was more than a mere
acknowledgment of a debt and constituted a written promise to pay, even though the
word "promise" was not used in the instrument. Smith v Haran (1st Dist) 273 Ill App 3d
866, 210 Ill Dec 191, 652 NE2d 1167, reh den (Jul 28, 1995) and app den 164 Ill 2d 583,
214 Ill Dec 332, 660 NE2d 1281.
As to the statutory requirement that an instrument contain an unconditional promise or

order to be negotiable, see 91.
Footnote 41. Sochaczewski v Wilmington Sav. Fund Soc. (Del Super Ct) 508 A2d 895, 2
UCCRS2d 181.
Although a cashier's check is a promise by the bank to pay, and therefore is a promissory
note rather than an order to pay, it is in the form of a check and is normally referred to as
one. Lassen v First Bank Eden Prairie (Minn App) 514 NW2d 831, 23 UCCRS2d 482,
review den (Minn) 1994 Minn LEXIS 534.
Footnote 42. People v Norwood (2nd Dist) 26 Cal App 3d 148, 103 Cal Rptr 7, 11
UCCRS 118.
91 Requirement of unconditional promise or order
View Entire Section

To be a negotiable instrument within the scope of Article 3 of the Uniform Commercial

Code (UCC), a writing must contain an unconditional promise or order to pay sum
certain 43 or fixed amount of money. 44 However, a negotiable instrument
circulates in the stream of commerce free of defects or conditions which are not apparent
on its face, 45 and negotiability is determined from what is expressed in the instrument
itself, 46 without recourse to extraneous agreements 47 or extrinsic facts. 48
While parol evidence is admissible to prove a condition precedent to the legal

effectiveness of an instrument, such as a note, if the condition does not contradict the
express terms of the note, such evidence cannot be used where the condition sought to be
proved is inconsistent with the unqualified form of the instrument. 49 For example,
where a note is unconditional on its face, the parol evidence rule will bar the introduction
of a purported oral agreement making payment on a note given for the purchase of a
business contingent on the payee's not competing with the maker, since such an oral
agreement is inconsistent with the unconditional promise to pay contained in the note. 50
Observation: By operation of the parol evidence rule, any condition must be stated
in the instrument; if not so stated, it cannot be proven that the condition exists, and
therefore the order or promise that is in the instrument is unconditional. 51 However,
when the instrument contains an express condition, the instrument is not negotiable,
whether or not the condition has been satisfied; that is, the conditional character exists
on the face of the instrument, and nothing external to the instrument can be used to
show that there is no longer any condition that remains to be satisfied. 52
Footnotes
Footnote 43. UCC 3-104(1)(b) [1952].
A holder's failure to allege that a note contains an unconditional promise to pay renders
the instrument nonnegotiable and transforms it into a simple contract to pay money
subject to any defenses which can be asserted against such a contract, including the
special defense that repayment is contingent upon the happening of a certain event.
Krasnow v Christensen (Super Ct) 40 Conn Supp 287, 492 A2d 850.
As to what constitutes a promise or order, see 90.
As to what constitutes a sum certain or fixed amount of money, see 98 et seq.

What constitutes "money" within meaning of Uniform Commercial Code, 40 ALR4th

346.

3-104(1)(b), 88 ALR3d 1100.
Footnote 45. Mecham v United Bank, 107 Ariz 437, 489 P2d 247, 9 UCCRS 1070
(holding that the maker's allegation that the note sued on was conditionally delivered
could not change the legally unconditional promise to pay appearing on the face of the
instrument so as to destroy its negotiability).
A promissory note constituted an unconditional promise to pay, notwithstanding a

contention that payment was conditioned upon the obtaining of a particular loan by the
payor, where the note was on a printed form containing the usual promise to pay without
any indication that the obligation was contingent. Demaio v Theriot (La App 3d Cir) 343
So 2d 1143, 21 UCCRS 799, cert den (La) 346 So 2d 218.
Footnote 46. Northwestern Nat'l Bank v Shuster (Minn) 307 NW2d 767, 32 UCCRS 585,
later proceeding (Minn App) 364 NW2d 900, affd, en banc (Minn) 388 NW2d 370.
Footnote 47. Philadelphia Gear Corp. v Federal Deposit Ins. Corp. (CA10 Okla) 751 F2d
1131, 40 UCCRS 240, cert gr 474 US 918, 88 L Ed 2d 253, 106 S Ct 245 and revd on
other grounds 476 US 426, 90 L Ed 2d 428, 106 S Ct 1931; First State Bank v Clark, 91
NM 117, 570 P2d 1144, 22 UCCRS 1186.
Footnote 48. Participating Parts Associates, Inc. v Pylant (Ala Civ App) 460 So 2d 1299,
40 UCCRS 498 (also holding that, where the holder of a check on which payment was
stopped failed to object to the drawer's testimony concerning the circumstances under

which the check was issued, the evidence was not subject to question on appeal and could
be considered in determining whether the check was an unconditional promise to pay).
Footnote 49. Bank of Suffolk County v Kite, 49 NY2d 827, 427 NYS2d 782, 404 NE2d
1323, 28 UCCRS 710.
Footnote 50. Loe v Murphy (Tex Civ App Dallas) 611 SW2d 449, writ ref n r e (Mar 18,
1981).
92 Inherently conditional documents
View Entire Section

Inherently conditional documents, such as guaranty agreements are not negotiable

instruments; to be negotiable an instrument must contain an unconditional promise or
order to pay, and a guaranty is, by its very nature, a promise to pay which is conditioned
upon the failure of the principal debtor to pay the obligation. 53 A letter of credit
likewise does not fulfill the requisites of negotiability by containing an unconditional
promise to pay, both by reason of the existence of conditions precedent to payment and
the duty of the issuing bank to reject noncomplying documents. 54
Footnotes
Footnote 53. In re Colbert (BC WD Va) 128 BR 734, 16 UCCRS2d 381; FDIC v
Galloway (DC Kan) 613 F Supp 1392, 2 UCCRS2d 926 (disapproved on other grounds
by Federal Deposit Ins. Corp. v P.L.M. International, Inc. (CA1 Puerto Rico) 834 F2d
248) and revd on other grounds, remanded (CA10 Kan) 856 F2d 112; Vesta State Bank v
Independent State Bank (Minn App) 506 NW2d 307, affd in part and revd in part on
other grounds, remanded (Minn) 518 NW2d 850, 24 UCCRS2d 553, reh den (Minn)
1994 Minn LEXIS 764; Prime Fin. Group v Smith, 137 NH 74, 623 A2d 757, 22
UCCRS2d 533 (also stating that a guaranty agreement fails to qualify as a negotiable
instrument because, among other reasons, the sum to be paid is not certain in that it
depends upon how much has been paid by the debtor); Guarantor Partners v Huff (Tenn
App) 830 SW2d 73, 18 UCCRS2d 798.
Footnote 54. Shaffer v Brooklyn Park Garden Apartments, 311 Minn 452, 250 NW2d
172, 20 UCCRS 1269 (also stating that a letter of credit is not payable to order or bearer).
An irrevocable letter of credit conditioned on presentation of certain documents on or

before a specified date is not a negotiable instrument. Heritage Housing Corp. v
Ferguson (Tex App Dallas) 651 SW2d 272, 37 UCCRS 158.

93 Factors which do not make promise or order conditional
View Entire Section

A promise or order which is otherwise unconditional is not made conditional by the fact
that the instrument:
(1) is subject to implied or constructive conditions; 55
(2) states its consideration, whether performed or promised, or the transaction which gave
rise to the instrument, or that the promise or order is made or the instrument matures in
accordance with such transaction; 56
(3) refers to or states that it arises out of a separate agreement, or refers to a separate
agreement for rights as to prepayment or acceleration; 57
(4) states that it is drawn under a letter of credit; 58
(5) states that it is secured, whether by mortgage, reservation of title, or otherwise; 59
(6) indicates a particular account to be debited, or any other fund or source from which
reimbursement is expected; 60
(7) is limited to payment out of a particular fund or the proceeds of a particular source, if
the instrument is issued by a government or by a government agency or unit; 61 or
(8) is limited to payment out of the entire assets of a partnership, unincorporated

association, trust, or estate by or on behalf of which the instrument is issued. 62
Under the 1990 Revision of the UCC, a promise or order is unconditional unless it states:
(1) an express condition to payment; (2) that the promise or order is subject to, or
governed by, another writing; or (3) that rights or obligations with respect to the promise
or order are stated in another writing. 63 However, a promise or order is not made
conditional (1) by a reference to another writing for a statement of rights with respect to
collateral, prepayment, or acceleration, 64 or (2) because payment is limited to resort to
a particular fund or source. 65
While a promise is not unconditional, if the instrument states that it is subject to or

governed by any other agreement or writing, 66 the incorporation by reference into a
note of an accompanying deed of trust or security agreement does not impair the
negotiability of the instrument; mere liens securing payment of a debt cannot affect the
obligation to pay it. 67 Similarly, a notice included in promissory notes to the effect that
the loan is not assumable without the approval of the Veterans Administration or its
authorized agent does not prevent a finding that the notes contain an unconditional
promise to pay, since a limitation on the assumability of an obligation does not qualify a
maker's obligation to pay. 68

Footnotes
Footnote 55. UCC 3-105(1)(a) [1952].
The addition of the words "Upon acceptance" in a draft drawn by an insurance company
upon itself did not render the instrument nonnegotiable, since the quoted words were
merely a restatement of an implied or constructive condition of any draft or check. Canal
Ins. Co. v First Nat'l Bank (Ark App) 27 UCCRS 730, affd 268 Ark 356, 596 SW2d 709,
28 UCCRS 1063.
Footnote 56. UCC 3-105(1)(b) [1952].
The fact that a check made payable to a swimming pool manufacturer for a pool to be
supplied by a retailer included language on its face stating that it was for a pool to be
delivered did not affect the negotiability of the check, since an order to pay is not made
conditional by the fact that the instrument states its consideration; the payee, thus, was
not bound to inquire of its retail dealer as to whether the pool purchased with money
represented by the check had been delivered. Strickland v Kafko Mfg., Inc. (Ala) 512 So
2d 714, 4 UCCRS2d 1502.
Footnote 57. 94.
Footnote 58. UCC 3-105(1)(d) [1952].
Footnote 59. UCC 3-105(1)(e) [1952].
Footnote 60. 95.
Footnote 61. UCC 3-105(1)(g) [1952].
A warrant issued by a governmental levee district directing the state comptroller to pay a
construction company a sum certain was a negotiable instrument, and the unconditional
promise to pay contained in warrant was not made conditional by fact that instrument
was limited to payment from a particular fund or from the proceeds of a particular source.
St. James Bank & Trust Co. v Board of Comm'rs (La App 4th Cir) 354 So 2d 233.
Footnote 62. UCC 3-105(1)(h) [1952].
UCC 3-105(1)(h) means that a note may be negotiable, even though payment is limited
to the assets of a particular partnership or trust estate, if the entire assets of the
partnership or trust estate, both presently owned and subsequently acquired, are subject
to execution for the note's payment. Hinckley v Eggers (Tex Civ App Dallas) 587 SW2d
448, 27 UCCRS 1024, writ ref n r e (Jan 23, 1980).
A note given by a limited partner to a partnership, which provided that it was subject to
the terms of a partnership debt assumption agreement, was nonnegotiable. Growth
Equities Corp. v Freed (1st Dist) 227 Cal App 3d 506, 277 Cal Rptr 848, 91 CDOS 920,
91 Daily Journal DAR 1466, 13 UCCRS2d 1134.

Forms: When promise or order unconditional. 19 Am Jur Legal Forms 2d, Uniform
Footnote 64. 94.
Footnote 66. 94.
Footnote 67. International Minerals & Chemical Corp. v Matthews, 71 NC App 209, 321
SE2d 545, 39 UCCRS 1359, review den 313 NC 330, 327 SE2d 890.
Footnote 68. Willson v MLA, Inc. (BC ND Ga) 153 BR 1002, 20 UCCRS2d 976.
94 Reference to, or incorporation of, another writing
View Entire Section

A promise or order, which is otherwise unconditional is not made conditional by the fact
that it refers to or states that it arises out of a separate agreement, 69 or refers to a
separate agreement for rights with respect to prepayment, acceleration, 70 or collateral.
71 A promise or order which is otherwise unconditional is not made conditional by
the fact that the instrument states that it is drawn under a letter of credit. 72 Moreover,
the mere fact that a negotiable instrument is attached to another document, as where a
note is attached to a conditional sales agreement or similar instrument, does not affect the
negotiability of the instrument. 73 But, an instrument is not unconditional, and thus, is
not negotiable, if it states that the promise or order contained therein is subject to, or
governed by another agreement 74 or writing. 75
Comment: A promissory note is not a negotiable instrument if it contains any

statement similar to the following examples:
(1) This note is subject to a contract of sale dated April 1, 1990 between the payee and
maker of this note.
(2) Rights and obligations of the parties with respect to this note are stated in an
agreement dated April 1, 1990 between the payee and maker of this note. 76
While a mere reference in a note to a separate agreement or document out of which it

arises does not affect the negotiability of the note, 77 if the note incorporates the terms
of a separate agreement by reference in such a manner that the essential terms of the
instrument cannot be ascertained from the face of the note itself, the promise to pay
contained in the note is conditional and the note is not negotiable; thus, the effect on the
instrument's negotiability depends on the nature of the reference which is made. 78

Footnotes
Footnote 69. UCC 3-105(1)(c) [1952].
Footnote 70. UCC 3-105(1)(c) [1952]; UCC 3-106(b)(i) [1990 Rev].
A note is not rendered nonnegotiable simply because it makes reference to another

document concerning additional rights of the holder of the note. First Fed. Sav. & Loan
Ass'n v Gump & Ayers Real Estate (Utah App) 771 P2d 1096, 105 Utah Adv Rep 27, 8
UCCRS2d 720, 9 UCCRS2d 139, petition for certiorari filed (Utah) 107 Utah Adv Rep
81 and cert den (Utah) 776 P2d 916, 110 Utah Adv Rep 61.
Footnote 71. UCC 3-106(b)(i) [1990 Rev].
Forms: Provision in negotiable instrumentRecital of originating agreement. 19 Am

253:2286.
Provision in negotiable instrumentReference to security agreement. 19 Am Jur Legal

Provision in negotiable instrumentReference to transaction giving rise to instrument.

Provision in negotiable instrumentReference to trust agreement. 19 Am Jur Legal

Contract giving rise to note. 3B Am Jur Legal Forms 2d, Bills and Notes 41:45.
Footnote 72. UCC 3-105(1)(d).
Forms: Provision in negotiable instrumentRecital of letter of credit. 19 Am Jur Legal

Footnote 73. Mutual Finance Co. v Martin (Fla) 63 So 2d 649, 44 ALR2d 1.
Although a certificate of deposit can be a negotiable instrument, it is not such an

instrument if an assignment attached thereto prevents it from being payable to order or to
bearer. Skiles v Security State Bank, 1 Neb App 360, 494 NW2d 355, 20 UCCRS2d 512.
Footnote 74. UCC 3-105(2)(a) [1952].
Footnote 75. UCC 3-106(a)(iii) [1990 Rev].
A note containing a statement that the maker's obligation was subject to conditions
recited in a bill of sale and covenant not to compete executed by the parties was not
unconditional and, therefore, was not negotiable. DBA Enters. v Findlay (Colo App) 923
P2d 298, reh den (Mar 7, 1996) and cert den, en banc (Colo) 1996 Colo LEXIS 386.
Where a refinancing agreement stated that its execution would not rescind or revoke two

underlying installment sales contracts, the agreement was subject to those contracts, since
a holder of the instrument would have to review them in order to determine the
agreement's full terms; therefore, the refinancing agreement was not a negotiable
instrument. Massey Ferguson Credit Corp. v Bice (SD) 450 NW2d 435, 11 UCCRS2d
116.
Forms: Provision in nonnegotiable instrumentInstrument governed by another

agreement. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
Footnote 77. A.I. Trade Fin. v Laminaciones de Lesaca, S.A. (CA2 NY) 41 F3d 830, 25
UCCRS2d 461, 42 ALR5th 771.
Footnote 78. Booker v Everhart, 294 NC 146, 240 SE2d 360, 24 UCCRS 165.
Notes given to pay for partnership interest which incorporated, by reference, an extrinsic
agreement that set forth conditions that had to be met before the debt evidenced by the
notes would become payable were nonnegotiable instruments, because they did not
contain an unconditional promise to pay. Salomonsky v Kelly, 232 Va 261, 349 SE2d
358, 2 UCCRS2d 939.
95 Payment from particular fund
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the negotiability of
an instrument is not affected by the fact that it indicates a particular account is to be
debited or any other fund or source from which reimbursement is expected. 79
However, except as otherwise provided for instruments issued by governmental entities
and by certain private concerns such as partnerships, or unincorporated associations, 80
a promise or order is not unconditional if the instrument states that it is to be paid only
out of a particular fund or source. 81
Comment: The 1990 Revision of the UCC differs from the pre-1990 version by
allowing payment to be limited to payment from a particular source or fund without
affecting the negotiability of an instrument. 82
Words of explicit limitation are required before an instrument can be said to be payable
only out of a particular account, fund, or source, so as to make the promise contained
therein conditional. 83 Thus, an obligation will not be found to be conditional where it
is clear that any reference in a note to a particular fund is not intended to make payment
depend on the adequacy of the fund. 84

Footnotes
Footnote 79. UCC 3-105(1)(f) [1952].
Where an instrument was payable out of "restaurant earnings," but payment was not
conditioned to be made only out of such earnings, the instrument was negotiable under
UCC 3-105(1)(f). Rogers v Willard (Fla App D3) 453 So 2d 1175, 9 FLW 1730, 39
UCCRS 517.
Footnote 80. 93.
Footnote 81. UCC 3-105(2)(b) [1952].
A promissory note payable out of a particular fund is not unconditional and does not
carry the maker's general personal credit; therefore, payment on such a note is contingent
on the sufficiency of the fund from which payment is to be made. Peppertree Apartments
v Peppertree Apartments (Ala) 631 So 2d 873, 22 UCCRS2d 759.
A note which limited its payment to foreclosure of the collateral, by exempting the maker
from personal liability, was not negotiable. United Nat'l Bank v Airport Plaza Ltd.
Partnership (Fla App D3) 7 UCCRS2d 488 (decided under the 1952 UCC).
As to the requirement that an instrument contain an unconditional promise or order to pay

to be negotiable, see 91.
Footnote 83. Bank of Viola v Nestrick (3d Dist) 72 Ill App 3d 276, 28 Ill Dec 469, 390
NE2d 636, 26 UCCRS 943.
An installment note which was ambiguous as to whether the parties intended the promise
to pay to be conditioned upon the availability of designated rental proceeds, or whether
the language was intended merely as an indication of the source from which funds were
expected, would have been unconditional if the UCC were applicable. Vogt v Hovander,
27 Wash App 168, 616 P2d 660 (holding that the UCC was not applicable to an action
between the maker and payee).
Footnote 84. DH Cattle Holdings Co. v Smith (1st Dept) 195 App Div 2d 202, 607
NYS2d 227, 22 UCCRS2d 799.
96 Effect of countersignature requirement
View Entire Section

If a promise or order requires a countersignature by a person whose specimen signature

appears on the promise or order, as a condition of payment, the condition does not make
the promise or order conditional; if the person whose specimen signature appears on the
promise or order fails to countersign the instrument, the failure does not prevent a
transferee of the instrument from becoming a holder of the instrument. 85
Comment: The foregoing provision applies to traveler's checks or other instruments

that require a countersignature; although the requirement of a countersignature is a
condition to the obligation to pay such instruments, traveler's checks are treated in the
commercial world as money substitutes and therefore should be governed by Article 3
of the Uniform Commercial Code. 86
Observation: An instrument can be a negotiable instrument, even though the

required countersignature has not been made; the only significance of a
countersignature requirement is that the issuer has a defense to a claim for payment if
the required person does not countersign the instrument. 87
Footnotes
97 Inclusion of statement as to defenses of obligor
View Entire Section

Statutes and administrative regulations may require that credit transaction contracts and
documents relating to consumers include a provision declaring that the defenses of the
consumer may be asserted against any subsequent holder of the contracts or documents.
88 Where a promise or order at the time it is issued or first comes into possession of a
holder contains a statement, required by applicable statutory or administrative law, to the
effect that the rights of a holder or transferee are subject to claims or defenses that the
issuer could assert against the original payee, the promise or order is not thereby made
conditional; but, if the promise or order is an instrument, there cannot be a holder in due
course of the instrument. 89
Comment: The foregoing provision applies only if the statement is required by a

statutory or administrative law, a prime example of which is the Federal Trade
Commission rule 90 preserving consumers' claims and defenses in consumer credit
sales. 91
Footnotes

Footnote 90. 16 CFR Part 433.
F. Sum Certain or Fixed Amount of Money [98-103]
Research References
UCC 3-104, 3-106, 3-107 [1952]; UCC 3-104, 3-107, 3-201 [1990 Rev]
ALR Digest: Bills and Notes 31, 73 et seq.
3B Am Jur Legal Forms 2d, Bills and Notes 41:47-41:50, 41:53; 19 Am Jur Legal
Forms 2d, Uniform Commercial Code: Article 3Negotiable Instruments 253:2315,
253:2317, 253:2319, 253:2326, 253:2327
5A Anderson Uniform Commercial Code 3d 3-106:12, 3-106:15, 3-106:18; 6A
Anderson, Uniform Commercial Code 3d [Rev] 3-104:9, 3-112:5
1. In General [98, 99]
98 Generally
View Entire Section

In order to be negotiable, an instrument must contain a promise or order to pay a sum

certain in money 92 or a fixed amount of money. 93
Definition: "Money" means any medium of exchange authorized or adopted by a

domestic state or foreign government, 94 including a monetary unit of account
established by an intergovernmental organization or by agreement between two or
more nations. 95
A promise or order to pay a sum stated in a foreign currency is for a sum certain in
money. 96 Unless a different medium of payment is specified in the instrument, an
amount payable in foreign money may be paid in the foreign money or in the equivalent
amount in dollars. 97
A note that is to be paid by delivering goods is not negotiable because it does not call for
the payment of money. 98 Likewise, a writing is not a negotiable instrument when it
calls for the extension of credit and not for the payment of money. 99
Footnotes

Footnote 92. UCC 3-104(1)(b) [1952].
As to certainty of the amount payable, see 99.
Annotation: What constitutes "money" within meaning of Uniform Commercial Code,

40 ALR4th 346.
Footnote 94. UCC 3-201(24) [1952]; UCC 3-201(24) [1990 Rev].
Footnote 95. UCC 3-201(24) [1990 Rev].
Footnote 96. UCC 3-107(2) [1952].
Footnote 98. Means v Clardy (Mo App) 735 SW2d 6, 5 UCCRS2d 119.
Footnote 99. Society Bank, N.A. v Kellar (Montgomery Co) 63 Ohio App 3d 583, 579
NE2d 717.
99 Certainty of amount to be paid
View Entire Section

The unconditional obligation, which is an essential characteristic of a negotiable

instrument 1 must be for sum certain or fixed amount of money. 2 Thus, the amount
payable must be in a definite amount, and an instrument, such as a guaranty, which
simply states the maximum amount of liability, is not negotiable. 3 However, the
certainty of the amount payable is not affected by the fact that the note or other
instrument calls for the payment of interest, 4 costs of collection, or attorney's fees. 5
If an instrument contains contradictory terms, the words used therein generally prevail
over any numbers, except that if the words are ambiguous the figures control. 6 Thus,
where the sum payable under a note is expressed in words and also in figures and there is
a discrepancy between the two, the sum denoted by unambiguous words controls the
determination of the amount of the instrument. 7
A note given to secure a line of credit under which the amount of the obligation varies,
depending upon the extent to which the line of credit is used, is not negotiable since it
calls for monthly payments in unstated amounts and does not state any aggregate balance
to be repaid. 8 Moreover, except as specifically provided to the contrary by the statute
governing the calculation of the dollar value of an amount stated in a foreign currency, 9
an instrument is not negotiable if it requires reference to any outside source to determine
the amount due. 10
Footnotes
Footnote 1. 91.
Footnote 2. 98.
Footnote 3. Branch Banking & Trust Co. v Creasy, 301 NC 44, 269 SE2d 117, 30
UCCRS 545; Dann v Team Bank (Tex App Dallas) 788 SW2d 182, 12 UCCRS2d 452.
Footnote 4. 100.
Footnote 5. 102.
Footnote 6. 127, 128.
Footnote 7. Yates v Commercial Bank & Trust Co. (Fla App D3) 432 So 2d 725, 36
UCCRS 205; Wall v East Texas Teachers Credit Union (Tex Civ App Texarkana) 526
SW2d 148, 18 UCCRS 984, writ granted (Tex) 19 Tex Sup Ct Jour 35 and revd on other
grounds (Tex) 533 SW2d 918, rehg of cause overr (Mar 17, 1976) and appeal after
remand (Tex Civ App Texarkana) 549 SW2d 232, writ ref (Tex) 20 Tex Sup Ct Jour 505.
Footnote 8. Cadle Co. v Richardson (La App 2d Cir) 597 So 2d 1052.
Footnote 9. UCC 3-107 [1952].
Footnote 10. Gillespie v De Witt, 53 NC App 252, 280 SE2d 736, 32 UCCRS 480, cert
den 304 NC 390, 285 SE2d 832,
As to the effect on negotiability of a provision in an instrument for a variable rate of

interest which cannot be ascertained from the terms of the instrument itself, see 100.
2. Effect of Particular Provisions
100 Provisions for payment of interest
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the sum payable is
a sum certain, even though it is to be paid with stated interest, or with stated different
rates of interest before and after default. 11 However, a note is nonnegotiable if it
prescribes a variable rate of interest which cannot be ascertained from the terms of the
note itself because, in such a case, the purchaser of the note must look beyond the face of
the note to determine how much is owed. 12

Comment: Under the pre-1990 version of the UCC, the computation of interest is
required to be one that can be made from the instrument itself, without reference to any
outside source; consequently, a note providing for the payment of interest "at the
current rate" is not negotiable. 13 Nonetheless, it has been held by some authorities
that a note specifying a variable interest rate tied to a readily ascertainable commercial
or financial index by way of a specific formula, so as to allow interest to be calculated
readily, is negotiable even under the pre-1990 version of the UCC. 14
Under the 1990 Revision of the UCC, the fixed amount of money payable pursuant to a
negotiable instrument, likewise, may be increased by the addition of interest or other
charges that are set forth in the instrument. 15 But, unlike the situation under the
pre-1990 version of the UCC, 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. 16 Thus, a
promissory note is negotiable, notwithstanding the fact that it contains an adjustable
interest rate. 17
Observation: The validity of the added interest or other charges is not determined
under the Uniform Commercial Code (UCC); rather, such matters continue to be
governed by pre-UCC law. 18 All that Article 3 of the 1990 Revision of the UCC is
intended to do is to provide that the interest term of an instrument does not affect its
"fixed amount" quality. 19
Footnotes
Footnote 11. UCC 3-106(1) [1952].
Footnote 12. FDIC v Rusconi (DC Me) 808 F Supp 30; Desmond v FDIC (DC Mass) 798
F Supp 829, 20 UCCRS2d 196 (among conflicting authorities on other grounds noted in
Vasapolli v Rostoff (CA1 Mass) 39 F3d 27); New Connecticut Bank & Trust Co., N.A. v
Stadium Management Corp. (DC Mass) 132 BR 205, 16 UCCRS2d 438; National Union
Fire Ins. Co. v Cooper (SD NY) 729 F Supp 1423, CCH Fed Secur L Rep 94452.
A note was not negotiable where the interest payable could not be computed without
reference to the bank's prime rate, which changed from time to time. Northern Trust Co.
v E.T. Clancy Export Corp. (ND Ill) 612 F Supp 712, 41 UCCRS 1315.
Notes providing for a variable rate of interest tied to the prime rate were not negotiable
instruments, because they did not contain an unconditional promise to pay a sum certain.
Beitzell & Co. v FDIC (In re Beitzel & Co.) (BC DC Dist Col) 163 BR 637, 6 Fourth Cir
& Dist Col Bankr Ct Rep 153.
Footnote 14. Federal Deposit Ins. Corp. v Hershiser Signature Properties (ED Mich) 777
F Supp 539, 16 UCCRS2d 702; Doyle v Trinity Sav. & Loan Ass'n (CA10 Okla) 940 F2d
592, 15 UCCRS2d 176; Carnegie Bank v Shalleck, 256 NJ Super 23, 606 A2d 389, 17
UCCRS2d 799; Goss v Trinity Sav. & Loan Ass'n (Okla) 813 P2d 492, 13 UCCRS2d
1138, amd on other grounds, on reh (Okla) 1991 Okla LEXIS 57 and companion case
(Okla) 824 P2d 1102; Amberboy v Societe de Banque Privee (Tex) 831 SW2d 793, 17
UCCRS2d 145, rehg of cause overr (Jun 3, 1992) and corrected (Tex) slip op and ans
conformed to (CA5) 973 F2d 1221, 23 FR Serv 3d 1114, 20 UCCRS2d 999, reh, en banc,
den (CA5 Tex) 979 F2d 211 and (disapproved on other grounds as stated in Bean v
Bluebonnet Sav. Bank FSB (Tex App Dallas) 884 SW2d 520).
See also Resolution Trust Corp. v Maplewood Invs. (CA4 Va) 31 F3d 1276, 24
UCCRS2d 119 (noting an amendment to Virginia's version of the UCC, providing that a
rate of interest that cannot be ascertained by looking only to the instrument does not
render the instrument nonnegotiable if the rate is readily ascertainable by a reference in
the instrument to any of various specified sources, such as a statute, a generally accepted
commercial or financial index, or an announced or established rate of a named financial
institution).
Forms: Interest. 3B Am Jur Legal Forms 2d, Bills and Notes 41:53.
Provision in negotiable instrumentInterest terms. 19 Am Jur Legal Forms 2d,

The provision of the 1990 Revision of the UCC which allows a variable rate of interest to
be determined by reference to information not contained in the instrument could not be
given retroactive application to instruments predating its January 1, 1992 effective date.
Johnson v Johnson (1st Dist) 244 Ill App 3d 518, 185 Ill Dec 214, 614 NE2d 348, 21
UCCRS2d 672, reh den (May 4, 1993).
Forms: Provision in negotiable instrumentInterest termsCompounding interest. 19

Footnote 17. Thompson v First Union Nat'l Bank (Fla App D5) 643 So 2d 1179, 19 FLW
D2187.
Annotation: Negotiability of instrument providing for variable rate of interest under

UCC 3-106, 69 ALR4th 1127.
101 Provisions for discount or addition
View Entire Section


Under the pre-1990 version of the Uniform Commercial Code (UCC), the certainty of an
obligation is not affected by a statement in the instrument that there will be a stated
discount if an instrument is paid before the date fixed for payment, or that there will be a
stated addition if it is paid after that date. 20
Observation: Although the foregoing provision of the UCC is stated in the

disjunctive, the same instrument may provide for both a discount and an addition
without affecting certainty. 21
Comment: A stated discount or addition does not affect the certainty of the sum to
be paid so long as the computation of that amount can be made from the instrument
itself, without reference to any outside source. 22
Footnotes
Footnote 20. UCC 3-106(1)(c) [1952].
Annotation: Validity and construction of provision imposing "late charge" or similar

exaction for delay in making periodic payments on note, mortgage, or instalment sale
contract, 63 ALR3d 50.
Forms: Authorization of advance or additional payments. 3B Am Jur Legal Forms 2d,

Bills and Notes 41:47.
Authorization of discount for early payment. 3B Am Jur Legal Forms 2d, Bills and
Notes 41:48.
Prepayment with no penalty. 3B Am Jur Legal Forms 2d, Bills and Notes 41:49.
Prepayment with penalty. 3B Am Jur Legal Forms 2d, Bills and Notes 41:50.
Provision in negotiable instrumentAuthorization of discount. 19 Am Jur Legal Forms

2d, Uniform Commercial Code: Article 3Negotiable Instruments 253:2319.
102 Provisions for collection costs or attorney's fees
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the sum payable in
an instrument is certain, even though it is to be paid with costs of collection or an
attorney's fee, or both, upon default. 23 While the principal and interest due under the

terms of a note must be for a sum certain, thus being in a liquidated amount, the costs of
collection and attorney's fees are ordinarily unliquidated; but, this fact does not prevent
the instrument from being negotiable. 24
A provision in commercial paper for a reasonable attorney's fee is generally valid and
enforceable. 25 However, the validity of a provision in a note authorizing payment of
attorney's fees is determined by the statutory law of the state where the note was executed
or, if none, by the pertinent statute of the forum where suit is brought to collect the fees;
where a statute authorizes the recovery of attorney's fees in an action on a note, the
statute is applicable to both negotiable and nonnegotiable notes, but an attorney's fee
provision cannot be enforced if prohibited by local non-UCC law. 26
In some states, the plaintiff may recover the attorney's fees stipulated in an instrument if
the defendant does not come forward with evidence in support of a defense that the fees
agreed upon are unreasonable. 27 In jurisdictions where this is the law, the holder is
entitled to recover the attorney's fees specified in the note in the absence of proof that to
enforce the provision would be unreasonable and unconscionable. 28 In other
jurisdictions, however, the burden of proving the reasonableness of attorney's fees is
imposed upon the party seeking to collect them. 29 In either event, the court may
determine if the amount of the attorney's fees to which the parties have agreed is
reasonable in view of the time and labor required, the novelty and difficulty of the
questions involved in the controversy, and the benefit resulting to the client from the
services rendered. 30
Footnotes
Footnote 23. UCC 3-106(1)(e) [1952].
The fact that a promissory note contained a promise by both the maker and indorser to
pay collection fees, including attorney's fees, did not destroy the notes negotiability
Jenkins v Karlton, 329 Md 510, 620 A2d 894, 22 UCCRS2d 769.
Forms: Provision in negotiable instrumentPayment of collection costs and attorneys'

fees. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable
Provision in negotiable instrumentPayment of collection costs and attorney

feesAnother form. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
Footnote 24. Bowman v Kingsland Dev. (Fla App D5) 432 So 2d 660 (disapproved on
other grounds as stated in West v West (Fla App D5) 534 So 2d 893, 13 FLW 2656).
Footnote 25. In re Morris (CA8 Ark) 602 F2d 826, 5 BCD 683, 20 CBC 950, CCH Bankr
L Rptr 67277, 27 UCCRS 333; National Bank of North America v Around The Clock
Truck Service (NY Sup) 5 UCCRS 866.
Annotation: Validity of provision in promissory note or other evidence of

indebtedness for payment, as attorneys' fees, expenses, and costs of collection, of
specified percentage of note, 17 ALR2d 288.

Footnote 26. 5A Anderson Uniform Commercial Code 3d 3-106:15.
Footnote 27. Emmons v Winters (Mo App) 627 SW2d 904; Security Nat'l Bank v
Bonnett (Okla App) 623 P2d 1061; RepublicBank Dallas, N.A. v Shook (Tex) 653 SW2d
278.
A statute permitting reasonable attorney's fees created a presumption that the fee
stipulated in a note was reasonable, but the defaulting party was entitled to an evidentiary
hearing to argue unreasonableness as an affirmative defense. Rock v Short (Del) 336
A2d 219.
Footnote 28. Stern Fixture Co. v Layton (Mo App) 752 SW2d 341.
Footnote 29. Appliances, Inc. v Yost, 186 Conn 673, 443 A2d 486 (holding that the trial
court erred in denying the plaintiff's request for attorney's fees based on the purported
insufficiency of evidence of reasonableness); Downing v Stiles (Wyo) 635 P2d 808, 32
UCCRS 995.
Annotation: Necessity of introducing evidence to show reasonableness of attorneys'

fees where promissory note provides for such fees, 18 ALR3d 733.
Footnote 30. First Nat'l Bank v Nash, 2 Ark App 135, 617 SW2d 24.
An award by the trial court of attorney's fees equivalent to 10 percent of the unpaid
principal balance on a note would not be overruled as an abuse of discretion, where the
party contesting the award made no showing that the amount was not reasonable, and
where the case involved a complex foreclosure which necessitated a trial and two
successive appeals. Bowen v Danna, 276 Ark 528, 637 SW2d 560, 34 UCCRS 1095.
Notwithstanding the rule that the payee of a note is entitled to recover attorney's fees as
stipulated in the note, an award of $53,000 for collection of a $215,000 note was not
justified, where the stipulated 25 percent fee was excessive in view of the actual services
rendered by the attorney in diligently pursuing the claim and violated public policy.
People's Nat'l Bank v Smith (La App 4th Cir) 360 So 2d 560.
An award of attorney's fees equal to 15 percent of the balance due on notes providing for
the collection of reasonable attorney's fees was not unwarranted, where the record
revealed that counsel had represented the plaintiff through lengthy litigation involving
substantial sums of money, and that the subject matter was above average in difficulty.
Campo v Maloney, 122 NH 162, 442 A2d 997, 33 UCCRS 1712.
103 Provisions for payment of insurance, taxes, and similar items
View Entire Section

The Uniform Commercial Code (UCC) contains no express provision as to the effect of
an agreement by the maker of a note to pay insurance, taxes, and similar items; however,
the fact that such items are not specified in the statutory provision, which lists other
additions that do not affect the certainty of the sum due, 31 implies that inclusion of the
unspecified items would affect the certainty of the obligation, rendering the note
nonnegotiable. 32
Footnotes
Footnote 31. UCC 3-106(1) [1952].
Where the maker of a note secured by a mortgage promises to pay not only the sum of
$50,000 with interest, which is a sum certain, but also all taxes assessed upon said sum
against the payee or holder of the note, the amount of the taxes which may be assessed
thereafter is not a sum certain and the note is not negotiable. Persky v Bank of America
Nat'l Ass'n, 261 NY 212, 185 NE 77 (decided under analogous pre-UCC principles).
G. Time of Payment [104-111]
Research References
UCC 1-208; UCC 3-104, 3-109 [1952]; UCC 3-104, 3-108 [1990 Rev]
ALR Digest: Bills and Notes 68 et seq., 155, 173
ALR Index: Acceleration of Maturity; Bills and Notes; Uniform Commercial Code
6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments,
Forms 3:15, 3:19, 3:22, 3:23, 3:24.
Uniform Commercial Code: Article 1General Provisions 253:123, 253:124; 19 Am
253:2313, 253:2331 et seq., 253:2351 et seq., 253:2356, 253:2357, 253:2360,
253:2362-253:2366
1A Anderson, Uniform Commercial Code 1-208:113; 5A Anderson, Uniform
Commercial Code 3-109:11, 3-109:12; 6A Anderson, Uniform Commercial Code 3d
[Rev] 3-108:6
104 Generally
View Entire Section

In order to be a negotiable instrument, a writing must be payable on demand or at a

definite time. 33 It is not essential that an instrument state a time of payment, because
it is payable on demand if no time is stated. 34 However, a promissory note which is
payable only upon the occurrence of a future event, such as acceptance of a loan
commitment, is not payable either on demand or at a definite time; consequently, such a
note is not negotiable. 35
If an instrument, payable at a fixed date, is also payable upon demand made before the
fixed date, the instrument is payable on demand until the fixed date; if demand for
payment is not made before that date, the instrument becomes payable at a definite time
on the fixed date. 36 An instrument which provides that the principal amount is due on
demand or, if no demand is made, then 180 days from the date of its execution, contains
features of both a demand note and a note payable at a definite time. 37
A promise to pay at a nonspecific date, such as when the maker is able, is not so vague as
to be unenforceable; however, whether such a promise is viewed as a conditional promise
or an absolute promise to pay within a reasonable time, the instrument is not negotiable
since it is neither demand nor definite time paper. 38
Footnotes
As to instruments payable on demand, see 105.
As to instruments payable at a definite time, see 106.
Footnote 34. 105.
Footnote 35. Barton v Scott Hudgens Realty & Mortg., Inc., 136 Ga App 565, 222 SE2d
126, 18 UCCRS 982.
Footnote 37. Crown Mortg. Corp. v Tarantino (La App 5th Cir) 606 So 2d 29, 19
UCCRS2d 805.
105 Instruments payable on demand
View Entire Section

A promise or order is payable on demand if (1) it states that it is payable on demand or at

sight, (2) it otherwise indicates that it is payable at the will of the holder, or (3) no time is
stated for payment. 39 Where a note does not designate a time for payment or indicate
that it is payable on demand, it is presumed to be a demand instrument in the absence of
any indication that a payment date was mistakenly omitted. 40 Undated promissory
notes are not invalid, but are payable on demand. 41
Comment: If an instrument is undated, but it is nonetheless made payable at a fixed

time after its date, the instrument is incomplete; it may be completed by dating,
however, so as to be payable at a definite time. 42
Where a note states that it is payable in installments, but the date when the first
installment is to be made is left blank, the note is regarded as payable on demand. 43
The date of maturity of a demand note, generally, is the date when demand for payment is
made; however, in the absence of any evidence as to the date of demand, a court will
assume that demand was made on the same day that the note was executed. 44
Observation: A demand note is payable immediately on the date of its execution,

unless a contrary intention appears on the face of the instrument; a right of action
against the maker of a demand instrument, therefore, accrues upon its date or, if no
date is stated, on the date of its issue. 45
The provision of the Uniform Commercial Code requiring the exercise of good faith
where acceleration of payment is at the option of the holder 46 is not applicable to
demand notes, and the lender, therefore, has no obligation to show good faith before
requesting payment. 47 However, provisions in notes stating that they were payable on
demand do not relieve a lender from its implied obligation of good faith, where the notes
are not true demand instruments in that they call for payments over time unless one of
several specified events give the bank the right to accelerate payment. 48
Footnotes
A trial court errs in finding that a plaintiff has failed to prove that money is due, where
the loan is evidenced by a canceled check made payable to the borrower, because
performance is due on demand in the absence of any due date specified by the parties.
Bannoura v Bannoura (Fla App D4) 655 So 2d 1187, 20 FLW D1183, 26 UCCRS2d 807.
In an action to foreclose a defaulted note and mortgage, it is error to hold that the absence
of a maturity date on the executed note renders it invalid. Braun v Ivey (Fla App D4)
552 So 2d 1175, 14 FLW 2644.
Annotation: When statute of limitations begins to run against note payable on

demand, 71 ALR2d 284.
Forms: Complaint, petition, or declarationTo recover damages for failure of maker to

pay demand note on demand. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Article 3Negotiable Instruments, Form 3:19.
Payable on demand. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
3Negotiable Instruments 253:2331 et seq.
Footnote 40. Lakhaney v Anzelone (SD NY) 788 F Supp 160, 18 UCCRS2d 191.
Unless a specific date is stated, an instrument must be assumed to be payable on demand.

Riddle v Bank of Montreal, 145 App Div 207, 130 NYS 15.

Footnote 41. Nuri Farhadi, Inc. v Anavian (1st Dept) 58 App Div 2d 546, 396 NYS2d
26.
Footnote 43. Sapin v Security First Nat'l Bank (2nd Dist) 243 Cal App 2d 201, 52 Cal
Rptr 254.
A note which stated that payment was due on demand, but that if no demand was made
monthly payments were to be made, was a demand note. Blanchard v Progressive Bank
& Trust Co. (La App 1st Cir) 413 So 2d 589, 33 UCCRS 1387.
Footnote 44. Federal Deposit Ins. Corp. v Thayer Ins. Agency, Inc. (DC Kan) 780 F Supp
745.
A note which stated that it was a demand instrument, but which specified no time for
payment, was due at the time of its making. Creech v La Porte Production Credit Asso.
(Ind App) 419 NE2d 1008.
Footnote 45. 190.
As to the requirement of good faith in the exercise of a right to accelerate at will, see
111.
Footnote 47. Nationsbank, N.A. v Barnes (Va Cir Ct) 24 UCCRS2d 782.
Good faith is not a necessary component of a holder's decision to collect the balance due
on a demand note. Shawmut Bank, N.A. v Miller, 415 Mass 482, 614 NE2d 668, 21
UCCRS2d 13, summary op at (Mass) 21 MLW 2828 (also holding that a note stating that
it is due and payable on demand might, when read in conjunction with other provisions in
the note or loan documents, in fact be payable on demand only if the maker defaults on
an obligation stated in the loan documents).
As to provisions for acceleration of maturity, see 110.
Law Reviews: Nation, Demand notes and good faith in commercial lending: The
impact of UCC revised Article 3. 27 UCCLJ 4:382 (1995).
Footnote 48. In re Martin Specialty Vehicles, Inc. (BC DC Mass) 87 BR 752, 6

UCCRS2d 337, revd on other grounds (DC Mass) 97 BR 721, app dismd (CA1 Mass)
892 F2d 5.
106 Instruments payable at definite time, generally
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), an instrument is
payable at a definite time if, by its terms, it is payable:
(1) on or before a stated date or at a fixed period after a stated date;
(2) at a fixed period after sight;
(3) at a definite time subject to any acceleration; or
(4) at a definite time subject to extension at the option of the holder, or to extension to a
further definite time at the option of the maker or acceptor, or automatically upon or after
a specified act or event. 49
The 1990 Revision of the UCC similarly provides that a promise or order is payable at a
definite time if it is payable:
(1) on elapse of a definite period after sight or acceptance; or
(2) at a fixed date or dates, or at a time or times readily ascertainable at the time the
promise or order is issued, subject to rights of prepayment, acceleration, extension at the
option of the holder, or extension to a further definite time at the option of the maker or
acceptor, or automatically upon or after a specified act or event. 50
Observation: Revised Article 3, in effect declares that whether an instrument is

payable at a definite time is to be determined from the face of the instrument when it is
issued, and that this character is not affected by later events, such as prepayment,
acceleration, or extensions of the time for payment, even though the instrument
authorizes those events. 51
Footnotes
As to provisions for extensions of time, see 109.
As to provisions for acceleration of maturity, see 110.
As to maturity of an instrument payable at a specified or fixed time, see 191, 634.
Forms: Definite time. 19 Am Jur Legal Forms 2d, Uniform Commercial Code:
Article 3Negotiable Instruments 253:2351 et seq.

107 --Payment on happening of specified event
View Entire Section

An instrument which, by its terms, is otherwise payable only upon an act or event
uncertain as to time of occurrence is not payable at a definite time, even though the act or
event has occurred. 52 Thus, an instrument payable a fixed number of days after receipt
of a shipment of goods is not payable at a definite time and is not negotiable. 53
Observation: A note which fails to contain an unconditional promise to pay at a

definite time is not negotiable and, thus, may not be enforceable by a subsequent
holder against the maker, but this failure does not affect the validity or enforcement of
the note as between the original parties. 54
A certificate of deposit which makes the death of the certificate owner a condition of the
payment of the proceeds to a beneficiary is not a negotiable instrument. 55 Although
the death of the specified individual is certain to occur, the time of the occurrence is
uncertain. 56
Footnotes
Footnote 52. UCC 3-109(2) [1952].
Footnote 53. Banco Portugues Do Atlantico v Fonda Mfg. Corp. (1st Dept) 31 App Div
2d 122, 295 NYS2d 701, affd 26 NY2d 642, 307 NYS2d 668, 255 NE2d 780.
Footnote 54. Reid v Cramer, 24 Wash App 742, 603 P2d 851, 27 UCCRS 1324.
Footnote 55. West Greeley Nat'l Bank v Wygant (Colo App) 650 P2d 1339, 34 UCCRS
589 (holding, as a result, that the indorsement of the named beneficiary was not
necessary to effect a change of the death beneficiary).
Annotation: Validity and effect of agreement that debt or legal obligation

contemporaneously or subsequently incurred shall be canceled by death of creditor or
obligee, 11 ALR3d 1427.
Provision for post-mortem payment or performance as affecting instrument's character

and validity as a contract, 1 ALR2d 1178.
Footnote 56. Rotert v Faulkner (Mo App) 660 SW2d 463, 37 UCCRS 1596.
108 --Installment payments
View Entire Section

The fact that a note is payable in installments does not destroy its negotiability; the rule
requiring certainty as to time of payment is satisfied by the fixing of the time for the
payment of each installment. 57 Moreover, the date of payment is not indefinite
where a note specifies that the balance is payable in a stated number of monthly
installments, since any reasonable interpretation would indicate that the subsequent
monthly payments would be due one month apart starting on the named date. 58
Footnotes
Footnote 57. Bliss v California Cooperative Producers, 30 Cal 2d 240, 181 P2d 369, 170
ALR 1009 (superseded by statute on other grounds as stated in Wilson v Steele (2nd
Dist) 211 Cal App 3d 1053, 259 Cal Rptr 851).
A note which states a definite schedule for payment is not a demand note, but is payable
at a definite time. Corbin Deposit Bank & Trust Co. v Mullins Enterprises, Inc. (Ky
App) 641 SW2d 760, 34 UCCRS 1201.
Forms: Complaint, petition, or declarationAllegationNote payable in stated

installments. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
3Negotiable Instruments, Form 3:15.
Promissory notePayable in installments. 3B Am Jur Legal Forms 2d, Bills and Notes,
Form 41:28.
Provision in negotiable instrumentNote payable in installments. 19 Am Jur Legal

Footnote 58. Standard Premium Plan Corp. v Hirschorn, 56 Misc 2d 687, 290 NYS2d
226.
109 Effect of provisions for extension of time
View Entire Section

An instrument is payable at a definite time, even though the date for payment may be
extended at the option of the holder. 59 The fact that the holder allows the obligor
additional time in which to find other financing does not constitute an extension,
however, where no consideration is given and no definite time is specified. 60 If the
extension is to be at the option of the maker or acceptor, or is to be automatic, a definite
time limit must be stated. 61
Comment: If no definite time is stated, the time of payment remains uncertain and
the order or promise is not a negotiable instrument. 62
Observation: No limitation is imposed by the Uniform Commercial Code as to the
duration or number of any extensions granted by the holder of an instrument, but only
one extension may be made by a maker or acceptor and it must be to a definite date. 63
Footnotes
Footnote 59. UCC 3-109(1)(d) [1952]; UCC 3-108(b)(iii) [1990 Rev].
As to mutual extensions, renewals, and modifications of instruments, see 198.
Forms: Complaint, petition, or declarationAllegationClause permitting holder to

extend time for payment. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Negotiable Instruments, Form 3:23.
AnswerDefensePayment is not yet due on note extended by maker. 6A Am Jur Pl &

Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments, Form 3:24.
Provision in negotiable instrumentPayment subject to extension. 19 Am Jur Legal

Provision in negotiable instrumentExtension of payment at option of payee to an

indefinite time. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
Provision in negotiable instrumentExtension of payment on occurrence of specific

event. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable
Agreement to pay additional interest in consideration of extension of maturity date. 19

Agreement to revise payment schedule of note. 19 Am Jur Legal Forms 2d, Uniform
Footnote 60. Haygood v First Nat'l Bank (Miss) 517 So 2d 553.
Footnote 61. UCC 3-109(1)(d) [1952]; UCC 3-108(b)(iv) [1990 Rev].
A note which was due on a specified date, subject to the maker's option to extend it for
up to four years, and which otherwise met the requirements of negotiability, was a
negotiable instrument. Cartwright v MBank Corpus Christi, N.A. (Tex App Corpus
Christi) 865 SW2d 546, writ den (May 4, 1994) and rehg of writ of error overr (Jul 28,
1994).
Forms: Provision in negotiable instrumentExtension of payment by maker to definite

time. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable

Footnote 63. 6A Anderson, Uniform Commercial Code 3d (Rev) 3-108:6.
110 Effect of acceleration clause
View Entire Section

An instrument is payable at a definite time even though the holder is given the right to
accelerate the date of payment. 64 Thus, a note permitting acceleration in the event
that the holder deems itself insecure is negotiable. 65
Comment: So far as the certainty of payment is concerned, an instrument payable at

a definite time but subject to acceleration is no less certain than an instrument payable
on demand; in fact, payment is more certain under such an instrument, since it at least
states a definite time. 66
There can be no acceleration of the amount due on commercial paper in the absence of an
express provision authorizing acceleration. 67 However, whether the right to accelerate
is expressly at the will of the holder, or is dependent upon some extrinsic circumstance or
the act or default of the obligor, is irrelevant to the issue of whether an instrument is
negotiable. 68
Observation: Acceleration clauses, either in notes or in separate agreements, may be

based on failure to pay an installment of principal or interest when due, or may be
based on defaults other than nonpayment, such as failure to pay taxes on property
serving as security, failure to keep such property insured, or selling such property prior
to maturity of the note. 69
Footnotes
Footnote 64. UCC 3-109(1)(c) [1952]; UCC 3-108(b)(ii) [1990 Rev].
Annotation: Usury as affected by acceleration clause, 66 ALR3d 650.
What is essential to exercise of option to accelerate maturity of bill or note, 5 ALR2d

968.
Forms: Complaint, petition, or declarationAllegationClause in installment note

providing for acceleration of payments. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Code : Article 3Negotiable Instruments, Form 3:22.
Provision in negotiable instrumentPayment subject to acceleration. 19 Am Jur Legal


Provision in negotiable instrumentAcceleration of maturity on sale or transfer of
collateral. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
Footnote 65. Broadway Management Corp. v Briggs (4th Dist) 30 Ill App 3d 403, 332
NE2d 131, 17 UCCRS 470.
As to the requirement of good faith in the exercise of a right to accelerate at will, see
111.
Footnote 67. 194.
As to the requirement of good faith where acceleration is at the option of the holder, see
111.
Footnote 69. 195.
111 --Requirement of good faith
View Entire Section

A provision in a negotiable instrument that one party may accelerate payment or

performance at will or when that party deems itself insecure, or in words of similar
import, must be construed to mean that that party will have power to accelerate payment
only if it, in good faith, believes that the prospect of payment or performance is impaired;
the burden of establishing lack of good faith is on the party against whom the power has
been exercised. 70
Comment: The statutory requirement of good faith in the acceleration of payment

applies only to an instrument which, in the first instance, is payable at a future date; it
does not apply to demand instruments or obligations whose very nature permits call at
any time, with or without reason. 71
The good-faith requirement imposed by the Uniform Commercial Code on the exercise of
a right to accelerate an obligation ordinarily applies only to clauses that place exclusive
control in the creditor over the event which will cause acceleration to occur; the
requirement of good faith thus normally does not pertain to clauses that provide for
default upon the occurrence of an event which is within the control of the debtor, 72
such as default in making monthly payments. 73 That is, the statute applies only to
at-will acceleration or acceleration when a creditor deems itself insecure. 74 It does not
apply to an unqualified option to accelerate upon a default in payment, since the right to
demand payment of commercial paper according to its terms is not subject to any
limitation of good faith. 75
Where the statutory good-faith requirement applies, the creditor need only have a
good-faith belief that the prospects of repayment are impaired in order to justify
acceleration. 76 Uncontroverted evidence that a debtor has threatened to institute
bankruptcy proceedings constitutes a sufficient showing of a creditor bank's good faith in
invoking an acceleration provision in the debtor's note and applying pledged security
against the balance due. 77 On the other hand, where a note provides for acceleration if
the creditor, in good faith, believes that the prospect of payment or performance by the
debtor is impaired, and where the secured creditor has no reason to feel less secure on the
date that it repossesses collateral than it did when the note was executed, the creditor acts
in bad faith in accelerating the obligation at a time when the debtor is current in making
the required payments. 78
Footnotes
Annotation: What constitutes "good faith" under UCC 1-208 dealing with "insecure"
or "at will" acceleration clauses, 85 ALR4th 284.
Forms: Contract provisionAccelerationOption of promisee. 18 Am Jur Legal Forms

2d, Uniform Commercial Code: Article 1General Provisions 253:123.
Contract provisionAccelerationCombined optional and automatic clause. 18 Am Jur

Legal Forms 2d, Uniform Commercial Code: Article 1General Provisions 253:124.
Footnote 72. Abrego v United Peoples Federal Sav. & Loan Asso., 281 Ark 308, 664
SW2d 858, appeal after remand 285 Ark 434, 688 SW2d 724 and (criticized on other
grounds by Damron v University Estates, Phase II, Inc., 295 Ark 533, 750 SW2d 402).
Footnote 73. Westlund v Melson, 7 Ark App 268, 647 SW2d 488, 36 UCCRS 749.
A savings and loan association's acceleration of a loan was within the bounds of good
faith, where it was undisputed that the borrowers could not make the scheduled payments
at the time they were due. Savers Federal Sav. & Loan Ass'n v Amberley Huntsville,
Ltd. (CA11 Ala) 934 F2d 1201, 16 UCCRS2d 277.
Footnote 74. Don Anderson Enterprises, Inc. v Entertainment Enterprises, Inc. (Mo App)
589 SW2d 70, 27 UCCRS 1238.
Footnote 76. South Carolina Nat'l Bank v Southern Polymers (App) 313 SC 246, 437
SE2d 148, 22 UCCRS2d 644.
Footnote 77. Jack M. Finley, Inc. v Longview Bank & Trust Co. (Tex App Texarkana)
705 SW2d 206, 1 UCCRS2d 17, writ ref n r e (Oct 1, 1986).

Footnote 78. Clayton v Crossroads Equip. Co. (Utah) 655 P2d 1125, 34 UCCRS 1448.
H. Terms And Omissions Not Affecting negotiability
Research References
UCC 3-104, 3-112, 3-801 [1952]; UCC 3-104, 3-311, 3-504 [1990 Rev]; UCC
9-105
ALR Digest: Accord and Satisfaction 1 et seq.; Bills and Notes 55, 56, 61, 195 et
seq.
Forms 3:45, 3:46
3A Am Jur Legal Forms 2d, Bills and Notes 41:43, 41:59, 41:71 et seq.;19 Am Jur
253:2371 et seq., 253:2378-253:2384, 253:2543
5A Anderson, Uniform Commercial Code 3d 3-112:22; 6A Anderson, Uniform
Commercial Code 3d [Rev] 3-104:14
112 Generally
View Entire Section

A negotiable instrument, generally, cannot contain any promise, order, obligation, or

power given by the maker or drawer, other than an unconditional promise or order to pay
money. 79 Under both the pre-1990 version of the Uniform Commercial Code (UCC)
and the 1990 Revision of the UCC, however, the negotiability of an instrument is not
affected by the inclusion of the following provisions:
(1) a promise or power to maintain or protect collateral or to give additional collateral, as

well as a provision authorizing the holder to dispose of or realize on collateral; 80
(2) a term authorizing a confession of judgment on the instrument if not paid when due,
81 or
(3) a term purporting to waive the benefit of any law intended for the advantage or
protection of any obligor. 82
Additional provisions are allowed under the pre-1990 version of the UCC which are not
specifically stated as allowable in the 1990 Revision, including (1) a provision that the
payee of a draft acknowledges full satisfaction of an obligation of the drawer by
indorsing or cashing the draft, 83 and (2) a statement in a draft drawn in a set of parts, in
the manner specified by statute, 84 to the effect that the order is effective only if no other
part has been honored. 85
Observation: The 1990 Revision of the UCC provides, subject to specified

exceptions, that if a person against whom a claim is asserted proves that (1) that person
in good faith tendered the instrument to the claimant as full satisfaction of the claim,
(2) the amount of the claim was unliquidated or subject to a bona fide dispute, and (3)
the claimant obtained payment on the instrument, the claim is discharged if the person
against whom the claim is asserted proves that the instrument or an accompanying
written communication contained a conspicuous statement to the effect that the
instrument was tendered in full satisfaction of the claim. 86
Under the pre-1990 version of the UCC, the negotiability of an instrument also is not
affected by the omission of a statement of any consideration, or of the place where the
instrument is drawn or payable. 87
Footnotes
A retail installment contract for the sale of a mobile home, which contained not only a
promise to pay a sum certain but also other promises, such as a provision for a rebate or
refund on partial repayments, was not a negotiable instrument. Wickware v National
Mortg. Corp. (Okla) 570 P2d 330, 22 UCCRS 720.
As to the requirement that a negotiable instrument contain an unconditional promise or

order to pay money, see 91.
Footnote 80. 113.
Footnote 81. 114.
Footnote 82. 115.
Footnote 83. UCC 3-112(1)(f) [1952].
Footnote 84. UCC 3-801 [1952].
Footnote 85. UCC 3-112(1)(g) [1952].
Forms: Terms and omissions not affecting negotiability. 19 Am Jur Legal Forms 2d,
Uniform Commercial Code: Article 3Negotiable Instruments 253:2371 et seq.
Footnote 87. UCC 3-112(1)(a) [1952].
113 Provisions as to collateral security
View Entire Section


The negotiability of an instrument is not affected by the inclusion of a statement that
collateral has been given to secure the obligations evidenced by the instrument or other
obligations of an obligor on the instrument. 88 Negotiability also is not affected by the
inclusion of a provision authorizing the holder to dispose of or realize on collateral. 89
in case of default by an obligor of obligations created by the instrument or otherwise. 90
Definition: "Collateral" means the property subject to a security interest, and

includes accounts and chattel paper which have been sold. 91
A negotiable instrument also may include a promise or power to maintain or protect

collateral, or to give additional collateral. 92
Observation: As is true for an at-will acceleration of the balance due under an

instrument, 93 a creditor must exercise good faith in requiring the furnishing of
additional collateral either at will, or because the prospect of payment or performance
by the obligor is impaired. 94
Footnotes
Footnote 88. UCC 3-112(1)(b) [1952].
Although it appears on the face of a note that its payment is secured by collateral
consisting of personal property or a mortgage on real property, the note is still negotiable
if otherwise in proper form. Bradley v Davis (6th Cir Ct) 5 Fla Supp 1, affd (Fla) 68 So
2d 613; First Nat'l Bank v Blackman, 249 NY 322, 164 NE 113, reh den 250 NY 537,
166 NE 315; Continental Casualty Co. v Aetna Casualty & Surety Co., 251 App Div 467,
296 NYS 833.
Forms: Security provisions in promissory notes. 3B Am Jur Legal Forms 2d, Bills and
Notes 41:71 et seq.
Complaint, petition, or declarationAllegationCollateral deposited to insure payment

of instrument. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
3Negotiable Instruments, Form 3:45.
Provisions in negotiable instrumentsCollateral security. 19 Am Jur Legal Forms 2d,

Uniform Commercial Code: Article 3Negotiable Instruments 253:2372 et seq.
Footnote 89. UCC 3-112(1)(b) [1952]; UCC 3-104(a)(3)(ii) [1990 Rev].
Forms: Disposition of collateral on default. 19 Am Jur Legal Forms 2d, Uniform

Footnote 90. UCC 3-112(1)(b) [1952].
Footnote 91. UCC 9-105(1)(c).
Footnote 92. UCC 3-112(1)(c) [1952]; UCC 3-104(a)(3)(i) [1990 Rev].
Forms: Complaint, petition, or declarationAllegationExpress right to call for

additional security to avoid default. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Code : Article 3Negotiable Instruments, Form 3:46.
Provision for maintenance of value of collateral. 19 Am Jur Legal Forms 2d, Uniform
Retention of collateral after discharge of obligation as security for other obligations.

Footnote 93. 111.
114 Provision authorizing confession of judgment
View Entire Section

The promise or order contained in a negotiable instrument may include an authorization

or power to the holder to confess judgment 95 if the obligation is not paid when due.
96
Observation: Because the pre-1990 version of the Uniform Commercial Code

(UCC) allows confession of judgment only if an instrument is not paid when due,
under that version, the grant of a power to confess judgment at any time, or at a time
before maturity, renders the instrument nonnegotiable. 97 Moreover, the fact that the
UCC allows an instrument to contain a confession of judgment clause and still be
negotiable does not remove any non-UCC limitation on the use of confession of
judgment that may exist in a particular state. 98
Comment: The fact that confession of judgment is made illegal by statute or

decision, thus, making a clause in an instrument authorizing such relief invalid, does
not affect the negotiability of the instrument. 99
Footnotes
Footnote 95. UCC 3-112(1)(d) [1952]; UCC 3-104(a)(3)(ii) [1990 Rev].
Forms: Confession of judgment. 3B Am Jur Legal Forms 2d, Bills and Notes
41:59.
Negotiable instrument with power to confess judgment. 19 Am Jur Legal Forms 2d,
Provision in negotiable instrumentPower to confess judgmentEffect of provision in

states where confession of judgment prohibited. 19 Am Jur Legal Forms 2d, Uniform
Footnote 96. UCC 3-112(1)(d) [1952].
A demand note authorizing confession of judgment at any time, whether or not default
has occurred, is nonnegotiable. Cheltenham Nat'l Bank v Snelling, 230 Pa Super 498,
326 A2d 557, 15 UCCRS 876, cert den 421 US 965, 44 L Ed 2d 453, 95 S Ct 1955.
115 Waiver of obligor's legal advantage or protection
View Entire Section

The negotiability of an instrument is not affected by the inclusion of a term purporting to

waive the benefit of any law intended for the advantage or protection of any obligor. 1
Comment: The foregoing provision applies not only to any waiver of the benefits of
Article 3 of the Uniform Commercial Code (UCC), such as presentment, notice of
dishonor, and protest, but also to a waiver of the benefits of any other law such as a
homestead exemption; however, a waiver cannot make an instrument negotiable if it
does not comply with the requirements of negotiability. 2
The UCC does not purport to validate or authorize many types of waivers, and it may be
that a waiver is invalid in a given case under non-UCC law. 3 Nonetheless, the UCC
does contain various provisions which tacitly authorize waivers by the obligor, such as
those which state that presentment for payment or acceptance of an instrument 4 and
notice of dishonor 5 are excused if the drawer or obligor has waived such presentment or
notice.
Footnotes
Footnote 1. UCC 3-112(1)(e) [1952]; UCC 3-104(a)(3)(iii) [1990 Rev].
Forms: Provision in negotiable instrumentWaiver of exemptions. 19 Am Jur Legal

Forms 2d, Uniform Commercial Code: Article 3Negotiable instruments 253:2381.
Provision in negotiable instrumentWaiver of benefitsHomestead and exemption

laws. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable
instruments 253:2382.

Forms: Waiver of presentment and notice. 19 Am Jur Legal Forms 2d, Uniform
Annotation: Validity, in contract for installment sale of consumer goods, or

commercial paper given in connection therewith, of provision waiving, as against
assignee, defenses good against seller, 39 ALR3d 518.
Validity of contractual stipulation or provision waiving debtor's exemption, 94 ALR2d

967.
Footnote 4. UCC 3-504(a)(iv) [1990 Rev].
116 Additional matters not affecting negotiability
View Entire Section

Memoranda inserted into a negotiable instrument for mere convenience in matters of

reference, generally, do not affect the negotiability of the instrument. 6 Likewise, when
a paper satisfies the requirements of negotiability, its negotiable character is not affected
by the fact that it carries a peculiar title, such as "check note," or has a heading of "first
lien note." 7 Similarly, the fact that the top portion of a promissory note sets forth an
itemization of transactions between the parties does not affect the character of the bottom
portion as a promissory note, when the instrument contains a promise to pay and
otherwise meets the requirements of negotiability. 8 The negotiability of an instrument
also is not destroyed by the inclusion of a clause declaring that the contract is to be
construed by the laws of the state in which it is executed. 9
An instrument is not rendered nonnegotiable by provisions which cannot in any way have
an effect on the instrument until after it becomes nonnegotiable by operation of law, that
is, after maturity. 10
Footnotes
Footnote 6. Rubio Sav. Bank v Acme Farm Products Co., 240 Iowa 547, 37 NW2d 16, 9
ALR2d 459 (involving memoranda on checks describing the funds and their source, or
the payment intended); Newman v Schwarz, 180 La 153, 156 So 206; Kewanee Private
Utilities Co. v Runzel, 256 Mich 345, 239 NW 325; Springs v Hanover Nat'l Bank, 209
NY 224, 103 NE 156.

Footnote 7. Schmuckie v Alvey (Ky) 758 SW2d 31, 8 UCCRS2d 1110.
Footnote 8. Accounts Management Corp. v Lyman Ranch, 230 Mont 35, 748 P2d 919, 5
UCCRS2d 1024.
Footnote 9. De Hass v Dibert (3 Pa) 70 F 227.
Footnote 10. First Nat'l Bank v Badham, 86 SC 170, 68 SE 536; Koppler v Bugge, 168
Wash 182, 11 P2d 236.
I. Incomplete Instruments [117-125]
Research References
UCC 3-112 through 3-115, 3-118, 3-406, 3-407 [1952]; UCC 3-111 through 3-113,
3-115, 3-302, 3-406, 3-407 [1990]
ALR Digest: Alteration of Instruments 1 et seq.; Bills and Notes 20, 60, 65
3:53, 3:54
19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3 Negotiable
5A Anderson, Uniform Commercial Code 3d 3-114:19, 3-114:20, 3-115:4, 3-115:5,
3-115:8, 3-115:22, 3-115:35; 6 Anderson, Uniform Commercial Code 3d 3-406:4; 6A
Anderson Uniform Commercial Code 3d [Rev] 3-109:10, 3-113:4, 3-115:6, 3-115:8,
3-115:10
1. In General [117-121]
117 Generally
View Entire Section

An incomplete instrument is 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. 11
Comments: The term "incomplete instrument" applies both to an instrument which

meets the requirements of negotiability and to a signed writing intended to be an
instrument which lacks some element of an instrument; the test in both cases is whether
the contents show that it is incomplete and that the signer intended that additional
words or numbers be added. 12 A writing which lacks an essential element of an
instrument, but which contains no blanks or other indications that what is missing is to
be supplied, is not an incomplete instrument. 13
Under the pre-1990 version of the Uniform Commercial Code (UCC), when a paper
whose contents at the time of signing show that it is intended to become an instrument is
signed while it is still incomplete in any necessary respect, it cannot be enforced until
completed. 14 However, provided that the instrument is sufficiently complete to show
that it was intended to become an instrument, 15 it is effective when completed in an
authorized manner. 16
Under the 1990 Revision of the UCC an incomplete instrument which is a negotiable
instrument may be enforced according to its terms if it is not completed, or according to
its terms as augmented by completion. 17 For example, where a note which is
otherwise negotiable was intended to be completed by filling out a schedule of
installment payments, but was left uncompleted, the note is effective as a demand note;
18 but, if the note is completed by the insertion of the due dates agreed to by the parties,
the note is payable on the dates stated. 19
If an incomplete instrument is not a negotiable instrument, but after completion the

requirements of negotiability are met, the instrument may be enforced according to its
terms as augmented by completion. 20 Thus, a check in which the amount to be paid is
not filled in is not negotiable and cannot be enforced; if the payee fills in an amount
authorized by the drawer, however, the check meets the requirements of negotiability and
is enforceable in its completed form. 21
Footnotes
Footnote 14. UCC 3-115(1) [1952].
Forms: Certification that all blanks are filled in prior to execution. 19 Am Jur Legal
Footnote 16. UCC 3-115(1) [1952].
It is no defense that a negotiable instrument contained blanks when it was delivered,

where there is no claim that the instrument was not later completed in conformity with
the parties' agreement. Harbage v Dollar Farm Products Co., 166 Ga App 561, 305 SE2d
25, 36 UCCRS 1653.
A continuing guaranty signed in blank and later completed in an unauthorized manner

was not enforceable, since UCC 3-115(1) applies only to negotiable instruments and a
guaranty is not such an instrument. Capital Bank & Trust Co. v Automotive Constr. &
Testing, Inc. (La App 1st Cir) 434 So 2d 1191, 36 UCCRS 1650.
As to authority to complete an instrument, see 119.

As to an unauthorized completion as an alteration, see 120.
Forms: Instruction to juryRight to enforce incomplete instrument. 6A Am Jur Pl &

Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments 54.
118 Effect of omission of term not required for negotiability
View Entire Section

The mere fact that blanks exist or are left on printed forms of commercial paper does not
necessarily affect the negotiability of the instrument; this is because the fact that a paper
fails to include a term that could be included, but which is not required to establish
negotiability, does not make the instrument incomplete. 22 In such a case, the
instrument may be legally effective as commercial paper without such a term. 23 For
example, the fact that an instrument does not state a due date does not require classifying
the paper as incomplete, since it is effective as a demand instrument when no date for
payment is specified. 24 Likewise, when a note calls for the payment of interest, but
fails to specify the date from which interest runs, the note is not an incomplete
instrument; this is because the Uniform Commercial Code specifies that, unless otherwise
stated, interest is to be paid from the date of the instrument 25 or from the date of issue
of an undated instrument. 26 Moreover, if an instrument provides for interest, but the
rate of interest payable cannot be ascertained from the description used, interest is
payable at the judgment rate in effect at the place of payment of the instrument at the
time interest first accrues. 27
Footnotes
Footnote 22. 5A Anderson, Uniform Commercial Code 3-115:4.
Footnote 23. 5A Anderson, Uniform Commercial Code 3-115:5.
Footnote 24. 104.
Footnote 25. UCC 3-118(d) [1952]; UCC 3-112(a) [1990 Rev].
Footnote 26. UCC 3-118(d) [1952].

Where a blank as to the interest rate is filled in subsequent to the making of a note, it is
binding if done with the maker's approval and instructions. Hundemer v Theriot (La App
1st Cir) 312 So 2d 123, cert den (La) 313 So 2d 845 and cert den (La) 313 So 2d 848.
119 Authority to complete
View Entire Section

The completion of an incomplete instrument must be made with the authority of the
signer in order to be effective. 28 However, because the Uniform Commercial Code
(UCC) places the burden of showing that any completion is unauthorized upon the person
so asserting, 29 by implication it is assumed that an instrument has been completed in
accordance with the parties' agreement. 30 Moreover, authority to complete an
instrument may be implied from the facts of a particular case, as where the obligor
accepts the proceeds of a note which was signed in an incomplete form without objecting
to the manner in which it has been completed, 31 or where the drawer gives the payee
the means of completing a draft by supplying missing information, such as the name of
the drawee bank. 32
Observation: Whether or not there is authority to complete an instrument is a

question of fact to be determined by the law of agency of the jurisdiction, rather than
under the UCC. 33
When an instrument is delivered to a person with the clear intention that the recipient
complete any blanks therein, whether that intention is evidenced by the circumstances or
by express language, that person becomes an agent for the purpose of completion and
binds the principal accordingly. 34
Comment: The authority to complete an instrument by filling in blanks must be

exercised within a reasonable time, unless a time limit is fixed. 35
One who signs a printed form in blank and entrusts it to another for the purpose of having
the blanks filled in cannot be heard to deny that completion of the form in a manner
consistent with the printed words is authorized. 36
Where a blank is thus filled in, a rebuttable presumption exists that authority has been
given to fill in the instrument for the amount written, and the burden is on the opposing
party to overcome the presumption. 37
Footnotes

228, revd on other grounds (CA5 Tex) 53 F3d 716.
Footnote 29. 120.
Footnote 30. Olken v Olken (1st Dist) 82 Ill App 3d 438, 38 Ill Dec 15, 403 NE2d 30, 29
UCCRS 563.
Footnote 31. First Nat'l City Bank v Cooper (1st Dept) 50 App Div 2d 518, 375 NYS2d
118, 18 UCCRS 159 (involving an action against a guarantor who signed notes while
they were incomplete).
228, revd on other grounds (CA5 Tex) 53 F3d 716 (also stating that the presumption of
implied authorization is difficult to overcome).
Footnote 34. Manufacturers Hanover Trust Co. v Eisenstadt, 64 Misc 2d 397, 315
NYS2d 19.
Footnote 36. Rancho San Carlos, Inc. v Bank of Italy Nat'l Trust & Sav. Asso., 123 Cal
App 291, 11 P2d 424.
Footnote 37. Estate of Gillett, 73 Cal App 2d 588, 166 P2d 870.
120 Effect of unauthorized completion; burden of proof
View Entire Section

If words or numbers are added to an incomplete instrument without authority of the

signer, there is an alteration of the incomplete instrument under the section of the
Uniform Commercial Code (UCC) 38 which governs the alteration of negotiable
instruments. 39 The person asserting a lack of authority to complete an instrument has
the burden of establishing that any completion is unauthorized, 40 or that words or
numbers were added to an incomplete instrument without authority of the signer. 41
Observation: Whether the required authority to complete an instrument exists is a

question of fact to be determined under common law principles of agency law. 42
The completion of an instrument in an unauthorized manner is a material alteration, 43

and an alteration made by the holder which is both fraudulent and material discharges
any party whose contract is thereby changed, unless that party assents, or is precluded
from asserting the defense. 44 A person who pays an altered instrument or takes it for
value, in good faith and without notice of the alteration, may enforce rights with respect
to the instrument (1) according to its original terms, or (2) in the case of an incomplete
instrument altered by unauthorized completion, according to its terms as completed. 45
As against an ordinary holder, a lack of authority to complete the instrument may be

shown, 46 but even if the completion of an instrument is unauthorized a holder in due
course may enforce a negotiable instrument as completed. 47 For example, where an
individual signs a promissory note in blank with the understanding that another person
will cosign the note and fill in an amount payable of $35,000, but the other person never
cosigns the instrument and inserts an amount of $85,000, the signer is liable to a
subsequent holder in due course for the entire amount of the note, despite the fact that the
completion of the note was unauthorized; in such a case, the loss is properly placed on
the person who left the instrument incomplete. 48 Likewise, in an action by a cashing
bank to recover from a drawer who signed two checks in blank and from an indorser who
stole, completed, and cashed the checks, the bank is a holder in due course who can
enforce the checks as completed if it has no notice of any defenses against, or claims to,
such checks. 49
Caution: There can be no holder in due course of an instrument which bears such
apparent evidence of forgery or alteration, or is otherwise so irregular or incomplete, as
to call into question its authenticity. 50
Footnotes
As to alteration of instruments, generally, see 4 Am Jur 2d, Alteration of Instruments

1 et seq.
Forms: AnswerDefenseUnsigned and undelivered note not intended as valid

instrumentUnauthorized alteration. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Code : Article 3Negotiable Instruments 53.
Footnote 40. UCC 3-115(2) [1952].
Footnote 42. 6A Anderson, Uniform Commercial Code 3d (Rev) 3-115:10.
Footnote 43. UCC 3-407(1)(b) [1952].
Footnote 44. UCC 3-407(2)(a) [1952]; UCC 3-407(b) [1990 Rev].
As to preclusion of a defense based on an unauthorized alteration, see 121.
Annotation: What constitutes "fraudulent and material" alteration of negotiable

instrument under UCC 3-407(2)(a), 88 ALR3d 905.

A promissory note signed, but left blank as the principal amount and dates of payment,
came into existence after it was completed; even though the completion was
unauthorized, it was enforceable by a holder in due course. Equilease Corp. v Indemnity
Ins. Co. (1st Dept) 183 App Div 2d 645, 584 NYS2d 793, 18 UCCRS2d 467.
Footnote 48. 122.
Footnote 49. Central State Bank v Kilroy (2d Dept) 57 App Div 2d 940, 395 NYS2d 78,
21 UCCRS 1374.
An employer who gives an employee checks signed in blank with no entry as to the
payee or amount, rather than the bank, bears the loss resulting from the bank's honoring
of the checks as altered by the employee. Globe Motor Car Co. v First Fid. Bank, N.A.
(Law Div) 273 NJ Super 388, 641 A2d 1136, 25 UCCRS2d 183, affd (App Div) 291 NJ
Super 428, 677 A2d 794.
121 --Preclusion of defense based on alteration
View Entire Section

Any person whose negligence 51 or failure to exercise ordinary care 52 substantially

contributes to a material alteration, or to the making of a forged 53 or unauthorized 54
signature, is precluded from asserting the alteration or unauthorized signature against a
holder in due course, 55 or against a person who, in good faith pays the instrument, 56
or takes it for value or for collection. 57
Comment: The foregoing provision does not make the negligent party liable in tort
for damages resulting from the alteration, but instead estops him or her from asserting
the alteration against a holder in due course or drawee; 58 if the negligent person is
estopped from asserting the alteration, the person taking the instrument is fully
protected, because the taker can treat the instrument as having been issued in its altered
form. 59
Observation: The rationale of Section 3-406 of the Uniform Commercial Code

(UCC) is to encourage the free circulation of commercial paper by applying the
principle that as between two innocent persons the one who is negligent should bear
the loss caused by the wrongdoing of a third person; 60 the UCC thus provides some
measure of protection to a reasonable business person who acts in good faith, 61 and
shifts the loss caused by negligence to the party who was in the best position to have
prevented it. 62

Footnotes
Footnote 51. UCC 3-406 [1952].
Footnote 53. UCC 3-406 [1952].
Footnote 55. UCC 3-406 [1952].
Footnote 56. UCC 3-406 [1952]; UCC 3-406(a) [1990 Rev].
Annotation: Commercial paper: what amounts to "negligence contributing to

alteration or unauthorized signature" under UCC 3-406, 67 ALR3d 144.
3-406 [1990 Rev].
Footnote 61. Jacoby Transport Systems, Inc. v Continental Bank, 277 Pa Super 440, 419
A2d 1227, 28 UCCRS 1398.
Footnote 62. Girard Bank v Mt. Holly State Bank (DC NJ) 474 F Supp 1225, 26 UCCRS
1210.
2. Particular Omissions [122-125]
122 Amount payable
View Entire Section

An instrument with a blank as to the amount payable is incomplete in a necessary respect,

since the amount is an essential element of an instrument, and thus, the section of the
Uniform Commercial Code governing incomplete instruments 63 is applicable. 64
Thus, even though an amount is stated in the margin, until the blank is filled in, no
recovery can be had on the instrument, 65 unless the amount owed is admitted by the
obligor. 66
Where a party to commercial paper entrusts it to another with a blank designed to be
filled in with the amount, that party is liable to a holder in due course of the instrument
for the amount filled in, even though the amount inserted is greater than that which was
stipulated with the person to whom the initial delivery was made. 67 For example,
where an individual signs a promissory note in blank with the understanding that another
person will cosign the note and fill in an amount payable of $35,000, but the other person
never cosigns the instrument and inserts an amount of $85,000, the signer is liable to a
subsequent holder in due course for the entire amount of the note despite the fact that the
completion of the note was unauthorized; in such a case, the loss is properly placed on
the person who left the instrument incomplete. 68
Footnotes
As to omission of the rate or accrual date of interest, see 118.
As to authority to complete an incomplete instrument, see 119.
Footnote 65. Hogan v Brogdon, 65 Ga App 8, 14 SE2d 575; Hollen v Davis, 59 Iowa
444, 13 NW 413; Chestnut v Chestnut, 104 Va 539, 52 SE 348.
When it is obviously the purpose of the maker that the body of a promissory note contain
the complete promise of payment, marginal figures will be regarded as a memorandum
for convenience of reference, and will not cure an omission in the body of the instrument.
Vinson v Palmer, 45 Fla 630, 34 So 276.
As to the interpretation of marginal notations on an instrument, see 130.
Footnote 66. De Bose v Los Angeles Teachers Credit Union (Mun Ct App Dist Col) 129
A2d 700.
Footnote 67. National Exchange Bank v Lester, 194 NY 461, 87 NE 779.
Footnote 68. American Federal Bank, FSB v Parker (App) 301 SC 509, 392 SE2d 798,
12 UCCRS2d 753.
123 Name of payee
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), an instrument in
which the name of the payee has not been filled in is an incomplete instrument which
cannot be enforced until it is completed. 69 For example, a promissory note which
promises to pay "to the order of ____________," but which has not been completed by
the naming of a specific payee, is an incomplete order instrument which is unenforceable
on its face; it is not a bearer instrument. 70 On the other hand, the 1990 Revision of the
UCC specifies that an instrument which does not designate a payee is a bearer
instrument. 71 This rule pertains whether the absence of a payee has been caused by a
failure to fill in a blank space or whether the instrument was merely written without
identifying any payee. 72
Footnotes
Footnote 69. 89.
Footnote 70. Hoss v Fabacher (Tex Civ App Houston (1st Dist)) 578 SW2d 454, 26
UCCRS 436 (decided under the 1952 UCC).
Footnote 71. 88.
124 Date of instrument; payment due date
View Entire Section

The negotiability of an instrument is not affected by the fact that it is undated. 73 The
1990 Revision of the Uniform Commercial Code (UCC) specifies that if an instrument is
undated, its date is the date of its issue; in the case of an unissued instrument, its date is
the date it first comes into possession of a holder. 74
Observation: The latter alternative, which pertains where the instrument is not
issued, assumes that the instrument is in bearer form, or that the payee did not indorse
the unissued instrument with a special indorsement after acquiring it. 75
Under the pre-1990 version of the UCC, if the existence of a date on the paper is not
essential to a determination of the nature of the obligation, as in the case of a demand
promissory note, the instrument is not incomplete. 76 However, where the date of the
instrument is essential to determining the obligation, as in the case of paper due a
specified number of days after the date, the undated instrument is incomplete. 77
Footnotes
Footnote 73. UCC 3-114(1) [1952].

125 Place of payment
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the negotiable
character of an instrument is not affected by the fact that it does not specify a place where
it is payable. 78 However, if the omission of the place of payment makes the instrument
obviously incomplete, the section of the UCC concerning incomplete instruments 79
governs the completion of the instrument. 80
The 1990 Revision of the UCC specifies that if no place of payment is stated, an
instrument is payable at the address of the drawee or maker, and if no address is stated,
the place of payment is the place of business of the drawee or maker; if a drawee or
maker has more than one place of business, the place of payment is any place of business
of the drawee or maker chosen by the person entitled to enforce the instrument. 81
Footnotes
Footnote 78. UCC 3-112(1)(a) [1952].
As to presentment of an instrument for payment or acceptance where no place for

presentment is specified, see 324.
Footnote 79. UCC 3-115 [1952].
J. Construction And Interpretation [126-137]
Research References
UCC 1-105, 1-202, 1-205, 1-205; UCC 3-110, 3-116, 3-117, 3-118, 3-119 [1952];
UCC 3-107, 3-110, 3-114, 3-117 [1990]
ALR Digest: Bills and Notes 10 et seq., 23, 24, 30, 31; Payment 1 et seq.;
Principal and Agent 4, 19
6 Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 1General Provisions
1:18, 1:31;
3:17, 3:36-3:38, 3:40 through 3:43, 3:60, 3:62, 3:172, 3:190
18 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 1General Provisions
253:81-253:90 25
25 Am Jur POF2d 165, Bank's Liability for Payment of Check or Withdrawal on Less
Than Required Number of Signatures
6A Anderson, Uniform Commercial Code 3d [Rev] 3-114:4, 3-117:4
1. In General [126-134]
126 Generally; intention of parties
View Entire Section

A promissory note or other negotiable instrument must be construed to give effect to the
manifest intention of the parties 82 when that intention can be ascertained from the
language used. 83 As between the original parties, a promissory note is nothing more
than a written contract for the payment of money to which fundamental rules of contract
law are applicable, 84 including rules of contract construction. 85 Therefore, as is true
under the objective law of contracts more generally, a court construing a negotiable
instrument must determine what a reasonable person in the parties' position would have
meant. 86
Promissory notes must be viewed as a whole. 87 However, whether or not an

instrument is negotiable is a question of law to be determined solely from the face of the
instrument, without reference to the intent of the parties. 88
Footnotes
Footnote 82. Brownlow v Aman (CA10 Colo) 740 F2d 1476; Carpenter v Riley, 234 Kan
758, 675 P2d 900.
Footnote 83. Reed v Holder (5th Dist) 200 Ill App 3d 1052, 146 Ill Dec 748, 558 NE2d
711.
Footnote 84. Appliances, Inc. v Yost, 181 Conn 207, 435 A2d 1.
Promissory notes are a variety of contract and are to be so construed and enforced. Derry
Finance N.V. v Christiana Cos. (DC Del) 616 F Supp 544, affd (CA3 Del) 797 F2d 1210.

Where a note has not been negotiated to a holder in due course, it should be construed,
like any contract, according to the intention of the parties. Ligran, Inc. v Medlawtel, Inc.,
86 NJ 583, 432 A2d 502, 32 UCCRS 166.
Footnote 85. First Nat'l Bank & Trust Co. v Lygrisse, 231 Kan 595, 647 P2d 1268.
Except as otherwise provided by statute, a negotiable instrument is to be interpreted in

the same manner as an ordinary contract. Devenir Assocs. v City of Phoenix (App) 173
Ariz 314, 842 P2d 1327, 115 Ariz Adv Rep 35.
As to rules of contract construction, generally, see 17A Am Jur 2d, Contracts 336 et
seq.
Footnote 86. Jenkins v Karlton, 329 Md 510, 620 A2d 894, 22 UCCRS2d 769.
The intention of the parties must be ascertained by a reasonable construction of the

language employed. Morton v Ansin (Fla App D3) 129 So 2d 177.
In construing loan documents, a court must give effect to the objective intention of the
parties as expressed in the written instruments. Woodcrest Associates, Ltd. v
Commonwealth Mortg. Corp. (Tex App Dallas) 775 SW2d 434, writ den (Jan 24, 1990)
and rehg of writ of error overr (Feb 28, 1990).
Footnote 87. International City Bank & Trust Co. v Morgan Walton Properties, Inc.
(CA5 Fla) 675 F2d 666, cert den 459 US 1017, 74 L Ed 2d 511, 103 S Ct 379.

710 F Supp 737, 9 UCCRS2d 145.
127 Rules of construction
View Entire Section

A note must be construed so as to give effect to all of its provisions 89 and, to the extent
possible, a court must attempt to read all of the provisions of the note as being
compatible. 90 Consequently, in making its determination as to the intention of the
parties, the court will look to the whole instrument and not to particular provisions to
ascertain the intention of the parties to it. 91
If there are no ambiguities in the terms of a note, the intention of the parties is to be
ascertained by the court as a question of law within the four corners of the instrument. 92
Plain and unambiguous language cannot be varied by the court, 93 and the words used in
a negotiable instrument are to be given their ordinary and natural meaning, unless there is
some apparent necessity for a different construction. 94 To give words any forced or
unusual meaning, different from that which is given them in normal business usage,
would be to defeat the intention of the parties. 95 Under the Uniform Commercial
Code, a course of dealing between the parties and any usage of trade in the vocation or
trade in which they are engaged, or of which they are or should be aware, give particular
meaning to and supplement or qualify the terms of an agreement. 96 Technical legal
phrases may be presumed to have been used in their technical sense, 97 but the technical
legal meaning of a word may be disregarded where the intention of the parties is not in
accord therewith. 98
When the instrument is complete within itself and is not ambiguous or uncertain in its
meaning, the intention of the maker and the legal effect of the terms used should be
determined by the court from an inspection of the instrument itself 99 rather than from
surrounding facts and circumstances. 1 In the absence of fraud, duress, or mistake, parol
evidence is not admissible to show the intention of the parties or to vary, alter, or
contradict the terms of a contract which is phrased in clear and unambiguous language. 2
However, the construction of a note by the parties thereto may be resorted to in the
clarification of any ambiguous terms. 3 Moreover, any ambiguity in a negotiable
instrument, such as a promissory note may properly be construed against the party which
prepared it. 4
Footnotes
Footnote 89. Amarillo Nat'l Bank v Dilday (Tex App Amarillo) 693 SW2d 38, 41
UCCRS 1326, 58 ALR4th 623.
Footnote 90. In re PCH Assoc. (BC SD NY) 122 BR 181.
Footnote 91. Blackshear Mfg. Co. v Fralick, 88 Fla 589, 102 So 753.
Footnote 92. Rouggly v Whitman (Mo App) 592 SW2d 516.
Footnote 93. Keller v Llewellyn, 175 Mont 164, 573 P2d 166.
In ascertaining the intention of the parties, the court should not inquire as to what the
parties meant to say, but should ascertain the meaning of what they did say. Echols v
Professional Financial Associates, Inc. (Tex Civ App Texarkana) 607 SW2d 292, writ ref
n r e (Feb 4, 1981).
Footnote 94. Barrett v Vaughan & Co., Bankers, 163 Va 811, 178 SE 64.
Footnote 95. International Finance Corp. v Calvert Drug Co., 144 Md 303, 124 A 891,
33 ALR 1162.
As to statutory rules of construction, see 128.
Footnote 97. Wolfe v Schuster (Tex Civ App Dallas) 591 SW2d 926, 10 ALR4th 888.
Footnote 98. Waldo Bros. Co. v Downing, 131 Me 410, 163 A 787 (holding that the word
"countersigned" prefacing a signature was used without thought as to its technical
meaning).

Footnote 99. Gendzier v Bielecki (Fla) 97 So 2d 604.
Footnote 1. Robert C. Roy Agency, Inc. v Sun First Nat'l Bank (Fla App D4) 468 So 2d
399, 10 FLW 1064, review den (Fla) 480 So 2d 1295.
Footnote 2. Jenkins v Karlton, 329 Md 510, 620 A2d 894, 22 UCCRS2d 769.
Footnote 3. Bennett v Williams, 149 Fla 4, 5 So 2d 51; Morton v Ansin (Fla App D3) 129
So 2d 177.
Footnote 4. Century Nat'l Bank v Williams (Fla App D1) 422 So 2d 1065; Norton v
Hutton, 172 Ga App 836, 324 SE2d 744; Corbin Deposit Bank & Trust Co. v Mullins
Enterprises, Inc. (Ky App) 641 SW2d 760, 34 UCCRS 1201; Whitney Nat'l Bank v
Derbes (La App 4th Cir) 436 So 2d 1185, cert den (La) 441 So 2d 1220 and cert den 466
US 938, 80 L Ed 2d 460, 104 S Ct 1912 and (criticized on other grounds by First
Acadiana Bank v Bieber (La App 3d Cir) 562 So 2d 1025).
The rule of construction that an ambiguity must be construed against the drafter of the
note should be employed as a last resort when no other information is available to shed
light on the actual intent of the parties. St. Louis Realty Fund v Mark Twain South
County Bank 21 (Mo App) 651 SW2d 568.
The rule that ambiguities in a note are to be construed against the preparer is to be
applied only where the note is still ambiguous after the ordinary rules of construction
have been applied. First Nat'l Bank v Clark, 226 Kan 619, 602 P2d 1299.
128 --Statutory rules
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the following rules
of construction apply to every instrument:
(1) where there is doubt as to whether an instrument is a draft or note, the holder may
treat it as either; 5
(2) handwritten terms control over typewritten and printed terms, and typewritten terms
prevail over printed terms; 6 and
(3) words control over figures, except that if the words are ambiguous, the figures
control. 7 Under both the pre-1990 version of the UCC and the 1990 Revision, unless
otherwise specified, a provision for interest means interest at the judgment rate at the
place of payment from the date of the instrument or from the date of issue of an undated
instrument. 8
Under the 1990 Revision of the UCC, as under the similar provision of the pre-1990
version, an instrument which falls within the definition of both a note and a draft may be
treated as either by the person entitled to enforce the instrument. 9 If an instrument
contains contradictory terms, typewritten terms prevail over printed terms, handwritten
terms prevail over both, and words prevail over numbers. 10
Observation: In the rare case in which application of the foregoing hierarchy rules
will not resolve an internal contradiction in an instrument, the law predating the
Uniform Commercial Code should be applied or the contradiction should be removed
by reformation of the document; if the instrument cannot be reformed and there is an
irreconcilable conflict between two material terms, the conclusion would normally be
that the writing has no effect. 11
A course of dealing between the parties and any usage of trade in the vocation or trade in
which they are engaged, or of which they are or should be aware, give particular meaning
to and supplement or qualify the terms of an agreement. 12 The express terms of an
agreement and an applicable course of dealing or usage of trade are to be construed,
wherever reasonable, as consistent with each other; but when such a construction is
unreasonable, the express terms control over both the parties' course of dealing and usage
of trade and any course of dealing prevails over usage of trade. 13
Footnotes
Footnote 5. UCC 3-118(a) [1952].
Footnote 6. UCC 3-118(b) [1952].
A note containing typewritten terms stating that is was payable "on demand" was
unquestionably a demand note, notwithstanding printed language in the note which was
asserted to be inconsistent with the term "on demand," since the typewritten provisions of
a note prevail over printed provisions. Henning Constr. v First E. Bank & Trust Co. (La
App 4th Cir) 635 So 2d 273, 25 UCCRS2d 120, dissenting op at (La App 4th Cir) 1994
La App LEXIS 1467 and cert den (La) 642 So 2d 870 (noting similar provisions of the
1990 Revision of the UCC, effective in Louisiana as of January 1, 1994).
Impressions made by a check imprinter on a check are not "printed" terms, under the
statute providing that typewritten terms prevail over printed terms in the event of an
ambiguity between them. St. Paul Fire & Marine Ins. Co. v State Bank of Salem (Ind
App) 412 NE2d 103, 30 UCCRS 557.
Footnote 7. UCC 3-118(c) [1952].
Forms: Instruction to juryEffect of contradictory terms in instrument. 6A Am Jur Pl

Footnote 8. 118.

Footnote 12. 127.
129 Effect of custom or usage
View Entire Section

Since the law merchant is founded on custom and usage and is designed to be in aid of
trade and commerce, 14 and since one of the underlying purposes and policies of the
Uniform Commercial Code is to permit the continued expansion of commercial practices
through custom, usage, and agreement of the parties, 15 a course of dealing between
parties, and any usage of trade in the vocation or trade in which they are engaged or of
which they are or should be aware, give particular meaning to, and supplement and
qualify terms of, an agreement. 16 The express terms of an agreement and an
applicable course of dealing or usage of trade must be construed, wherever reasonable, as
consistent with each other; but when such construction is unreasonable, express terms
control both course of dealing and usage of trade, and course of dealing controls usage of
trade. 17
Evidence of a well-established industry custom is relevant to aid the court in determining

the intent of the contracting parties. 18 However, a custom must be general and well
settled, and not contrary to law or reason, if it is to be presumed that the parties
contracted with reference to it. 19 Moreover, a local usage can never be set up to
contradict a rule of law merchant or of the common law, 20 although a custom may be
shown in contradiction of a common-law rule applicable in the absence of such custom or
usage, where no statute and no decision of the court has established the rule. 21 A
custom relied upon to take the place of a settled principle of law, and therefore, to have
the force of law, ought to be as definite and specific in negativing the principle as the law
which it assumes to supplant is in affirming it. 22
Footnotes
Footnote 14. 3.
Footnote 15. UCC 1-102(2)(b).
A usage of trade is any practice or method of dealing having such regularity of

observance in a place, vocation, or trade as to justify an expectation that it will be
observed with respect to the transaction in question; the existence and scope of such a
usage are to be proved as facts. UCC 1-205(2).
As to the effect of custom or usage on banking transactions, generally, see 21A Am Jur
2d, Customs and Usages 14.
Forms: Complaint, petition, or declarationAllegationApplication of trade usages. 6

Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 1General Provisions
1:18.
Instruction to jury"Course of dealing" definedEffect on construction of agreement. 6

Am Jur Pl & Pr Forms (Rev), Uniform Commercial Code : Article 1General
Provisions 1:31.
Contract provisions as to binding effect of course of dealing or usage of trade. 18 Am

Jur Legal Forms 2d, Uniform Commercial Code: Article 1General Provisions
253:81-253:86.
Contract provisions excluding course of dealing or usage of trade. 18 Am Jur Legal

Forms 2d, Uniform Commercial Code: Article 1General Provisions
253:87-253:90.
Footnote 18. Sonfast Corp. v York Int'l Corp. (MD Pa) 875 F Supp 1088, 24 UCCRS2d
811, findings of fact/conclusions of law (MD Pa) 875 F Supp 1099, 27 UCCRS2d 814
and affd without op (CA3 Pa) 74 F3d 1227; Intratex Gas Co. v Puckett (Tex App El
Paso) 886 SW2d 274.
Footnote 19. Jarrard v Associates Discount Corp. (Fla) 99 So 2d 272 (ovrld on other
grounds as stated in Lumbermens Mut. Casualty Co. v Alvarez (Fla App D3) 443 So 2d
279) and (ovrld on other grounds as stated in Progressive American Ins. Co. v Kurtz (Fla
App D5) 518 So 2d 1339, 13 FLW 1).
As to the admissibility of evidence of custom or usage, see 21A Am Jur 2d, Customs and
Usages 38 et seq.
Footnote 20. Security Bank of New York v National Bank of Republic, 67 NY 458.
Footnote 22. President & Directors of Manhattan Co. v Morgan, 242 NY 38, 150 NE
594.
130 Memoranda or marginal notations
View Entire Section

As a general rule, memoranda or marginal notations placed on a note or draft at the time
of its execution, with the intention of making them a part of the contract constitute part of
the instrument, and must be construed, along with the body of the instrument to arrive at
the true agreement of the parties. 23 Such memoranda may appear at any place on the
same paper as the body of the instrument, 24 and may relate to various matters, such as
the purpose for which the instrument was given, 25 the medium of payment, 26 the
fund for payment, 27 or the time of payment. 28 However, a notation made merely for
the purpose of convenience, indexing, or identification will not affect the contract, 29
and a notation not intended to become part of the contract or made after the execution of
the instrument will not be construed as part thereof. 30
A marginal notation may be intended to limit, qualify, or alter the obligation expressed in
the body of an instrument, as where the body of a note states that it is payable on demand
but a due date is noted in the margin; in such a case, the instrument may be found to be
due on the stated date rather than on demand. 31 Similarly, a time for payment stated in
a memorandum which is different from that fixed in the body of an instrument is a part of
the contract and may be considered in determining its meaning and effect. 32
Footnotes
Footnote 23. Verner v White, 214 Ala 550, 108 So 369; Stephens v Smith, 233 Ark 417,
345 SW2d 10; Baucom v Friend (Mun Ct App Dist Col) 52 A2d 123; Hodson v
Scoggins, 102 Ga App 44, 115 SE2d 715; Bradford v Sturman, 86 Idaho 178, 384 P2d
64; In re Fedlman's Estate, 387 Ill 568, 56 NE2d 405, 155 ALR 210; In re Smith's Estate,
244 Iowa 866, 58 NW2d 378; Kline v McElroy (Mo App) 296 SW2d 664; Tanners Nat'l
Bank v Lacs, 136 App Div 92, 120 NYS 669; Swanson v Sanders, 75 SD 40, 58 NW2d
809; Banking Com. v Townsend, 243 Wis 329, 10 NW2d 110.
Footnote 24. City Bank Farmers Trust Co. v Kiamie (Sup) 32 NYS2d 181.
Footnote 25. Scholbe v Schuchardt, 292 Ill 529, 127 NE 169, 13 ALR 247; Clanin v
Esterly Harvesting-Machine Co., 118 Ind 372, 21 NE 35.
Footnote 26. Polo Mfg. Co. v Parr, 8 Neb 379, 1 NW 312.
Footnote 27. Adcock v Mandeville Mills, 182 Ga 244, 185 SE 288.
Footnote 28. In re Fedlman's Estate, 387 Ill 568, 56 NE2d 405, 155 ALR 210.
Footnote 29. Hollen v Davis, 59 Iowa 444, 13 NW 413.
Footnote 30. Danforth v Sterman, 165 Iowa 323, 145 NW 485; Fales v Wilson, 121 Me
207, 116 A 268, 22 ALR 553; Theopold Mercantile Co. v Deike, 76 Minn 121, 78 NW
977.
Footnote 31. Whittier v First Nat'l Bank, 73 Colo 153, 214 P 536; Baucom v Friend (Mun
Ct App Dist Col) 52 A2d 123.
Footnote 32. Bradford v Sturman, 86 Idaho 178, 384 P2d 64 (stating that a marginal
notation which indicates a due date later than that set forth in the body of the note and
which appears to have been typed in the same type as that used in filling in the blanks of
the instrument will be presumed, in the absence of a contrary showing, to have been on
the note at the time of its execution).

131 Effect of contemporaneous written agreement
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), as between the
obligor and his or her immediate obligee or any transferee, the terms of an instrument
may be modified or affected by any other written agreement executed as part of the same
transaction. 33 Although a note and separate written agreement which are part of the
same transaction may refer to each other, or one of the documents may incorporate terms
of the other, it is not necessary that this be true in order for the terms of the note to be
modified or affected; a note and a separate agreement are part of the same transaction,
even when they have not been executed together, if the transaction cannot be understood
without interpreting them together. 34
Comments: The separate writing is most commonly an agreement creating or

providing for a security interest such as a mortgage, chattel mortgage, conditional sale,
or pledge; however, it may be any type of contract, including an agreement that the
note is not to be paid upon the occurrence of certain conditions 35 or even an
agreement that contradicts the terms of the instrument itself. 36
As between the immediate parties to a note, a mortgage and other documents executed
contemporaneously with the note at a real estate closing can be considered in determining
the meaning of the note. 37 Thus, a promissory note given to pay a real estate agent's
commission is properly construed together with the vendee's earnest money receipt and
the sales agreement between the vendor and vendee, where those other documents have
been executed as part of the same transaction and contain terms dealing with the
commission. 38 Likewise, where a draft and deed are contemporaneously exchanged,
they likewise, must be construed together. 39 On the other hand, commercial paper and
another document executed at the same time will not be construed as one instrument
when it was the intention of the parties that they be separate. 40
Under the 1990 Revision of the UCC, subject to applicable law regarding the exclusion
of contemporaneous or previous agreements, the obligation of a party to a negotiable
instrument to pay the instrument may be modified, supplemented, or nullified by a
separate agreement of the obligor and a person entitled to enforce the instrument, if the
instrument is issued or the obligation is incurred in reliance on the agreement or as part of
the same transaction giving rise to the agreement; to the extent an obligation is so
modified, supplemented, or nullified, the separate agreement is a defense to the
obligation. 41
Observation: Unlike under the pre-1990 version of the UCC, the other agreement to
which reference is made in Section 3-117 of the 1990 Revision may be either oral or
written; the only restriction that is imposed is that the instrument must have been
issued or the obligation incurred in reliance on the separate agreement, or as part of the
same transaction giving rise to the agreement. 42

Footnotes
Footnote 33. UCC 3-119(1) [1952].
Forms: Instruction to juryEffect of execution of other writings affecting instrument.

Instruments 3:62.
Footnote 34. Jenkins v Karlton, 329 Md 510, 620 A2d 894, 22 UCCRS2d 769 (holding
that a confirmatory letter written by the promisee some four months after the note's
execution, although affecting the note by purporting to preclude a demand on it for at
least one year, did not purport to modify the demand character of the note).
Footnote 37. Edward A. Kemmler Memorial Foundation v 691/733 East

Dublin-Granville Rd. Co., 62 Ohio St 3d 494, 584 NE2d 695, 17 UCCRS2d 489.
Where there was a conflict between a deed of trust and an accompanying promissory
note, the typewritten language of the note prevailed over the printed terms of the deed.
Moss v McDonald (Colo App) 772 P2d 626, 8 UCCRS2d 1125 (criticized on other
grounds by Matthews v Saleen (Colo App) 812 P2d 1186, 15 UCCRS2d 1255).
A note and the mortgage given to secure its repayment may be construed together to
ascertain the nature and extent of the creditor's remedies upon default. Mellor v
Goldberg (Fla App D2) 658 So 2d 1162, 20 FLW D1740.
The primary rule in interpreting a promissory note and accompanying mortgage is to

determine the intention of the parties, and that intention should be determined from an
examination of both documents rather than from each one separately. Mark Twain
Kansas City Bank v Cates, 248 Kan 700, 810 P2d 1154.
A limitation of liability agreement which was executed contemporaneously with a note

and was part of the same loan transaction was effective as between the initial parties to
the transaction. Commerce Sav. Asso. v GGE Management Co. (Tex Civ App Houston
(1st Dist)) 539 SW2d 71, mod on other grounds (Tex) 543 SW2d 862, rehg of cause
overr (Dec 31, 1976).
Footnote 38. Evenson v Hlebechuk (ND) 305 NW2d 13, 32 UCCRS 154.
Footnote 39. Sun Exploration & Production Co. v Benton (Tex) 728 SW2d 35, 93 OGR
600, rehg of cause overr (May 13, 1987).
Footnote 40. First Nat'l Bank v Jarnigan (Tex App Amarillo) 794 SW2d 54, writ den
(Dec 12, 1990) and rehg of writ of error overr (Feb 6, 1991).
UCC 3-119 does not require that a prior agreement must be read into a later negotiable

instrument, and is not to be so read when it is clear that the later instrument was not to be
subject to the former agreement. Waller, Lansden, Dortch, & Davis v Haney (Tenn) 851
SW2d 131, 21 UCCRS2d 301.
Footnote 41. UCC 3-117 [1990 Revision].
132 --Effect of integration clause; parol evidence rule
View Entire Section

An integration clause in a promissory note excludes any other writing when there is no
reason to set aside the integration clause for mistake, or on the ground that it was not
intended by the parties. 43
Comment: The effect of merger or integration clauses providing that a writing is

intended to be the complete and exclusive statement of the terms of the agreement, or
that the agreement is not subject to conditions, is left to the supplementary law of the
jurisdiction. 44
The parol evidence rule does not bar proof of contemporaneous written agreements. 45
Consequently, parol evidence is admissible to establish that different instruments were
executed as part of the same transaction. 46 However, the parol evidence rule may be
invoked to bar admission of prior or collateral oral agreements which contradict the
express terms of a written instrument; the rule likewise, will bar proof of an oral
agreement which purports to show that an obligation evidenced by a note is conditional
despite the fact that the note is absolute on its face. 47
Footnotes
Footnote 43. Henning Constr. v First E. Bank & Trust Co. (La App 4th Cir) 635 So 2d
273, 25 UCCRS2d 120, dissenting op at (La App 4th Cir) 1994 La App LEXIS 1467 and
cert den (La) 642 So 2d 870.
Footnote 44. Official Comment 2 to UCC 3-117 [1990 Rev], referring to UCC 1-103.
Footnote 45. Port Distrib. Corp. v Pflaumer (SD NY) 880 F Supp 204, 33 CBC2d 921, 28
UCCRS2d 235, affd (CA2 NY) 70 F3d 8, 28 UCCRS2d 248.
Footnote 46. Basu v Stelle (2d Dist) 237 Ill App 3d 113, 177 Ill Dec 879, 603 NE2d
1253.
Footnote 47. Thomas v First Nat'l Bank (1st Dist) 134 Ill App 3d 192, 89 Ill Dec 8, 479
NE2d 1014.

133 --Effect on holder in due course and negotiability
View Entire Section

A holder in due course is not affected by any limitation of rights arising out of a separate
agreement if he or she had no notice of the limitation at the time the instrument was
taken. 48 Furthermore, a separate agreement does not affect the negotiability of an
instrument 49 that is negotiable on its face. 50
Comment: The negotiability of an instrument is always to be determined by what

appears on the face of the instrument alone, and if it is negotiable in itself, a purchaser
without notice of a separate writing is in no way affected by it. 51
Footnotes
Footnote 48. UCC 3-119(1) [1952].
Footnote 49. UCC 3-119(2) [1952].
Footnote 50. Burns v Resolution Trust Corp. (Tex App Houston (14th Dist)) 880 SW2d
149, 24 UCCRS2d 563.
If an instrument states that it is subject to or governed by another agreement, it is not

negotiable; but, if the instrument merely refers to a separate agreement or states that it
arises out of such an agreement, its negotiability is not affected. Northwestern Bank v
Neal, 271 SC 544, 248 SE2d 585, 25 UCCRS 487.
134 Instrument payable in foreign money
View Entire Section

Unless the instrument otherwise provides, an instrument that states the amount payable in
foreign money may be paid in the foreign money or in an equivalent amount in dollars
calculated by using the current bank-offered spot rate at the place of payment for the
purchase of dollars on the day on which the instrument is paid. 52
Comment: The comparable section of the pre-1990 version of Article 3 also

provides that an instrument is payable in money if the medium of exchange in which it
is payable is money at the time the instrument is made, and that an instrument payable
in "currency" or "current funds" is payable in money; 53 however, the 1990 version
omits the reference to instruments payable in "currency" or "current funds" as
superfluous. 54
Footnotes
Footnote 52. UCC 3-107 [1990 Rev]
Forms: Instruction to juryPayment of sum stated in foreign currency satisfied by

payment of equivalent sum in dollars. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Footnote 53. UCC 3-107(1) [1952].
2. Identification of Person To Whom Instrument Is Payable [135-137]
135 Generally
View Entire Section

The person to whom an instrument is initially payable is determined by the intent of the
person, whether or not authorized, signing as, or in the name or behalf of, the issuer of
the instrument. 55 The instrument is payable to the person intended by the signer,
even if that person is identified in the instrument by a name or other identification that is
not that of the intended person. 56 If more than one person signs in the name or behalf
of the issuer of an instrument, and all the signers do not intend the same person as payee,
the instrument is payable to any person intended by one or more of the signers. 57
If the signature of the issuer of an instrument is made by automated means, such as a

check-writing machine, the payee of the instrument is determined by the intent of the
person who supplied the name or identification of the payee, whether or not authorized to
do so. 58
Footnotes
Forms: Complaint, petition, or declarationAllegationMaker did not intend payee to

have any interest in instrument. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :

AnswerDefenseChange in name of payee. 6A Am Jur Pl & Pr Forms (Rev),

Instructions to juryIdentification of person to whom instrument payable. 6A Am Jur

Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments
3:36-3:38.
136 Particular identifications
View Entire Section

A person to whom an instrument is payable may be identified in any way, including by

name, identifying number, office, or account number. 59
For purposes of determining the holder of an instrument
if an instrument is payable to an account, and the account is identified only by number,

the instrument is payable to the person to whom the account is payable. 60
if an instrument is payable to an account identified by number and by the name of a

person, the instrument is payable to the named person, whether or not that person is the
owner of the account identified by number. 61
if an instrument is payable to a trust, an estate, or a person described as trustee or

representative of a trust or estate, the instrument is payable to the trustee, the
representative, or a successor of either, whether or not the beneficiary or estate is also
named. 62
if an instrument is payable to a person described as agent or similar representative of a

named or identified person, the instrument is payable to the represented person, the
representative, or a successor of the representative. 63
if an instrument is payable to a fund or organization that is not a legal entity, the

instrument is payable to a representative of the members of the fund or organization. 64
if an instrument is payable to an office or to a person described as holding an office, the

instrument is payable to the named person, the incumbent of the office, or a successor to
the incumbent. 65

Footnotes
Footnote 60. UCC 3-110(c)(1) [1990 Rev].
Footnote 62. UCC 3-110(1)(e) [1952]; UCC 3-110(c)(2)(i) [1990 Rev].
Footnote 63. UCC 3-117 [1952]; UCC 3-110(c)(2)(ii) [1990 Rev].
Footnote 64. UCC 3-110(1)(e) [1952]; UCC 3-110(c)(2)(iii) [1990 Rev].
Footnote 65. UCC 3-110(1)(f) [1952]; UCC 3-110(c)(2)(iv) [1990 Rev].
137 Instrument payable to two or more persons
View Entire Section

If an instrument is payable to two or more persons alternatively, it is payable to any of

them and may be negotiated, discharged, or enforced by any or all of them in possession
of the instrument. 66
If an instrument is payable to two or more persons not alternatively, it is payable to all of

them and may be negotiated, discharged, or enforced only by all of them. 67
The purpose of this provision is to protect the interest of all the parties entitled to
payment and to enable all such parties to receive payment without subjecting the maker
to multiple liability. 68
If an instrument payable to two or more persons is ambiguous as to whether it is payable

to the persons alternatively, the instrument is payable to the persons alternatively. 69
Footnotes
Footnote 66. UCC 3-116 [1952]; UCC 3-110(d) [1990 Rev].
Forms: Complaint, petition, or declarationAllegationInstrument payable to alternate

payees. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:42.
Footnote 67. UCC 3-116 [1952]; UCC 3-110(d) [1990 Rev].
Annotation: Bank's liability to nonsigning payee for payment of check drawn to joint
payees without obtaining indorsement by both, 47 ALR3d 537.
Practice References Proof that bank was negligent resulting in payment of checks
with less than the required number of signatures. 25 Am Jur POF2d 165, Bank's
Liability for Payment of Check or Withdrawal on Less Than Required Number of
Signatures 6-27.
Forms: Complaint, petition, or declarationBy joint payee whose indorsement was

forgedAgainst collecting bank. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Complaint, petition, or declarationBy joint payee whose indorsement was not

obtainedAgainst payor bank. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Footnote 68. McHenry County Credit Co. v Feuerhelm (CA8 Neb) 720 F2d 525, 37
UCCRS 803; Schranz v I. L. Grossman, Inc. (1st Dist) 90 Ill App 3d 507, 45 Ill Dec 654,
412 NE2d 1378, 30 UCCRS 1299.
Forms: Instruction to juryInstrument payable to two or more persons. 6A Am Jur Pl

K. Operation of Instrument [138-140]
Research References
UCC 3-409, 3-802 [1952]; UCC 3-310, 3-408 [1990]; UCC 9-102, 9-105
ALR Digest: Bills and Notes 226 et seq.
6A Anderson, Uniform Commercial Code 3d [Rev] 3-310:4
3:64; 19A Am Jur Pl & Pr Forms (Rev), Payment, Form 53
138 Instrument as evidence of debt; as property
View Entire Section

A draft or note, generally, is considered to be mere evidence of an indebtedness, rather

than the debt itself. 70 However, to a certain extent, the debt is inseparable from the
paper which declares and constitutes it. 71
An instrument which remains in the hands of the maker or drawer, 72 and has not been
delivered to the payee, is not property. 73 However, after negotiation the paper becomes
intangible 74 personal 75 property. 76

Comment: A negotiable instrument is the property of the holder, and a refusal to
return it on demand is a conversion. 77
Negotiable instruments are property which can serve as collateral under Article 9 of the
Uniform Commercial Code, 78 since that article applies to any transaction which is
intended to create a security interest in personal property, including instruments, 79 and
the term "instrument" includes a negotiable instrument. 80
Footnotes
Footnote 70. Industrial Bank of Commerce v Shapiro, 276 App Div 370, 94 NYS2d 437,
app dismd 300 NY 741, 92 NE2d 317 and affd 302 NY 566, 96 NE2d 619; In re Miller's
Estate, 189 Or 246, 218 P2d 966.
As to the effect of an instrument on the obligation for which it is given, see 139.
Footnote 71. First Trust Co. v Matheson, 187 Minn 468, 246 NW 1, 87 ALR 478
(analogizing a bearer bond to the container in which the property right in the debt
reposes).
Footnote 72. Helvering v Stein (CA4) 115 F2d 468, 40-2 USTC 9782, 25 AFTR 1007.
Footnote 73. Reese v State, 192 Miss 147, 5 So 2d 236 (holding that checks remain the
property of the drawer until there is a valid delivery to, and acceptance by, the payee);
Erskine v Nemours Trading Corp., 239 NY 32, 145 NE 273 (holding that acceptance of
delivery of a draft is necessary to create property for attachment).
Footnote 74. Bullen v Wisconsin, 240 US 625, 60 L Ed 830, 36 S Ct 473, 3 AFTR

2944.
Footnote 75. Helvering v Stein (CA4) 115 F2d 468, 40-2 USTC 9782, 25 AFTR 1007.
Footnote 76. Graves, Inc. v Commissioner (CA5 Miss) 202 F2d 286, 53-1 USTC
66050, 43 AFTR 411, cert den 346 US 812, 98 L Ed 340, 74 S Ct 21; International
Firearms Co. v Kingston Trust Co., 6 NY2d 406, 189 NYS2d 911, 160 NE2d 656.
Footnote 78. UCC 9-101 et seq.
Footnote 79. UCC 9-102(1)(a).
Footnote 80. UCC 9-105(i).
139 Instrument as payment
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), where an
instrument is taken for an underlying obligation, unless otherwise agreed, the obligation
is pro tanto discharged if a bank is drawer, maker, or acceptor of the instrument and there
is no recourse on the instrument against the underlying obligor. 81 Thus, where a
teller's check is taken as payment, the underlying obligation is discharged, even though
the issuing bank stops payment on the check; 82 in such a case, the bank becomes liable
in an action on the check, because the underlying obligation had been discharged. 83 In
any other case where an instrument is taken for an underlying obligation, unless
otherwise agreed, the obligation is suspended pro tanto until the instrument is due or, if it
is payable on demand, until its presentment; however, if the instrument is dishonored, an
action may be maintained on either the instrument or the obligation. 84
Observation: The delivery of an instrument may cause either a discharge or a

suspension of the underlying debt; the significance of a discharge is that the obligation
remains discharged, even though the instrument is subsequently dishonored, whereas in
the case of suspension, the obligation is merely suspended until the instrument is either
honored or dishonored. 85
Under the similar provisions of the 1990 Revision of the UCC, unless otherwise agreed,
the obligation is discharged by the taking of a note or check to the same extent that
discharge would result if money equal to the amount of the instrument were taken in
payment of the obligation. 86 In the case of an uncertified check, suspension of the
obligation continues until dishonor of the check, or until it is paid or certified, and
payment of the check results in the discharge of the obligation to the extent of the amount
of the check. 87 In the case of a note, suspension of the obligation continues until
dishonor of the note or until it is paid, and payment likewise discharges the obligation to
the extent of the payment. 88
Comment: Under the pre-1990 version of the UCC, the obligation is not discharged
if there is a right of recourse on the instrument against the obligor; under the 1990
Revision of the UCC, by comparison, the underlying obligation is discharged in such a
case, but any right of recourse on the instrument is preserved. 89
As between the drawer and payee, the tender of a check is the drawer's acknowledgment
that a debt to the payee exists, combined with a promise to pay the stated amount if the
drawee does not honor the check; while the tender and passage of the check suspends the
underlying payment obligation pro tanto, it does not impact in any other way on the
contractual relationship between the drawer and the payee. 90 When a check or note
received by the obligee of the underlying obligation has been dishonored and the obligee
is the person entitled to enforce the instrument, the obligee therefore may either enforce
the instrument or the underlying obligation. 91 However, if the person entitled to
enforce the instrument taken for an obligation is a person other than the obligee, the
obligee may not enforce the obligation to the extent that has been suspended. 92
Likewise, if the obligee is entitled to enforce an instrument, but no longer has possession
of it because it was lost, stolen, or destroyed, the obligee may not enforce the obligation
to the extent of the amount payable on the instrument; to that extent, the obligee is
limited to suit on the instrument. 93

Footnotes
Footnote 81. UCC 3-802(1)(a) [1952].
Annotation: Account stated based upon check or note tendered in payment of debt, 46
ALR3d 1325.
Buyer's note as payment within contemplation of statute of frauds, 81 ALR2d 1355.
Forms: AnswerDefenseObligation for which check given discharged by payment.

Instruments 3:64.
AnswerDefensePayment by draft. 19A Am Jur Pl & Pr Forms (Rev), Payment,

Form 53.
Footnote 82. Malphrus v Home Sav. Bank, 44 Misc 2d 705, 254 NYS2d 980, 2 UCCRS
373.
Footnote 83. Fur Funtastic, Ltd. v Kearns (Sup App T) 120 Misc 2d 794, 467 NYS2d
499, 41 UCCRS 862.
Footnote 84. UCC 3-802(1)(b) [1952].
Where the circumstances of the case indicated that the parties had implicitly agreed that
the acceptance of uncertified checks was to be considered as an absolute, rather than a
conditional, payment of the purchase price, the obligation to pay the purchase price was
discharged. Burnett v Vance (Sup) 126 Misc 2d 402, 483 NYS2d 595.
Footnote 86. UCC 3-310(a), (b) [1990 Rev].
Footnote 87. UCC 3-310(b)(1).
The tendering and acceptance of a check in exchange for goods constitutes conditional
payment. In re Wegener (BC DC Neb) 186 BR 692, 27 UCCRS2d 923.
The acceptance of an instrument suspends the underlying obligation until the instrument
is either paid, which discharges the obligation, or until it is dishonored, which reimposes
the obligation. Harper v K & W Trucking Co. (Alaska) 725 P2d 1066, 2 UCCRS2d 556.
Footnote 88. UCC 3-310(b)(2).
Footnote 90. Check Control v Anderson (In re Anderson) (BC DC Minn) 181 BR 943, 33
CBC2d 967, CCH Bankr L Rptr 76539.
Footnote 91. UCC 3-310(b)(3) [1990 Rev].

140 Draft as assignment of fund
View Entire Section

A check or other draft does not of itself operate as an assignment of any funds in the
hands of the drawee available for its payment, and the drawee is not liable on the
instrument until the drawee accepts it. 94
Comment: While a check or draft does not of itself operate as an assignment in law
or equity, an assignment may appear from other facts or agreements; when the intent to
assign is clear, the check may be the means by which the assignment is effected. 95
A check or a draft is merely an order directed to the drawee to pay the payee from funds
of the drawer in its possession. 96 A check or draft, thus, does not by itself vest the
payee with any title to or interest in the funds held by the drawee. 97 While a payee may
call upon the drawee to pay over funds of the drawer in its possession, the payee obtains
no interest in those funds until the check is presented and the drawer accepts it. 98
Moreover, a check does not constitute an assignment to the payee of any funds of drawer
in the hands of the drawee even though it has been certified. 99
Footnotes
As to the liability of a drawee or acceptor, generally, see 446 et seq.
Footnote 96. Check Control v Anderson (In re Anderson) (BC DC Minn) 181 BR 943, 33
CBC2d 967, CCH Bankr L Rptr 76539.
Footnote 97. Klein v Tabatchnick (SD NY) 459 F Supp 707.
Footnote 98. United States v One Household Finance Check (DC Conn) 769 F Supp 69.
Footnote 99. Clinger v Clinger (Colo App) 503 P2d 363, 11 UCCRS 1026.
Since a check is not an assignment of the fund, a check held by a payee and drawn by a
bankrupt was subject to the drawee bank's setoff rights. Dube v Manufacturers Hanover
Trust Co. (1st Dept) 39 App Div 2d 684, 332 NYS2d 358, affd 33 NY2d 739, 349

NYS2d 1001, 304 NE2d 569.
III. CONSIDERATION [141-184]
Research References
UCC 3-105, 3-112 [1952]
ALR Digest: Bills and Notes 21, 32, 33
ALR Index: Bills and Notes; Consideration
Uniform Commercial Code: Article 3Negotiable Instruments 253:2283-253:2285
141 Generally
View Entire Section

A negotiable instrument is a simple contract, 1 and, as such, one of its essential

elements, as between the original parties, or one taking with notice of the facts, or after
maturity, 2 is a sufficient consideration. 3 A note for which there is no consideration
cannot be enforced. 4
Under Article 3 of the Uniform Commercial Code, a distinction exists between

"consideration" and "value." 5 While outside Article 3 anything that is consideration is
also value, a different rule applies under Article 3. 6 "Consideration" means any
consideration sufficient to support a simple contract, 7 and the lack of consideration in
the issuance of an instrument is a defense to the obligation to pay the instrument, 8
except as against a holder in due course. 9 "Value," on the other hand, is relevant to,
and has primary importance in cases involving the issue of whether a holder is a holder in
due course. 10 However, anything that constitutes value also constitutes consideration.
11
Footnotes
Footnote 1. C. I. T. Corp. v Panac, 25 Cal 2d 547, 154 P2d 710, 160 ALR 1285.
Footnote 2. Braly v Henry, 71 Cal 481, 12 P 623; Ager v Duncan, 50 Cal 325.
Footnote 3. Shipley Co. v Rosemead Co., 100 Cal App 706, 280 P 1017; Florida Nat'l
Bank & Trust Co. v Brown (Fla) 47 So 2d 748; Hamor v Moore's Adm'rs, 8 Ohio St 239.
It is the general rule that a promise to pay is still nothing but a promise reduced to writing
and called a promissory note, and that the delivery of a promissory note is nothing more

than the delivery of a promise and unenforceable for want of consideration. Hoodlett v
Hoodlett (App, Athens Co) 12 Ohio L Abs 577.
As to what constitutes consideration, generally, see 145 et seq.
As to the absence or failure of consideration, generally, see 159 et seq.
For a general discussion of consideration as an essential element to the validity of a

contract, see 17A Am Jur 2d, Contracts 113 et seq.
Forms: Provision in negotiable instrumentRecital of consideration received. 19 Am

253:2283-253:2285.
Footnote 4. Prudential Preferred Properties v J & J Ventures (Wyo) 859 P2d 1267.
Footnote 7. 145.
Footnote 9. 556.
Footnote 10. Official Comments 1 and 2 to UCC 3-303 [1990 Rev].
Annotation: Who is holder of instrument for "value" under UCC 3-303, 97 ALR3d
1114.
Footnote 11. 146.
142 Adequacy of consideration
View Entire Section

The law concerns itself only with the existence of legal consideration for a bill or note;
12 that is, it is concerned only with whether good consideration exists in the nature of a
benefit to the promisor or a detriment to the promisee, and it will not weigh the quantum
of detriment suffered by the promisee any more than it will weigh the quantum of benefit
received by the promisor. 13 As long as there is some consideration, the law will not
attempt to measure the amount. 14 Thus, the mere inadequacy of the consideration is
not within the concern of the law, 15 unless the inadequacy of the consideration is so
gross as to prove fraud or undue influence. 16

Footnotes
Footnote 12. Johnson Lumber & Supply Co. v Byron (Fla App D2) 113 So 2d 577.
Footnote 13. Whelan v Swain, 132 Cal 389, 64 P 560.
Footnote 14. Poggetto v Bowen, 18 Cal App 2d 173, 63 P2d 857.
As to the absence or failure of consideration, generally, see 159 et seq.
Footnote 15. Johnson Lumber & Supply Co. v Byron (Fla App D2) 113 So 2d 577; In re
Taylor's Estate, 251 NY 257, 167 NE 434.
Footnote 16. Wilbur v Griffins, 56 Cal App 668, 206 P 112; Earl v Peck, 64 NY 596;
Judy v Louderman, 48 Ohio St 562, 29 NE 181.
143 Recital of consideration
View Entire Section

Article 3 of the Uniform Commercial Code provides that the negotiability of an

instrument is not affected by the omission of a statement of any consideration. 17
However, in many instances, a recital of consideration will be set forth in an instrument,
and a promise or order, otherwise unconditional is not rendered conditional by the fact
that the instrument states its consideration, whether performed or promised. 18
Observation: These provisions 19 of the 1952 version of the Uniform Commercial

Code have been omitted in the 1990 Revision. The provision stating that a recital of
consideration does not render an otherwise unconditional instrument conditional 20
has been omitted, because it is unnecessary; the law is not changed in this regard. 21
Footnotes
Footnote 17. UCC 3-112(1)(a) [1952].
Footnote 18. UCC 3-105(1)(b) [1952].
Forms: Recital of consideration. 3B Am Jur Legal Forms 2d, Bills and Notes 41:43.
Provision in negotiable instrumentRecital of consideration received. 19 Am Jur Legal

Forms (Rev), Article 3Negotiable Instruments 253:2283-253:2285.
Footnote 19. UCC 3-105(1)(b) [1952], 3-112(1)(a) [1952].
Footnote 20. UCC 3-105(1)(b) [1952].

144 --Statutes requiring recital
View Entire Section

In some jurisdictions, statutes may require that promissory notes given in specified
transactions recite the consideration for which they are given. 22 Failure to comply
with such a statute may render the instrument void, 23 and some statutes specifically
provide to this effect. 24 However, there is authority that the note is not void in the
absence of such a statutory declaration, but merely subject to the defenses which would
have existed if the statutory words had been included. 25
Footnotes
Footnote 22. Hayter v Dinsmore, 125 Kan 749, 265 P 1112; McGovern v Kraus, 200
Wis 64, 227 NW 300, 67 ALR 1381.
Footnote 23. Yuncker v English, 121 Kan 425, 247 P 637.
Footnote 24. Williams v Layes, 168 Ark 675, 271 SW 11; Lawson v First Nat'l Bank, 31
Ky LR 318, 102 SW 324.
Footnote 25. Tod v Wick Bros. & Co., 36 Ohio St 370.
B. What Constitutes Consideration [145-158]
Research References
UCC 3-303 [1952]; UCC 3-303 [1990 Rev]
145 Generally
View Entire Section


Under the Uniform Commercial Code, "consideration" is defined as any consideration
sufficient to support a simple contract. 26 Thus, consideration for an instrument may
consist of a benefit to the promisor or a detriment to the promisee. 27 However, while
nothing is consideration that is not regarded as such by both parties, 28 the consideration
need not move from the promisee 29 nor be pecuniary or beneficial to the promisor. 30
Rather, it may consist of a benefit to a third person, 31 or a detriment incurred on such
person's behalf. 32
While the most common consideration for a bill or note is money loaned 33 or property
or goods sold, 34 consideration may also be found in the grant of a privilege, such as the
privilege of naming a child, 35 an inconvenience, 36 or some risk or trouble 37
incurred by the promisee at the instance of the promisor.
Footnotes
Any consideration which is sufficient to sustain an ordinary contract is sufficient for

commercial paper under Article 3 of the Uniform Commercial Code. Hallowell v Turner,
94 Idaho 718, 496 P2d 955, 10 UCCRS 1076 (applying UCC 3-408 [1952]); Rybak v
Dressler (2d Dist) 178 Ill App 3d 569, 127 Ill Dec 366, 532 NE2d 1375, app den 126 Ill
2d 566, 133 Ill Dec 677, 541 NE2d 1115 (applying UCC 3-408 [1952]).
As to the general principles concerning what constitutes consideration for a contract, see
17A Am Jur 2d, Contracts 126 et seq.
Footnote 27. Leach v Treber, 164 Neb 419, 82 NW2d 544; City Trust & Sav. Bank v
Schwartz (Mahoning Co) 68 Ohio App 80, 22 Ohio Ops 176, 39 NE2d 548, motion
overr.
Footnote 28. Stern v Franks, 35 Cal App 2d 676, 96 P2d 802; Dougherty v Salt, 227 NY
200, 125 NE 94; First Nat'l Bank v Chandler (Tex Civ App) 58 SW2d 1056, writ dism.
Footnote 29. Flores v Woodspecialties, Inc. (2nd Dist) 138 Cal App 2d 763, 292 P2d 626;
In re Pascal's Estate, 3 Misc 2d 136, 146 NYS2d 364.
Footnote 30. Kelley, Glover & Vale, Inc. v Heitman, 220 Ind 625, 44 NE2d 981, cert den
319 US 762, 87 L Ed 1713, 63 S Ct 1320; County Trust Co. v Mara, 242 App Div 206,
273 NYS 597, affd 266 NY 540, 195 NE 190.
Footnote 31. Benderson Dev. Co. v Hallaway Properties, Inc. (4th Dept) 115 App Div 2d
339, 495 NYS2d 820, affd 67 NY2d 963, 502 NYS2d 1001, 494 NE2d 106.
Footnote 32. Third Nat'l Bank & Trust Co. v Rodgers, 330 Pa 523, 198 A 320.
Footnote 33. Farmers' & Merchants' State Bank v Kuhn, 125 Neb 457, 250 NW 652;
Cohen v Warren, 238 App Div 841, 262 NYS 711.
Evidence that the plaintiffs executed a note in return for the defendants' loan to the
partnership constituted evidence of consideration. Wolfe v Eaker, 50 NC App 144, 272

SE2d 781, 30 UCCRS 574, cert den 302 NC 222, 277 SE2d 69.
Footnote 34. Bulger v Colonial House of Flushing, Inc., 281 App Div 847, 119 NYS2d
233.
Footnote 35. Gardner v Denison, 217 Mass 492, 105 NE 359.
Annotation: Validity and enforceability of contract in consideration of naming child,

21 ALR2d 1061.
Campbell v Jefferson, 296 Pa 368, 145 A 912, 63 ALR 1180.
Footnote 37. First Nat'l Bank v Hansbarger, 129 W Va 418, 40 SE2d 822.
146 Consideration as encompassing instruments issued for value
View Entire Section

Although Article 3 of the Uniform Commercial Code distinguishes between

"consideration" and "value," 38 an instrument that is issued for value, as defined by the
Code, 39 is also issued for consideration. 40 In the context of the issuing of an
instrument, therefore, anything that is value is also consideration. 41
For purposes of Article 3, an instrument is issued or transferred for value if:
(1) the instrument is issued or transferred for a promise of performance, to the extent the
promise has been performed;
(2) the transferee acquires a security interest or other lien in the instrument, other than a
lien obtained by judicial proceeding;
(3) the instrument is issued or transferred as payment of, or as security for, an antecedent
claim against any person, whether or not the claim is due;
(4) the instrument is issued or transferred in exchange for a negotiable instrument; or
(5) the instrument is issued or transferred in exchange for the incurring of an irrevocable
obligation to a third party by the person taking the instrument. 42
Observation: The 1990 Revision of this provision 43 of Article 3 of the Uniform

Commercial Code restates the substance of the prior version of this provision 44 of
Article 3 in specifying when an instrument is issued or taken for value. 45
Footnotes

Footnote 38. 141.
Footnote 44. UCC 3-303 [1952].
147 Past consideration
View Entire Section

As a general rule, past consideration is not consideration for a bill or note under
circumstances not creating liability. 46 However, if an instrument or an obligation
thereon is given in payment of, or as security for, an antecedent obligation, sufficient
consideration exists under the Uniform Commercial Code. 47
Footnotes
Footnote 46. Gooch v Gooch, 178 Iowa 902, 160 NW 333.
As to the application of this rule where personal services are rendered gratuitously or
without expectation of remuneration, whether because of a moral obligation or because of
friendship, see 152, 153.
Footnote 47. 148.
148 Antecedent obligation
View Entire Section

An instrument is issued or transferred for value, and thus, is issued for consideration, 48

when it is taken as payment of, or as security for, an antecedent claim against any person,
whether or not the claim is due 49 and whether or not, under contract law, the payee is
deemed to have given consideration for the note. 50 This provision is intended to apply,
in particular to an instrument given in payment of, or as security for, the debt of a third
person, even though no concession is made in return. 51
Under Article 3, therefore, a note which is given to consolidate several prior loans or
obligations is supported by sufficient consideration. 52 Consequently, where a person
executes a note to a bank renewing earlier notes which were given to extinguish a prior
indebtedness to the bank, such person cannot avoid liability on the renewal note on the
ground that there was no consideration. 53
Footnotes
Footnote 48. 146.
No consideration is necessary for an instrument or obligation thereon given in payment

of, or as security for, an antecedent obligation of any kind. UCC 3-408 [1952].
Professional legal services rendered for the benefit of a third party, for which a note is
executed by the maker in consideration thereof, constitute a valid antecedent debt under
Article 3 of the Uniform Commercial Code, upon which the payee may successfully sue
the maker as if the payee were a holder in due course. Austrian, Lance & Stewart, P.C. v
Hastings Properties, Inc., 87 Misc 2d 25, 385 NYS2d 466, 19 UCCRS 1177.
This provision of the 1990 version restates the rule set forth in the 1952 version of the
Code (UCC 3-303(b)). Official Comment 4 to UCC 3-303 [1990].
Footnote 52. Farmers State Bank v Johnson, 188 Mont 55, 610 P2d 1172; Utah Bank &
Trust v Quinn (Utah) 622 P2d 793, 31 UCCRS 389 (among conflicting authorities on
other grounds noted in Cottam v Heppner (Utah) 777 P2d 468, 112 Utah Adv Rep 12, 9
UCCRS2d 805).
A maker's antecedent debt to the payee supplied consideration for a note that the maker
executed in order to obtain time to acquire the funds needed to make restitution for
embezzlement. Kurtz v Fischer (Mo App) 600 SW2d 642.
Where the amount of unpaid promissory notes represented a loan, such amount
constituted an obligation owed by the makers which existed when the notes were
executed and thus supplied requisite consideration for the notes. Cantonwine v Fehling
(Wyo) 582 P2d 592, 24 UCCRS 904 (criticized on other grounds by Stanbury v Larsen
(Wyo) 803 P2d 349).
Footnote 53. First Nat'l Bank v Carver (Miss) 375 So 2d 1198, 27 UCCRS 1039.

149 Promise to perform acts in future
View Entire Section

As a general rule, an executory contract 54 or promise to perform in the future 55

constitutes sufficient consideration for commercial paper. Thus, where the consideration
for a promissory note is the promise on the part of the payee to perform an executory
contract made between the maker and the payee concurrently in point of time with the
execution and delivery of the note, such promise is sufficient consideration for the note.
56
Observation: Under the Uniform Commercial Code, an instrument which is issued

or transferred in exchange for a promise of performance is issued for value, but only to
the extent that the promise has been performed. 57 While the question of value is
distinct from the question of consideration, in that it is relevant to the issue of whether
a holder of an instrument is a holder in due course and whether the issuer has a defense
to the instrument, 58 the definition of consideration also includes an instrument which
is issued for value. 59 Thus, a promise to perform services in the future is
consideration for the issuance of a bill or note, but is value only to the extent the
promise is performed 60 and, thus, is also issued for consideration, 61 but only to the
extent that the promise has been performed. 62
Footnotes
Footnote 54. Whitehall Realty Corp. v Manufacturers Trust Co. (Fla) 100 So 2d 617;
First Nat'l Bank v Hauss, 214 App Div 689, 213 NYS 198, app withdrawn 243 NY 552,
154 NE 601.
Footnote 55. Jones v Green, 173 Ark 846, 293 SW 749; Tradesmen's Nat'l Bank v Curtis,
167 NY 194, 60 NE 429; Motor Finance Corp. v Huntsberger, 116 Ohio St 317, 4 Ohio L
Abs 738, 5 Ohio L Abs 201, 156 NE 111.
Footnote 56. Harper v Bronson, 104 Fla 75, 139 So 203; Motor Finance Corp. v
Huntsberger, 116 Ohio St 317, 4 Ohio L Abs 738, 5 Ohio L Abs 201, 156 NE 111.
An agreement to sell real estate constituted sufficient consideration for a check even
though the agreement could not be enforced against the promisor for want of a sufficient
writing to satisfy the statute of frauds, so long as the payee was willing and able to carry
out the agreement. Rubinger v Rippey, 201 Misc 135, 110 NYS2d 5.
Footnote 58. 141.

Footnote 59. 146.
Footnote 61. 146.
A payee's promise to deliver fertilizer constitutes consideration sufficient to support the

note's validity, at least to the extent of subsequent performance of the promise. Sheffield
v Virginia Carolina Chemical Corp., 114 Fla 721, 154 So 833 (decided under pre-Code
law).
As to the failure of performance constituting a failure of consideration, see 167.
As to the defense of failure of consideration based on the failure of performance, see

556 et seq.
150 Performance of non-obligatory act
View Entire Section

The consideration which renders a promise binding need not exist at the time an
instrument is executed; rather, if what is anticipated or requested by the promisor is
performed by the promisee, it is not necessary that the promisee have promised or been
under an obligation to perform the act. 63
Thus, a bill or note given for services to be performed in the future is binding for the full
amount when services are subsequently rendered even where there was no agreement to
render the services. 64
Footnotes
Footnote 63. Miller v McKenzie, 95 NY 575.
Footnote 64. Griffin v Louisville Trust Co., 312 Ky 145, 226 SW2d 786; Miller v
McKenzie, 95 NY 575.
151 Personal services
View Entire Section

As a general rule, personal services rendered under an express or implied agreement to

pay for them constitute sufficient consideration for a bill or note, 65 even where
services are rendered under an agreement to a relative or family member. 66 However,
services by a person in close blood relationship to the person to whom the services are
rendered do not constitute consideration, unless it is shown that the services were
rendered under such circumstances as would evince an intention to pay at the time the
services were rendered. 67 A similar principle applies to services rendered to a friend or
neighbor. 68
Where personal services constitute consideration, there is consideration, even though the
actual value of the services rendered is inadequate in comparison to the amount of the
note, 69 since the maker of the note has a right to make his own estimate of the value of
the services. 70
Footnotes
Footnote 65. In re Hore's Estate, 220 Minn 374, 19 NW2d 783, 161 ALR 1366; Miller v
Simoni (NY Sup) 4 UCCRS 1171; Brown v Willis, 13 Ohio 26.
Forms: Provision in negotiable instrumentRecital of consideration receivedServices

rendered. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
Footnote 66. In re Andrews' Estate, 245 Iowa 819, 64 NW2d 261; Miller v McKenzie, 95
NY 575.
Footnote 67. Florida Nat'l Bank & Trust Co. v Brown (Fla) 47 So 2d 748.
Footnote 68. Page v Provident Sav. Bank & Trust Co. (Hamilton Co) 98 Ohio App 410,
57 Ohio Ops 448, 130 NE2d 97.
Services which are merely friendly acts or neighborly kindness do not constitute
consideration. Blanshan v Russell, 32 App Div 103, 52 NYS 963, affd 161 NY 629, 55
NE 1093.
Footnote 69. Miller v McKenzie, 95 NY 575.
As to the adequacy of consideration, generally, see 142.
Footnote 70. Worth v Case, 42 NY 362.
152 Moral obligation
View Entire Section

In accordance with the rule applicable to executory contracts, generally, 71 a mere

moral obligation, unconnected with any legal or equitable obligation, does not constitute
sufficient consideration for a bill or note. 72 Thus, a moral obligation based on honor
and dignity is not consideration. 73 A moral obligation based upon a mistake of fact or
judgment in advice to another to the detriment of the latter likewise, does not support a
note given for the loss incurred. 74 However, where the payees, in return for the payor's
promise to pay an amount owed under a financing agreement, agree to assume and
discharge the payor's indebtedness to a third party for which they are not obligated, the
note executed by the payor is supported by sufficient consideration and not solely by the
payor's moral obligation to pay. 75
Where a debt has been extinguished by the voluntary act of the creditor, a note for the
debt or accrued interest on the debt is not supported by a moral consideration. 76 On the
other hand, a moral obligation arising from what was once a legal liability, which has
become suspended or barred by the operation of a positive rule of law, will furnish
consideration for a subsequent executory promise embraced in full in a bill or note, 77
as where a debt is discharged in bankruptcy. 78 The receipt of material or pecuniary
benefits, or services by the promisor may give rise to a moral obligation which will also
support a subsequently executed bill or note, even though there was no antecedent legal
liability, 79 unless such services were intended to be gratuitous and were rendered
without any expectation of remuneration. 80 Similarly, where a statute provides that a
moral obligation originating in some benefit conferred on the promisor, or prejudice
suffered by the promisee, is good consideration for a promise, but only to an extent
corresponding with the extent of the obligation, a nonnegotiable instrument, which
directs the payment of a certain sum of money in appreciation of personal services made,
is supported by consideration to the extent of the reasonable value of those services. 81
Footnotes
Footnote 71. 17A Am Jur 2d, Contracts 168.
Footnote 72. Meginnes v McChesney, 179 Iowa 563, 160 NW 50; Griffin v Louisville
Trust Co., 312 Ky 145, 226 SW2d 786; Whitaker v Whitaker, 52 NY 368; Hamor v
Moore's Adm'rs, 8 Ohio St 239.
Annotation: Moral obligation as consideration for contractmodern trend, 8 ALR2d

787.
Footnote 73. Meginnes v McChesney, 179 Iowa 563, 160 NW 50.
Footnote 74. Morris v Norton (CA6 Mich) 75 F 912.
Footnote 75. Alexander v DeLaCruz (Utah) 545 P2d 518.
Footnote 76. Fender v McCain, 144 Neb 58, 12 NW2d 541.
Footnote 77. Born v Lafayette Auto Co., 196 Ind 399, 145 NE 833, 41 ALR 952.

Footnote 78. Silva v Robinson, 115 Fla 830, 156 So 280.
Footnote 79. In re Bradbury, 105 App Div 250, 93 NYS 418.
The evidence supported the trial court's determination that there had been no failure of
consideration for a promissory note executed by the defendants where there was evidence
that the note was under seal and was given as payment for shipping costs on modular
units delivered by the payee to the defendants' motel construction site. Chesson v
Gardner, 32 NC App 777, 233 SE2d 668.
Footnote 80. Florida Nat'l Bank & Trust Co. v Brown (Fla) 47 So 2d 748; Miller v
McKenzie, 95 NY 575.
Footnote 81. Herbert v Lankershim, 9 Cal 2d 409, 71 P2d 220.
153 Love and affection; relationship; friendship
View Entire Section

Love and affection alone, 82 or family relationship, 83 or a moral obligation based

thereon, is not sufficient consideration to support or create an obligation to pay a bill or
note. Mere friendly acts also do not constitute consideration. 84
The fact that an instrument is executed for past services or support provided to a relative
by a third person, 85 or in appreciation or gratitude for past services gratuitously
rendered to the maker by a relative, 86 does not establish sufficient consideration for the
instrument.
Footnotes
Footnote 82. Sullivan v Sullivan, 122 Ky 707, 92 SW 966; In re Simmons' Estate, 48

Misc 484, 96 NYS 1103; Production Credit Ass'n v Rub (ND) 475 NW2d 532, cert den
502 US 1118, 117 L Ed 2d 469, 112 S Ct 1235, reh den 503 US 1000, 118 L Ed 2d
418, 112 S Ct 1712; Hamor v Moore's Adm'rs, 8 Ohio St 239.
Footnote 83. Sullivan v Sullivan, 122 Ky 707, 92 SW 966; Dougherty v Salt, 227 NY
200, 125 NE 94; Hoodlett v Hoodlett (App, Athens Co) 12 Ohio L Abs 577.
Footnote 84. In re Estate of Phillips, 12 Misc 2d 402, 176 NYS2d 918; Page v Provident
Sav. Bank & Trust Co. (Hamilton Co) 98 Ohio App 410, 57 Ohio Ops 448, 130 NE2d 97.
Footnote 85. In re Dashnau's Estate, 194 Misc 156, 88 NYS2d 13; Peters v Poro's Estate,
96 Vt 95, 117 A 244, 25 ALR 615.
Footnote 86. 152.

154 Promise of marriage, or marriage
View Entire Section

A marriage or a contemporaneous promise of marriage constitutes a valuable

consideration for a promissory note. 87 However, a marriage already consummated
cannot constitute consideration for a bill or note. 88 Moreover, an existing promise to
marry cannot be consideration for a draft or note where there is nothing to show that the
procuring of the promise, or the renewal of a broken promise, was the inducement for the
giving of the instrument. 89 On the other hand, it has been recognized that a promise of
marriage is a continuing one, and does not come within the rule as to past consideration;
90 therefore, an instrument executed in light of an existing engagement to marry may be
regarded as supported by a substituted new promise. 91
Footnotes
Footnote 87. Wilson's Adm'r v Nolen, 200 Ky 609, 255 SW 267, 34 ALR 80; In re Roy's
Estate, 278 Mich 6, 270 NW 196; Wright v Wright, 54 NY 437.
Footnote 88. Kramer v Kramer, 181 NY 477, 74 NE 474.
Footnote 89. Blanshan v Russell, 32 App Div 103, 52 NYS 963, affd on op below 161
NY 629, 55 NE 1093; Campbell v Jefferson, 296 Pa 368, 145 A 912, 63 ALR 1180.
Footnote 90. 147.
Footnote 91. Guild v Eastern Trust & Banking Co., 122 Me 514, 121 A 13.
155 Extension and forbearance
View Entire Section

An extension of time for the payment of an existing legal obligation constitutes sufficient
consideration for an undertaking on commercial paper, 92 whether the undertaking is by
the one owing the original obligation 93 or by a third person, 94 since in either case the
giving of the extension of time is at least a disadvantage to the promisee if it is not of
advantage to the promisor. 95 However, the giving of an extension of time within which
to pay a void note does not constitute consideration for a renewed promise to pay the
note, since there is neither advantage gained by the maker nor detriment suffered by the
payee. 96

Observation: Some jurisdictions take the position that the application of the general
rule as to an extension of time depends upon the facts of the case, and that the
extension of time must be given upon the indebtedness which is assumed by the giving
of the note, in order to constitute a consideration therefor. 97
A forbearance to sue 98 or to assert a right, either legal or equitable, 99 likewise

constitutes sufficient consideration for an undertaking on commercial paper, even though
the promise is made by a third person who is a stranger to the original obligation. 1
Although there is some authority to the contrary, 2 it is generally recognized that
forbearance alone is insufficient to constitute valid consideration, and that there must be a
prior agreement to forbear. 3 However, the agreement to forbear may be implied from
the circumstances. 4
Forbearance to press a claimed right, wholly without legal foundation, furnishes no

consideration for a new promise. 5 Thus, where the payee does not have any claim
against the maker of the note and does not honestly believe that he has a valid claim, a
note given to obtain forbearance is not supported by consideration. 6
Footnotes
Footnote 92. Schaefer v First Nat'l Bank, 134 Ohio St 511, 13 Ohio Ops 129, 18 NE2d
263; Perry v Riske, 2 Wis 2d 377, 86 NW2d 429.
A creditor's grant of a two-year extension of time and a reduction in interest is sufficient

consideration for a note given representing the loan. Harrison-Floyd Farm Bureau
Cooperative Asso. v Reed (Ind App) 546 NE2d 855.
A renewal note that is executed in order to obtain an extension of time is supported by

consideration. Walker v First State Bank (Tenn App) 849 SW2d 337, 22 UCCRS2d 628,
reh den (Tenn App) 1992 Tenn App LEXIS 904.
Footnote 93. First State Bank v Williams, 143 Iowa 177, 121 NW 702; Farmers' &
Merchants' State Bank v Kuhn, 125 Neb 457, 250 NW 652; Traill County v Moackrud,
65 ND 615, 260 NW 821.
Footnote 94. First Nat'l Bank v Bristol (Mo App) 35 SW2d 999; Farmers' & Merchants'
State Bank v Kuhn, 125 Neb 457, 250 NW 652.
Southern Frozen Foods, Inc. v Hill, 241 SC 524, 129 SE2d 420.
An extension of time confers on the debtor an advantage or benefit which in itself

constitutes a sufficient consideration for the execution of the instrument by the debtor;
where the instrument is executed by a third person in consideration of an extension given
to the debtor, the detriment to the creditor is sufficient consideration to support the third
person's promise. Westphal v Nevills, 92 Cal 545, 28 P 678.
Footnote 96. Pacific Railways Advertising Co. v Carr (1916) 29 Cal 722, 157 P 529.

Footnote 97. Schaefer v First Nat'l Bank, 134 Ohio St 511, 13 Ohio Ops 129, 18 NE2d
263 (holding that there was no consideration for a note given by a debtor to a creditor
under an agreement between them by which the debtor merely assumed an indebtedness
to the creditor from a third party who was not privy to the agreement, even though as part
of the agreement the creditor extended time to the debtor on other existing indebtedness
owing by the debtor to the creditor).
Footnote 98. Acme Inv. Corp. v Thompson, 216 Cal 335, 14 P2d 87; Lea v Suhl (Fla App
D2) 417 So 2d 1179; Leef v Steele (1st Dept) 81 App Div 2d 764, 439 NYS2d 113.
Forbearance from collecting on a debt is consideration for a new note and guaranty.
Graphic Prep, Inc. v Graphcom, Inc., 206 Ga App 689, 426 SE2d 183, 92 Fulton County
D R 2888, cert den (Ga) 1993 Ga LEXIS 138.
A note given to a creditor to prevent his suing the debtor is supported by consideration.
Helena Chemical Co. v Rivenbark, 45 NC App 517, 263 SE2d 305.
Footnote 99. Jamaica Tobacco & Sales Corp. v Ortner, 70 Misc 2d 388, 333 NYS2d 669,
11 UCCRS 100.
Footnote 1. Adolph Ramish, Inc. v Woodruff, 2 Cal 2d 190, 40 P2d 509, 96 ALR 1146;
Farmers' & Merchants' State Bank v Kuhn, 125 Neb 457, 250 NW 652.
Footnote 2. In re Taylor's Estate, 236 App Div 571, 260 NYS 836, reh den 238 App Div
755, 261 NYS 1027.
Footnote 3. Parrino v Rallis, 116 Cal App 364, 2 P2d 515.
Footnote 4. Bank of America Nat'l Trust & Sav. Asso. v Hollywood Improv. Co., 46 Cal
App 2d 817, 117 P2d 13; Saunders v Bank of Mecklenburg, 112 Va 443, 71 SE 714.
Footnote 5. Blyth v Robinson, 104 Cal 239, 37 P 904; Hooff v Paine, 172 Va 481, 2
SE2d 313.
Footnote 6. Matey v Pruitt (Fla App D2) 510 So 2d 351, 12 FLW 1804, review den (Fla)
518 So 2d 1276, and review den (Fla) 520 So 2d 585.
156 Release or waiver of right; compromise of claim
View Entire Section

The relinquishment by the promisee of some right which he may lawfully exercise or
enforce 7 or his waiver of any legal right 8 constitutes sufficient consideration to
support a bill or note. Under this rule, sufficient consideration exists where
the promisee cancels the indebtedness of a third person and surrenders to such third
person the paper evidencing such indebtedness. 9
a note is given in exchange for a release of a lien on real property. 10
a note is given to settle a disputed claim. 11
Surrender of a claim against an insolvent constitutes consideration for a bill or note given
by a third person. 12 However, where the insolvent is dead and leaves no property liable
to process, a note by a widow, heir, or other person is generally recognized as being
without consideration. 13
Footnotes
Footnote 7. City Trust & Sav. Bank v Schwartz (Mahoning Co) 68 Ohio App 80, 22 Ohio
Ops 176, 39 NE2d 548, motion overr.
Footnote 8. Bumgardner v Groover, 245 NC 17, 95 SE2d 101.
Footnote 9. City Trust & Sav. Bank v Schwartz (Mahoning Co) 68 Ohio App 80, 22 Ohio
Ops 176, 39 NE2d 548, motion overr.
Footnote 10. Sam Stockton Grading Co. v Hall, 111 NC App 630, 433 SE2d 7.
A building owner who gave a note to an improver of the building, thereby paying the
debt and securing a release of the latter's lien on the building, received consideration for
his note. Polo Corp. v Medco Management Corp. (La App 4th Cir) 377 So 2d 484, 27
UCCRS 1340, cert den (La) 380 So 2d 101.
Footnote 11. Mitchell v Mitchell, 191 Ga App 139, 381 SE2d 84.
The surrender of a claim under a land sales contract was consideration for a promissory
note given in return for the release, even though the claim may in fact have been
worthless. Todd v Berner, 214 Mont 263, 693 P2d 506.
There was sufficient consideration for the defendant wife's execution of a note and deed
of trust to plaintiff where the evidence showed that, pursuant to the settlement of an
action by the plaintiff against the defendant husband to recover an amount due under an
agreement dissolving a business partnership, the defendants executed the note and deed
of trust to the plaintiff in exchange for the plaintiff's voluntary dismissal of the action.
Deal v Christenbury, 50 NC App 600, 274 SE2d 867.
Footnote 12. Home State Bank v Dewitt, 121 Kan 29, 245 P 1036; Stack v Weatherwax
(Sup) 5 NYS 510; Judy v Louderman, 48 Ohio St 562, 29 NE 181.
Footnote 13. Bank of Commerce v McCarty, 119 Neb 795, 231 NW 34; Peck v Burwell,
48 Hun 471, 1 NYS 33.
157 Renewal and exchange of paper

View Entire Section
A renewal note is supported by a sufficient consideration either in the form of the

consideration for the original instrument, 14 the antecedent debt, 15 the surrender of the
original instrument, or the extension of time obtained by the renewal. 16
Under the Uniform Commercial Code, an instrument which is issued or transferred in

exchange for a negotiable instrument is issued for consideration, 17 since it has also
been issued or transferred for value. 18
Observation: The provision 19 of Article 3 relating to transfers for value with

respect to the exchange of instruments restates the law under the prior version 20 of
Article 3. 21 It has generally been recognized, moreover, that where a cross note, bill,
or check is given for the mutual accommodation of the parties, or of one of them, in
which the maker and the payee of one note are, respectively, the payee and maker of
the other note, the paper thus exchanged constitutes business paper, with the one
instrument being a good consideration for the other received in exchange, provided that
there is no restriction on use or negotiation of the paper. 22 Whether there is an
exchange of paper so as to constitute one instrument the consideration for the other, or
a mere accommodation with the accommodation party taking the accommodated
party's note merely by way of indemnity, depends upon the intent of the parties; 23
however, a rebuttable presumption of exchange and mutual consideration arises from
similarity of date, amount, and terms of the respective instruments. 24
Where the original note is merely voidable, the renewal note is supported by
consideration. 25 On the other hand, where the old or exchanged paper is absolutely
void and worthless, and where there is no basis for a legal claim or a belief in the
existence of such a claim, there is no consideration for the renewal 26 or exchanged
paper. 27
Footnotes
Footnote 14. Reese v Schenck, 107 Fla 166, 144 So 313; Manhattan Co. v Cocheo, 256
App Div 560, 10 NYS2d 770.
No consideration was necessary for a note representing the renewal of other notes and
accumulated interests thereon, and the note was valid as to the wife, even though she was
not a party to the original note creating the indebtedness represented by the renewal note,
since the bank's agreement to refinance the loan would, in and of itself, be consideration.
Barelmann v Fox, 239 Neb 771, 478 NW2d 548, 18 UCCRS2d 302.
Footnote 15. 148.
Footnote 16. Hoover v Hoover, 228 Iowa 681, 291 NW 154; Van Norden Trust Co. v L.
Rosenberg, Inc., 62 Misc 285, 114 NYS 1025.
As to an extension of time as consideration, see 155.

Footnote 17. UCC 3-303(a)(4), (b) [1990 Rev].
Footnote 18. 146.
Footnote 20. UCC 3-303 [1952].
Footnote 22. Hederman v Cox, 188 Miss 21, 193 So 19; Artia Parliament Distributing
Corp. v Kendricks (1st Dept) 19 App Div 2d 813, 243 NYS2d 493; First Nat'l Bank v
Rodgers, 130 Okla 146, 265 P 1049.
Footnote 23. Hederman v Cox, 188 Miss 21, 193 So 19.
Footnote 24. Mutual Loan Ass'n v Brandt, 35 Misc 270, 71 NYS 770.
Footnote 25. Born v Lafayette Auto Co., 196 Ind 399, 145 NE 833, 41 ALR 952.
Footnote 26. Union Collection Co. v Buckman, 150 Cal 159, 88 P 708; National City
Bank v Parr, 205 Ind 108, 185 NE 904, 95 ALR 958.
Footnote 27. Fairfield County Nat'l Bank v Hammer, 89 Conn 592, 95 A 31.
158 Paper given to make good impaired bank asset
View Entire Section

An instrument executed by directors, officers, or stockholders of a bank, 28 or by others

not so directly interested, 29 so that the bank may continue in business, is based upon a
sufficient consideration. Consideration also exists where stockholders execute a note to
take the place of worthless paper and to avoid charging such paper off against the
apparent surplus, and thus, reduce the bank's assets, which would result in a fall in the
value of the bank's stock. 30
Footnotes
Footnote 28. Queensboro Nat'l Bank v Kelly, 220 App Div 515, 221 NYS 703;
Merchants & Farmers Bank v Cardwell, 174 Tenn 490, 127 SW2d 113.
Footnote 29. Hurd v Kelly, 78 NY 588.
Footnote 30. Union Bank of Brooklyn v Sullivan, 214 NY 332, 108 NE 558.

C. Want or Failure of Consideration [159-172]
Research References
UCC 3-113, 3-408, 3-415 [1952]; UCC 3-303, 3-419 [1990 Rev]
ALR Digest: Bills and Notes 32, 34, 243, 244
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms 21-23, 83; 6A Am Jur Pl & Pr
Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:139-3:142
6 Anderson, Uniform Commercial Code 3d 3-408:58, 3-408:62, 3-408:64; 6A
Anderson, Uniform Commercial Code 3d [Rev] 3-303:12, 3-303:13, 3-419:7
1. In General [159-164]
159 Generally
View Entire Section

Like any other contract, a negotiable instrument must be supported by a consideration. 31

Even a commercial paper which is nonnegotiable must also be supported by a
consideration. 32 Where no consideration exists or none was intended to pass, there is a
want or absence of consideration. 33
Under Article 3 of the Uniform Commercial Code, a defense exists if the instrument is
issued without consideration. 34 If an instrument is issued for a promise of
performance, a defense exists to the extent that performance of the promise is due and the
promise has not been performed. 35
Total absence or total failure of consideration goes to the entire validity of the instrument
and avoids it, or discharges the promisor or excuses performance on his part. 36 A
partial failure of consideration constitutes a defense pro tanto. 37
Footnotes
Footnote 31. 141.
Footnote 32. Lull v Brooks' Estate, 195 Misc 175, 89 NYS2d 6.
Footnote 33. Hart v Hart (Iowa) 160 NW2d 438.
Want or failure of consideration is a defense against any person not having the rights of a
holder in due course. UCC 3-408 [1952].

As to the status and rights of a holder in due course, generally, see 247 et seq.
As to the want or failure of consideration as a defense, generally, see 556 et seq.
Forms: AnswerDefenseFailure of consideration. 5 Am Jur Pl & Pr Forms (Rev),

Bills and Notes, Forms 21, 22.
AnswerDefense of failure of consideration. 6A Am Jur Pl & Pr Forms (Rev),

Commercial Code : Article 3Negotiable Instruments 3:139-3:142.
Footnote 36. Kelley, Glover & Vale, Inc. v Heitman, 220 Ind 625, 44 NE2d 981, cert den
319 US 762, 87 L Ed 1713, 63 S Ct 1320.
Footnote 37. UCC 3-408 [1952].
Under the revised Article 3, if there is a partial failure of consideration, there is a defense
pro tanto. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-303:12.
Forms: AnswerDefensePartial want of consideration. 5 Am Jur Pl & Pr Forms

(Rev), Bills and Notes, Form 23.
160 Effect of seal
View Entire Section

Since the common-law distinction between a sealed and an unsealed instrument has
generally been abolished, 38 consideration is as necessary for a negotiable instrument
under seal as it is for an instrument not under seal. 39
Observation: The 1990 Revision of Article 3 of the Uniform Commercial Code no

longer contains the provision 40 of the 1952 version dealing with the effect of a seal
on a negotiable instrument under Article 3. However, at least half of the states have
judicially modified or, apart from the Uniform Commercial Code, have statutorily
abolished the seal or the common-law distinction between sealed and unsealed
instruments. 41 Therefore, in those jurisdictions which have abolished the
common-law rule of seals, the use of a seal neither imports consideration 42 nor
creates a presumption as to the existence of consideration. 43
Footnotes
Footnote 38. 68.

3-408 [1952].
Footnote 40. UCC 3-113 [1952].
Footnote 41. 68 Am Jur 2d, Seals 2.
Footnote 42. 68 Am Jur 2d, Seals 2, 3.
Footnote 43. 68 Am Jur 2d, Seals 2, 4.
161 Who may assert want or failure of consideration
View Entire Section

If an instrument is issued without consideration, 44 the drawer or maker of the

instrument has a defense. 45
Observation: The 1952 version of this provision 46 of Article 3 states that "want or
failure of consideration is a defense," thereby implying that the defense can be raised
by any party. 47 In contrast, the 1990 Revision appears to limit these defenses to the
drawer or maker who is sued for the amount of the instrument. 48 However, the
question of who may raise these defenses will ordinarily be academic for the reason
that the instrument will be held by a holder having the rights of a holder in due course
and these defenses cannot be asserted against such a holder. 49
Where the want or failure of consideration can be raised by any party, an indorser may
raise such a defense subject to the rights of a holder in due course. 50 However, in the
absence of a disclaimer of liability written on the contract of indorsement, an indorser
incurs liability to pay the instrument without regard to whether or not the indorser
transferred the instrument for value or received consideration for his indorsement. 51
Where an instrument is issued for a promise of performance, the issuer has a defense to
the extent performance is due. 52
Footnotes
Footnote 44. 159.
As to the defense of a want or failure of consideration, generally, see 556 et seq.

As to the status and rights of a holder in due course, generally, see 247 et seq.
Footnote 50. Brotherton v McWaters (Okla) 438 P2d 1.
3-415 [1990 Rev], stating that the revised provision, UCC 3-415(a), (b) [1990 Rev],
restates the substance of former UCC 3-414(1) [1952].
As to the liability of the various parties, generally, see 433 et seq.
162 --Parties signing after consideration has passed; accommodation parties
View Entire Section

Under Article 3 of the Uniform Commercial Code, the obligation of an accommodation

party, that is, one who signs an instrument for the purpose of incurring liability on the
instruments without being a direct beneficiary of the value given for the instrument, 53
may be enforced whether or not the accommodation party receives consideration for the
accommodation. 54 An accommodation party is one who signs the instrument, in any
capacity, for the purpose of lending his name to another party to it. 55 Pursuant to this
rule, therefore, there is no want of consideration when consideration moves before
maturity to the party accommodated, even though the accommodation maker receives no
consideration for executing the instrument. 56 Regardless of whether a surety signs
gratuitously or receives compensation, his obligation is supported by consideration,
which moves from the creditor to the principal debtor, 57 even though such
consideration was furnished prior to the signature of the accommodation party on the
notes. 58
Observation: If the term "consideration" is used accurately, the accommodation

party always receives consideration, because he obtains certain action or conduct in
return for his signing even though he does not receive an actual payment of money or
delivery of property. For example, if he signs as an original party, the consideration is
the making of a loan or the extension of credit to the accommodated party; if he signs
after the original execution of the instrument, he is seeking to obtain forbearance of the
holder. 59
Footnotes

As to accommodation parties, generally, see 473.
Section 3-419(b) [1990 Rev] takes the view stated in Comment 3 to former 3-415
[1952] that there need be no consideration running to the accommodation party: "The
obligation of the accommodation party is supported by any consideration for which the
instrument is taken before it is due." Official Comment 2 to UCC 3-419 [1990 Rev].
As to the extent of an accommodation party's liability, see 476 et seq.
Footnote 55. UCC 3-415(1) [1952].
Footnote 56. Franklin Nat'l Bank v Eurez Constr. Corp., 60 Misc 2d 499, 301 NYS2d
845, 6 UCCRS 634.
An accommodation maker of a note is primarily liable to the holder for value in

accordance with the terms of the instrument despite the fact that the consideration for its
delivery was paid to another; accordingly, the fact that the maker of the note and not the
accommodation maker received the consideration is not a defense to the accommodation
maker. Delbrook Associates, Inc. v Law (NY Sup) 4 UCCRS 88.
Footnote 57. In re Couchot (BC SD Ohio) 169 BR 40, 23 UCCRS2d 1170.
Footnote 58. St. Charles Nat'l Bank v Ford (2d Dist) 39 Ill App 3d 291, 349 NE2d 430,
19 UCCRS 1178 (holding that in an action by a bank against an accommodation party on
promissory notes, the accommodation party was liable to the bank under Article 3, since
the obligation of the accommodation party was adequately supported by the monetary
consideration furnished to the maker of the notes).
163 Substitutes for consideration; promissory estoppel
View Entire Section

In some situations, substitutes or equivalents for the consideration ordinarily required for
a contract are recognized, and such substitutes or equivalents apply with respect to
negotiable instruments as in other contract cases. 60 One such substitute or equivalent is
the doctrine of promissory estoppel. 61
Observation: The Official Comments to the revised version 62 of this provision of

Article 3 contain no references to the applicability of substitutes or equivalents to
consideration, such as promissory estoppel. However, the revised version 63 defines
consideration as anything which is regarded as sufficient consideration for a simple
contract. 64
Where the doctrine of promissory estoppel is applicable as a substitute or equivalent of

consideration, a promise to pay money without consideration is enforceable where the
promise has been relied on to the detriment of the promisee and such reliance is within
the expectation of the maker. 65
Footnotes
As to promissory estoppel and whether it constitutes consideration for a contract,

generally, see 17A Am Jur 2d, Contracts 120.
Footnote 64. 145.
Footnote 65. Smith v Morgan, 214 Iowa 555, 240 NW 257; Miller v McKenzie, 95 NY
575.
Annotation: Comment Note.Promissory estoppel, 48 ALR2d 1069.
164 --Notes which falsify asset position of bank
View Entire Section

In many cases, promissory notes are executed, usually to a bank or to some other
institution, for the purpose of inflating the assets of such bank or institution, of
concealing losses, 66 or of otherwise aiding in the deception of examining authorities or
the evasion of the law. 67 While such notes are ordinarily accompanied by an oral or
written agreement that the bank will merely hold the note and not enforce it, 68 and
are recognized to have been executed without any consideration for the accommodation
of the bank, 69 the defense of lack of consideration as to such notes is not available
on the grounds of public policy and estoppel, 70 especially to one who knowingly
participates in the deceit. 71 However, there is some contrary authority permitting the
want of consideration to be raised in an action by a bank where the rights of creditors are
not involved. 72
Footnotes

Footnote 66. Lepori v Hilson, 109 Cal App 295, 293 P 86; Cedar State Bank v Olson, 116
Kan 320, 226 P 995; Mt. Vernon Trust Co. v Bergoff, 272 NY 192, 5 NE2d 196.
Footnote 67. Mt. Vernon Trust Co. v Bergoff, 272 NY 192, 5 NE2d 196.
Footnote 68. D'Oench, Duhme & Co. v Federal Deposit Ins. Corp., 315 US 447, 86 L
Ed 956, 62 S Ct 676, reh den 315 US 830, 86 L Ed 1224, 62 S Ct 910 and (superseded
by statute on other grounds as stated in Gunter v Hutcheson (CA11 Ga) 674 F2d 862,
CCH Fed Secur L Rep 98654) and (superseded by statute on other grounds as stated in
Brookside Assocs. v Rifkin (CA9 Ariz) 49 F3d 490, 95 CDOS 1244, 95 Daily Journal
DAR 2241) and (criticized on other grounds in Resolution Trust Corp. v Kennelly (CA9
Alaska) 57 F3d 819, 95 CDOS 4455) and (ovrld in part on other grounds as stated in
FDIC v O'Melveny & Myers (CA9 Cal) 61 F3d 17, 95 CDOS 5839) and (criticized on
other grounds in Murphy v FDIC (App DC) 314 US App DC 24, 61 F3d 34) and
(criticized on other grounds in Resolution Trust Corp. v Miller (CA9 Cal) 1995 US App
LEXIS 28183) and (criticized on other grounds in DiVall Insured Income Fund Ltd.
Pshp. v Boatmen's First Nat'l Bank (CA8 Mo) 69 F3d 1398) and (criticized on other
grounds in McGlothlin v Resolution Trust Corp. (DC Dist Col) 913 F Supp 15) and
(superseded by statute on other grounds as stated in Cadle Co. v Bochte (ND Ill) 1997
US Dist LEXIS 980); Mt. Vernon Trust Co. v Bergoff, 272 NY 192, 5 NE2d 196.
by statute on other grounds as stated in Gunter v Hutcheson (CA11 Ga) 674 F2d 862,
CCH Fed Secur L Rep 98654) and (superseded by statute on other grounds as stated in
DAR 2241) and (criticized on other grounds in Resolution Trust Corp. v Kennelly (CA9
Alaska) 57 F3d 819, 95 CDOS 4455) and (ovrld in part on other grounds as stated in
FDIC v O'Melveny & Myers (CA9 Cal) 61 F3d 17, 95 CDOS 5839) and (criticized on
other grounds in Murphy v FDIC (App DC) 314 US App DC 24, 61 F3d 34) and
(criticized on other grounds in Resolution Trust Corp. v Miller (CA9 Cal) 1995 US App
LEXIS 28183) and (criticized on other grounds in DiVall Insured Income Fund Ltd.
Pshp. v Boatmen's First Nat'l Bank (CA8 Mo) 69 F3d 1398) and (criticized on other
grounds in McGlothlin v Resolution Trust Corp. (DC Dist Col) 913 F Supp 15) and
(superseded by statute on other grounds as stated in Cadle Co. v Bochte (ND Ill) 1997
US Dist LEXIS 980); Mt. Vernon Trust Co. v Bergoff, 272 NY 192, 5 NE2d 196;
Western Sav. & Deposit Bank v Sauer, 343 Pa 332, 22 A2d 727.
Footnote 70. Deitrick v Greaney, 309 US 190, 84 L Ed 694, 60 S Ct 480, reh den 309
US 697, 84 L Ed 1036, 60 S Ct 611 and (superseded by statute on other grounds as
stated in Gunter v Hutcheson (CA11 Ga) 674 F2d 862, CCH Fed Secur L Rep 98654);
West End Federal Sav. & Loan Asso. v Di Boise (3d Dept) 19 App Div 2d 476, 244
NYS2d 282; West Rutland Trust Co. v Houston, 104 Vt 204, 158 A 69, 80 ALR 664.
Footnote 71. Bay Parkway Nat'l Bank v Shalom, 270 NY 172, 200 NE 685, reh den 271
NY 532, 2 NE2d 681.
Footnote 72. First Nat'l Bank v Reed, 198 Cal 252, 244 P 368; Quiney Trust Co. v
Woodbury, 299 Mass 565, 13 NE2d 377.

2. What Constitutes Want or Failure of Consideration [165-172]
165 Generally
View Entire Section

Under Article 3 of the Uniform Commercial Code, which provides that the lack or failure
of consideration constitutes a defense in an action involving a bill or note, 73 a
distinction exists between want of consideration and failure of consideration: want of
consideration is a total lack of any valid consideration, while failure of consideration,
which may be only partial, 74 is the neglect, refusal, or failure of one of the parties to
perform or furnish the consideration agreed upon. 75 When there is a lack of
consideration, there never was a contract; when there is a failure of consideration, there is
an assumption that there was a contract initially, but that the contract has been broken by
the failure of one party to perform. 76 Thus, where there is a want of consideration, a
promise cannot be enforced, but where there is a failure of consideration, such failure
operates as a defense pro tanto. 77
Practice guide: Where several promises are made by one party, the question of
whether the breach of one such promise results in a complete or partial failure of
consideration, or no failure at all, is determined under the doctrine of substantial
performance. 78
Footnotes
Footnote 73. 6 Anderson, Uniform Commercial Code 3d 3-408:58; 6A Anderson

Uniform Commercial Code 3d [Rev] 3-303:12.
As to the want or failure of consideration, generally, see 159.
For further discussion of the defense of a want or failure of consideration, see 556 et
seq.
A maker of a note who received any of the agreed benefits cannot be heard to say that
there was a total failure of consideration. United Transp. Co. v Glenn, 225 App Div 171,
232 NYS 373.
Footnote 75. Holm v Woodworth (Fla App D4) 271 So 2d 167, 11 UCCRS 818.
Failure of consideration consists of the failure to perform, carry out, or make good a
promise given as consideration for an instrument. Bliss v California Cooperative
Producers, 30 Cal 2d 240, 181 P2d 369, 170 ALR 1009 (superseded by statute on other
grounds as stated in Wilson v Steele (2nd Dist) 211 Cal App 3d 1053, 259 Cal Rptr 851);

Henry v Reich (Franklin Co) 80 Ohio App 185, 35 Ohio Ops 512, 48 Ohio L Abs 500, 72
NE2d 500.
Footnote 77. Parker v McGaha, 291 Ala 339, 280 So 2d 769.
Forms: AnswerDefenseFailure of consideration for note. 5 Am Jur Pl & Pr Forms

(Rev), Bills and Notes, Forms 21, 22.
AnswerDefense of failure of consideration. 6A Am Jur Pl & Pr Forms (Rev),

Footnote 78. Sepo v First Nat'l Bank, 21 Ariz App 606, 522 P2d 562.
166 Inadequacy distinguished
View Entire Section

Since it is ordinarily not necessary that the consideration for an instrument be equal in
pecuniary value to the obligation incurred, 79 there is no failure of consideration when
the consideration is merely inadequate, 80 that is, when the party obtains everything that
was bargained for but is disappointed as to the expected value of the consideration. 81
Thus, there is no failure of consideration when the consideration received for the
instrument proves to have little or no value, 82 as long as there is no fraud, failure of title
or warranty, or other legal failure of the consideration for the promise. 83
Footnotes
Footnote 79. 142.
Footnote 80. Cowee v Cornell, 75 NY 91.
Footnote 81. FPI Development, Inc. v Nakashima (3rd Dist) 231 Cal App 3d 367, 282
Cal Rptr 508, 91 CDOS 4707, 91 Daily Journal DAR 7396; Burch v Ashburn (App) 295
SC 274, 368 SE2d 82.
The fact that a business purchased with a promissory note does not prove profitable does
not constitute a failure of consideration. Commerce Bank of Joplin v Shallenburger (Mo
App) 766 SW2d 764.
A note is supported by consideration when it is given in return for the maker's assignment
of his right to commissions from a specified insurance company; the fact that the
assignment proves of little value does not affect its character as consideration because it
was what the maker bargained for. Smith v Jones, 81 NC App 129, 343 SE2d 579,
review den 318 NC 418, 349 SE2d 602 and review den 318 NC 418, 349 SE2d 603.
Footnote 82. Fagala v Morrison, 146 Ga App 377, 246 SE2d 408, subsequent app 161 Ga
App 655, 289 SE2d 528; Galbraith v McDonald, 123 Minn 208, 143 NW 353.
Footnote 83. Harshbarger v Eby, 28 Idaho 753, 156 P 619; Larson v Lybyer, 312 Ill App
188, 38 NE2d 177; In re Dashnau's Estate, 194 Misc 156, 88 NYS2d 13.
167 Nondelivery of property purchased; failure of title; breach of warranty
View Entire Section

There is a failure of consideration for a purchase-money obligation where the seller fails
to deliver the property purchased or agreed to be purchased, 84 or where there is a want
or failure of title which the seller agreed to transfer. 85
A breach of warranty on a sale constitutes a failure of consideration for the

purchase-money paper. 86
Footnotes
Footnote 84. Bamberg v Griffin (2d Dist) 76 Ill App 3d 138, 31 Ill Dec 708, 394 NE2d
910, 27 UCCRS 740; Pennsylvania Rubber Co. v Miller, 260 App Div 485, 23 NYS2d
513; Motor Finance Corp. v Huntsberger, 116 Ohio St 317, 4 Ohio L Abs 738, 5 Ohio L
Abs 201, 156 NE 111.
Footnote 85. Rubinger v Rippey, 201 Misc 135, 110 NYS2d 5; Fiedler v Bigelow
(Cuyahoga Co) 25 Ohio App 456, 5 Ohio L Abs 803, 159 NE 131.
In a bank's action to collect on a promissory note secured by a purchase money mortgage,

the court should have sustained the bank's motions for directed verdict and judgment
notwithstanding the verdict on the promisors' partial failure of consideration defense
which was based on the promisors' contentions that the bank would have a valid first
security position on the farm, and that the bank's failure to make sure that it took the
mortgage on the fee simple estate constituted a partial failure of consideration, since the
only consideration flowing from the bank to the promisors was the loan of money which
the promisors received, and since the promisor rather than the bank were responsible for
the failure of consideration in that the promisor warranted in the mortgage that they were
the fee owners of the farm when, as it turned out, they were not. Federal Land Bank v
Woods (Iowa) 480 NW2d 61.
Footnote 86. Marin v Francisca Reyes, Inc., 263 NY 550, 189 NE 692; Carius v Ohio
Contract Purchase Co. (Cuyahoga Co) 30 Ohio App 57, 164 NE 234.
168 Loss or destruction of property after delivery

View Entire Section
Under the view that the risk of loss or destruction of property sold under a title retention
or conditional sales contract lies with the purchase after delivery of the goods, unless
otherwise provided by the contract, the occurrence of such a loss or destruction does not
result in failure of consideration for a bill or note given for the purchase price. 87
Thus, there is no failure of consideration where there is a delivery of machinery to be
installed and it is destroyed by fire before installation. 88
Footnotes
Footnote 87. American Soda Fountain Co. v Vaughn, 69 NJL 582, 55 A 54.

Transferee of commercial paper given by purchaser of chattel and secured by

conditional sale, retention of title, or chattel mortgage, as subject to defenses which
chattel purchaser could assert against seller, 44 ALR2d 8.
Footnote 88. First Prize, Ins. v Fireman's Fund Ins. Co. (Tex Civ App) 269 SW2d 939,
writ ref n r e.
169 Rescission, forfeiture, or repossession of property sold
View Entire Section

Where a contract for the sale of land is accompanied by the vendee's check, note, or other
separate obligation for the whole or a portion of the purchase price, and the vendor
rescinds the contract, this termination of the contract destroys the consideration for the
separate obligation of the vendee and it is no longer enforceable against him by the
vendor or one not a holder in due course of a negotiable instrument. 89 However, if a
check or other negotiable instrument is given in lieu of a cash deposit as the first
payment, the vendor, upon default by the vendee by his refusal to carry through the
purchase, has the same right to enforce such instrument as he would have to retain a cash
deposit for which it is a substitute. 90
Since Article 9 of the Uniform Commercial Code relating to a secured party's right to
dispose of collateral constituting personality generally provides for the debtor's liability
for a deficiency unless otherwise agreed, 91 it appears that a conditional vendee of
personalty may not, on the ground of failure of consideration, escape liability on an

unpaid note given for the purchase price of property which the conditional vendor has
repossessed, if the property has been sold and the note remains unsatisfied. 92
Footnotes
Footnote 89. Gray v Mitchell, 145 Or 519, 28 P2d 631; First Nat'l Bank v Larson, 53 SD
262, 220 NW 506, 68 ALR 940.
Footnote 90. Horton v Hedberg, 143 Colo 62, 351 P2d 843; Coseboom v Marshall's
Trust, 67 NM 405, 356 P2d 117; Schottenstein v Devoe (Hamilton Co) 83 Ohio App 193,
38 Ohio Ops 266, 52 Ohio L Abs 184, 82 NE2d 552.
Footnote 91. 68A Am Jur 2d, Secured Transactions 695.
Footnote 92. Aid Inv. & Discount, Inc. v Younkin (App, Franklin Co) 66 Ohio L Abs
514, 118 NE2d 183 (decided under pre-UCC law which accords with the UCC).
Annotation: Repossession by secured seller as affecting his right to recover on note or

other obligation given as a downpayment, 49 ALR3d 364.
Forms: AnswerSurrender of automobile pursuant to demand precludes suit on note

given for purchase price. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 83.
170 Retention of old instrument after execution of new
View Entire Section

If a note is executed in renewal of another, 93 or in payment of a prior note, 94 or to

extend the time of payment of a prior note, 95 or in consideration of forbearance to sue
on another note, 96 the mere fact that the original note is retained and not surrendered or
destroyed does not render the new note unenforceable, in the absence of an express
agreement that the old note shall be surrendered or destroyed; however, if a new note is
given in consideration of the surrender of an old note and the old note is not surrendered
on demand, there is a failure of consideration for the new note. 97
Footnotes
Footnote 93. Purcellville Nat'l Bank v Carter (Mun Ct App Dist Col) 146 A2d 206; Low
v Learned, 13 Misc 150, 34 NYS 68.
Footnote 94. Citizens' Nat'l Bank v Lilienthal, 40 App Div 609, 57 NYS 567.
Footnote 95. Murphy v Carey, 89 Hun 106, 34 NYS 1038.
Footnote 96. Phenix Nat'l Bank v Raia, 68 RI 348, 28 A2d 20, 6 CCH LC 61229, 141
ALR 1474.
Footnote 97. Gansevoort Bank v Gilday, 53 Misc 107, 104 NYS 271; Phenix Nat'l Bank
v Raia, 68 RI 348, 28 A2d 20, 6 CCH LC 61229, 141 ALR 1474.
171 Effect of impossibility of performance
View Entire Section

The maker of a note is excused from paying the note where there has been a failure to
furnish the consideration, even if such failure is due to impossibility for any reason. 98
Where a contract contemplates future performance as the consideration, and before the
time comes for that consideration to pass, and before it has passed, unforeseen things
occur which are not brought about by either party and which make it impossible for the
contract to be performed, a total failure of consideration results. 99
Footnotes
Footnote 98. Wallinger v Kelly, 136 Va 547, 117 SE 850.
Footnote 99. Wilson's Adm'r v Nolen, 200 Ky 609, 255 SW 267, 34 ALR 80; In re Roy's
Estate, 278 Mich 6, 270 NW 196.
There is a failure of consideration for an installment note given to a cooperative

marketing corporation as an extension of credit to assist in the marketing and processing
of the producers' products where the corporation, by its voluntary bankruptcy, rendered
itself incapable of further performance of the marketing contracts with the producers who
made the not. Bliss v California Cooperative Producers, 30 Cal 2d 240, 181 P2d 369,
170 ALR 1009 (superseded by statute on other grounds as stated in Wilson v Steele (2nd
Dist) 211 Cal App 3d 1053, 259 Cal Rptr 851).
In an action to enforce a note given for the purchase price of a product, the seller's
inability to deliver the product because the manufacturer subsequently ceased to
manufacture the product would constitute a good defense. Motor Finance Corp. v
Huntsberger, 116 Ohio St 317, 4 Ohio L Abs 738, 5 Ohio L Abs 201, 156 NE 111
(holding that the defense was not good in the particular case because the plaintiff was a
holder in due course).
172 Miscellaneous
View Entire Section

Various other situations may give rise to the question of whether consideration for a bill
or note exists or has failed. For example, where the consideration for a negotiable
instrument consists of a promise by the payee to do or furnish something and he or she is
unwilling or unable to do so, there is a failure of consideration. 1 However, where an
instrument contains a plain promise to pay an admittedly existing debt, with an added
provision that if certain conditions are not complied with the promise in the instrument
will be of no effect, the condition is a condition subsequent, and substantial performance
of it is all that is required. 2
When the sale of a motor vehicle is void under local law because the seller does not
deliver the title certificate, there is a failure of consideration for the note given by the
buyer in payment. 3 Similarly, where a note is given by an insurance company in
payment of a loss, there is a failure of consideration precluding an action on the note if
the policy is void for want of an insurable interest. 4
Footnotes
Footnote 1. Henry v Reich (Franklin Co) 80 Ohio App 185, 35 Ohio Ops 512, 48 Ohio L
Abs 500, 72 NE2d 500.
Where a personal injury action was settled by the payment of a certain amount in cash
and the giving of 44 notes, and it was stipulated that the settlement fund should be used
to discharge hospital liens, the payee's failure to pay the hospital bills constituted a partial
failure of consideration for the 25th and subsequent notes. Maber, Inc. v Factor Cab
Corp. (1st Dept) 19 App Div 2d 500, 244 NYS2d 768, 2 UCCRS 532.
When the maker executed a note in return for the payee's making a loan to the maker's
son but the loan was never made, there is a failure of consideration and the note could not
be enforced. Progressive State Bank & Trust Co. v Stutts (La App 2d Cir) 516 So 2d
1207.
Footnote 2. Bruner-Goodhue-Cooke-Cranz Agency Co. v Smith (Summit Co) 25 Ohio

App 21, 5 Ohio L Abs 182, 157 NE 407, motion overr (Sup) 25 Ohiolr 332.
Footnote 3. Robinson v Densman (Tex Civ App El Paso) 470 SW2d 451, writ ref n r e
(Jan 5, 1972) and rehg of writ of error overr (Feb 23, 1972).
Footnote 4. Morrison v Boston Ins. Co., 234 Mass 453, 125 NE 698.
D. Illegal Consideration [173-184]
Research References
ALR Digest: Bills and Notes 15-18

1. In General [173-178]
173 Generally
View Entire Section

Commercial paper, like other contracts, 5 is subject to the condemnation of agreements

which are founded upon an illegal consideration 6 or grow out of an illegal
transaction, 7 whether the illegality consists of a violation of a constitutional 8 or
statutory 9 provision, public policy, 10 or good morals. 11 Such illegality may
arise in a great variety of circumstances and is primarily a matter of law outside of the
Uniform Commercial Code. 12
Where parties are equally at fault in the violation of a law or a rule of public policy, the
law will deny relief to either one seeking it; however, this is not the result where the one
who took a note is not the wrongdoer, and the denial of relief would benefit the guilty
body at the expense of the innocent. 13
Footnotes
Footnote 6. Cromwell v County of Sac, 96 US 51, 96 Otto 51, 24 L Ed 681; Ashley

State Bank v Hood, 47 Idaho 780, 279 P 418; Dobbs v Holder (Ky) 242 SW2d 605;
Messineo v Kletz, 16 Misc 2d 624, 185 NYS2d 397, affd (2d Dept) 10 App Div 2d 734,
201 NYS2d 486, app den (2d Dept) 11 App Div 2d 730, 205 NYS2d 887 and app
withdrawn 8 NY2d 708.
Footnote 7. Driscoll v Burlington-Bristol Bridge Co., 8 NJ 433, 86 A2d 201, cert den
344 US 838, 97 L Ed 652, 73 S Ct 25, reh den 344 US 888, 97 L Ed 687, 73 S Ct 181;
Messineo v Kletz, 16 Misc 2d 624, 185 NYS2d 397, affd (2d Dept) 10 App Div 2d 734,
201 NYS2d 486, app den (2d Dept) 11 App Div 2d 730, 205 NYS2d 887 and app
withdrawn 8 NY2d 708.
Footnote 8. Weinberg v Goldstein, 226 App Div 479, 235 NYS 529.
Footnote 9. Craig v Missouri, 29 US 410, 4 Pet 410, 7 L Ed 903; Ludwig v Steger, 99

Cal App 235, 278 P 494; Beverage Co. v Villa Marie Co., 69 SD 627, 13 NW2d 670.
Footnote 10. Embrey v Jemison, 131 US 336, 33 L Ed 172, 9 S Ct 776; Driscoll v

Burlington-Bristol Bridge Co., 8 NJ 433, 86 A2d 201, cert den 344 US 838, 97 L Ed
652, 73 S Ct 25, reh den 344 US 888, 97 L Ed 687, 73 S Ct 181.
Footnote 11. Board of Educ. v Angel, 75 W Va 747, 84 SE 747.
3-305 [1990 Rev].
Footnote 13. Furlong v Johnston, 209 App Div 198, 204 NYS 710, affd 239 NY 141, 145
NE 910.
174 Illegality as dependent upon legislative intent
View Entire Section

As in the case of contracts, generally, 14 the mere fact that a statute is violated in a
particular transaction does not render illegal a bill or note executed in the transaction. 15
In determining whether a bill or note made in violation of a law is legal or illegal, the test
is the intention of the legislature 16 and the entire statute must be examined to determine
such intent. 17 Under this rule, an action on a check is not barred by a violation of a
law requiring that the check cashers be licensed where the statute does not evince a clear
legislative intent to deprive the person of contractual rights. 18
Footnotes
Footnote 15. Miltenberger v Cooke, 85 US 421, 18 Wall 421, 21 L Ed 864; First Nat'l
Bank v Luverne, 235 Ala 606, 180 So 283; Furlong v Johnston, 209 App Div 198, 204
NYS 710, affd 239 NY 141, 145 NE 910.
Footnote 16. Pinney v First Nat'l Bank, 68 Kan 223, 75 P 119.
It does not necessarily follow that when the law prohibits an act, a contract made in
contravention thereof may be avoided, as the intent of the legislature may be to impose
other penalties rather than to declare the contract void. Conrad v Rarey, 125 Ohio St
326, 181 NE 444.
Footnote 17. Harris v Runnels, 53 US 79, 12 How 79, 13 L Ed 901; Mascari v Raines,
220 Tenn 234, 415 SW2d 874.
Annotation: Construction and effect of constitutional or statutory provisions

precluding issuance of corporate stock in consideration of promissory notes, 78
ALR2d 834.
Footnote 18. Messineo v Kletz, 16 Misc 2d 624, 185 NYS2d 397, affd (2d Dept) 10
App Div 2d 734, 201 NYS2d 486, app den (2d Dept) 11 App Div 2d 730, 205 NYS2d
887 and app withdrawn 8 NY2d 708.
Annotation: Failure of building and construction artisan or contractor to procure

business or occupational license as affecting enforceability of contract or right of
recovery for work donemodern cases, 44 ALR4th 271.
Rights of assignee or subsequent holder of negotiable paper executed to a foreign
corporation doing business in state without compliance with local requirements, 80
ALR2d 465.
175 Relation between illegality and consideration
View Entire Section

In order to prevent recovery on the ground of illegality, the connection of the plaintiff
with the illegal transaction must be direct and not remote. 19 The test in determining
whether the relation of an illegal transaction is sufficiently close to preclude recovery by
the plaintiff is whether the plaintiff can establish his or her case without requiring the aid
or proof of the illegal consideration; if so, the plaintiff may recover. 20 In some
situations, however, the denial of recovery may be based not on an illegal contract, but on
the plaintiff's participation in or knowledge of the defendant's intended unlawful use of
the consideration. 21
Footnotes
Footnote 19. Central Republic Trust Co. v Evans, 378 Ill 58, 37 NE2d 745.
Footnote 20. Rogers v First State Bank, 79 Colo 84, 243 P 637; Central Republic Trust
Co. v Evans, 378 Ill 58, 37 NE2d 745.
Footnote 21. 176.
176 Knowledge of intended unlawful use
View Entire Section

Where money is loaned or property is transferred as consideration for a bill or note, and
such money or property is used or is further transferred in an illegal transaction, the
question as to whether the bill or note is rendered unenforceable ordinarily turns on
whether the payee participated in the illegal transaction or had knowledge of an intended
illegal use. 22 As a general rule, consideration for a promise on commercial paper is
illegal by force of the known intended use of the consideration, not by reason of such
knowledge alone, but only where the promisee becomes a participant in the illegal design
or act, as where money is advanced for the express purpose of being put to the intended
use. 23 Thus, a person who advances money on a note is not precluded from recovery
by the fact that the money was used corruptly or illegally if he or she did not know that

the money was to be so used. 24
Footnotes
Footnote 22. Rose v Nelson, 79 Cal App 2d 751, 180 P2d 749.
Footnote 23. Hanauer v Doane, 79 US 342, 12 Wall 342, 20 L Ed 439; Sondheim v

Gilbert, 117 Ind 71, 18 NE 687; Johnson v McMillion, 178 Ky 707, 199 SW 1070.
One who made a loan with knowledge that the borrower intended to finance a bookmaker
could not recover on a note given for such loan. Chapin v Austin, 165 Misc 414, 300
NYS 932.
Footnote 24. Leite v Dietz, 95 Cal App 2d 41, 212 P2d 265; Brock v Wilson, 290 Ky
425, 161 SW2d 637.
177 Partial illegality
View Entire Section

Partial illegality of consideration for a bill or note is generally regarded as being as

complete a defense as is total illegality. 25 However, it has been recognized that where
there are distinct transactions, some of which are legal and some of which are illegal,
constituting the total consideration for an instrument, and these transactions are
separable, the payee or other holder may recover the legal portion of the obligation. 26
Footnotes
Footnote 25. Johnson v McMillion, 178 Ky 707, 199 SW 1070; Widoe v Webb, 20 Ohio
St 431.
If the consideration for a bill or note is in part illegal, the instrument is wholly void, at
least in the event the illegal part is indefinite or inseparable from the remainder.
Campbell v Romfh Bros., Inc. (Fla App D2) 132 So 2d 466.
Footnote 26. Parker v Claypool, 223 Miss 213, 78 So 2d 124, 53 ALR2d 340, corrected
223 Miss 218, 78 So 2d 884, 53 ALR2d 343.
178 Effect of renewal
View Entire Section

In the absence of waiver or estoppel, 27 it is the general rule that the taint of illegality
of consideration for a bill or note is not removed by renewal, and such illegality operates
against the renewal, 28 however remote 29 and, even though made in compromise, 30
as fully as against the original paper. However, the rule is somewhat qualified as to
usurious consideration, since under some circumstances, in particular the execution of a
new obligation for the amount of the actual debt, free from usury and bearing only legal
interest, such a change may be worked by a renewal as to purge the transaction of usury.
31
Footnotes
Footnote 27. 553, 554.
Footnote 28. Williams v Turnbull, 65 Okla 34, 162 P 770.
A renewal note, which is given in place of an original note based upon a gambling
consideration, has no more validity than the original note, and the same defense that can
be made in a suit on the original note can be made in a suit on the renewed obligation.
Kinker v Aberegg (Sandusky Co) 40 Ohio App 43, 8 Ohio L Abs 741, 177 NE 645.
As to statutory provisions rendering void notes and bills given in consideration of money
won or lost in a gambling transaction, see 180.
Footnote 29. Brown v Marion Nat'l Bank, 169 US 416, 42 L Ed 801, 18 S Ct 390.
Footnote 30. Fowler v Cheirrett, 69 Idaho 224, 205 P2d 502.
Footnote 31. 45 Am Jur 2d, Interest and Usury 252.
2. Particular Transactions [179-184]
179 Concealment, suppression, or compounding of offense
View Entire Section

In accordance with general contract principles, 32 the consideration for commercial

paper is illegal, and the paper void and unenforceable as between the parties where it is
given to conceal, suppress, or compound a crime, 33 even though it is also given in
settlement of civil liability arising from the same act that constitutes the offense. 34
However, consideration for an instrument is not necessarily illegal because it bears some
relation to a charge of crime, such as where the consideration of an instrument is the
compromise of a legal claim arising out of the crime which does not involve any
smothering of the crime or perversion of the use of the criminal law. 35 Similarly, an
instrument executed to repay embezzled money is valid in the absence of a threat to
prosecute or a promise to suppress prosecution. 36
Footnotes
Footnote 32. 17A Am Jur 2d, Contracts 272 et seq.
Footnote 33. W. T. Joyce Co. v Rohan, 134 Iowa 12, 111 NW 319; Union Exch. Nat'l
Bank v Joseph, 231 NY 250, 131 NE 905, 17 ALR 323; Board of Educ. v Angel, 75 W
Va 747, 84 SE 747.
A promissory note given for a promise not to instigate a criminal prosecution for
embezzlement was void as against public policy and good morals. Thom v Stewart, 162
Cal 413, 122 P 1069.
Footnote 34. Haynes v Rudd, 102 NY 372, 7 NE 287.
Footnote 35. Blair Milling Co. v Fruitager, 113 Kan 432, 215 P 286, 32 ALR 416;
O'Neil v Dux, 257 Minn 383, 101 NW2d 588.
Footnote 36. Blair Milling Co. v Fruitager, 113 Kan 432, 215 P 286, 32 ALR 416;
O'Neil v Dux, 257 Minn 383, 101 NW2d 588; Great Am. Indem. Co. v Berryessa, 122
Utah 243, 248 P2d 367.
180 Gambling
View Entire Section

Antigambling statutes which declare void bills, notes, and other obligations based upon
gambling consideration are independent of, and unaffected by, the Uniform Commercial
Code. 37 Thus, whether based on statute or public policy, illegality of consideration
arising out of a gaming or wagering transaction voids a bill or note at least as against the
original parties and parties with notice. 38 Accordingly, an instrument is
unenforceable by reason of illegality of consideration where the lender knows that the
money loaned is to be used by the borrower in gambling 39 or in setting up an unlawful
gambling enterprise, 40 such as a lottery establishment. 41 However, the fact that an
instrument is used to raise money for gambling purposes does not preclude recovery on
such instrument where the person advancing the money is without knowledge of such
purpose. 42 Moreover, if checks are cashed at an establishment that runs a legitimate
business as well as a gambling house, and if there is no restriction on the use of the
money given in exchange for the checks, a jury may find that the transaction is not
tainted with illegality. 43

Observation: It has been recognized that the owner or operator of a licensed
gambling establishment in Puerto Rico may recover the amount of checks given in
Puerto Rico in payment of gambling debts incurred there, even though the checks were
drawn on state banks and were sought to be enforced in those jurisdictions, 44 where
the debts were valid in Puerto Rico and where Puerto Rican law provided a remedy for
their enforcement. 45
Footnotes
3-305 [1990 Rev].
Footnote 38. Embrey v Jemison, 131 US 336, 33 L Ed 172, 9 S Ct 776; Fowler v

Cheirrett, 69 Idaho 224, 205 P2d 502; Farmers' State Bank v Clayton Nat'l Bank, 31 NM
344, 245 P 543, 46 ALR 952.
Footnote 39. Hamilton v Abadjian, 30 Cal 2d 49, 179 P2d 804; Chapin v Austin, 165
Misc 414, 300 NYS 932.
The owner of a gambling house who honors a check for the purpose of providing a
prospective customer with funds with which to gamble and who then participates in the
transaction thus promoted by that act cannot recover on the check. Lane & Pyron, Inc. v
Gibbs (3rd Dist) 266 Cal App 2d 61, 71 Cal Rptr 817.
A promissory note for money furnished for gambling purposes was void, whether the
money was lost at the time of the giving of the note or not. Kinker v Aberegg (Sandusky
Co) 40 Ohio App 43, 8 Ohio L Abs 741, 177 NE 645.
Annotation: Right to recover money lent for gambling purposes, 53 ALR2d 345.
Footnote 40. Corre v Rogers, 57 Ohio St 661, 50 NE 1128.
Footnote 41. Sloss v Holland, 38 Cal App 318, 176 P 72.
Footnote 42. Birdsall v Wheeler, 62 App Div 625, 71 NYS 67, affd 173 NY 590, 65 NE
1114.
Footnote 43. Hamilton v Abadjian, 30 Cal 2d 49, 179 P2d 804.
Footnote 44. Caribe Hilton Hotel v Toland, 63 NJ 301, 307 A2d 85, 71 ALR3d 171;
Intercontinental Hotels Corp. v Golden, 15 NY2d 9, 254 NYS2d 527, 203 NE2d 210.
Footnote 45. Intercontinental Hotels Corp. v Golden, 15 NY2d 9, 254 NYS2d 527, 203
NE2d 210.
181 Usurious consideration

View Entire Section
The statutes of the various jurisdictions which limit the amount of interest that may be
exacted on a loan or forbearance of money and which make provision for the violation of
such statutes are not repealed or otherwise affected by Article 3 of the Uniform
Commercial Code. 46 Thus, where a transaction accompanying a bill or note is
condemned by the usury statutes, the usury may preclude any recovery on such bill or
note, 47 or may limit recovery to the principal and the legal rate of interest. 48
Footnotes
3-305 [1990 Rev].
Footnote 47. Hare v General Contract Purchase Corp., 220 Ark 601, 249 SW2d 973;
Consumers Credit Service, Inc. v Craig (Mun Ct App Dist Col) 75 A2d 525; Modern
Finance Co. v Holz, 307 Mass 281, 29 NE2d 922.
Footnote 48. Braswell v Tindall, 200 Tenn 629, 294 SW2d 685.
As to the effect of usury on a renewal note, see 178.
As to the effect of usury, generally, see 45 Am Jur 2d, Interest and Usury 238 et seq.
182 Paper given on issuance or redemption of corporate stock
View Entire Section

Where a promissory note is given for the issuance of corporate stock in violation of a
statute which precludes the issuance of stock for promissory notes, such a note is
generally unenforceable by the corporation, or a transferee with notice, as without legal
consideration. 49 However, receivers, trustees in bankruptcy, and others acting on
behalf of creditors of a corporation which has failed, are usually permitted to enforce
such a note. 50 In addition, a transferee who has given money for a note executed in
payment for stock may be entitled to enforce such note against the maker, on the ground
that there was compliance with the spirit, if not the letter, of a statute requiring payment
for stock in cash, when the subscriber gave a note which enabled the corporation to
obtain the cash required by the statute. 51
Footnotes
Footnote 49. Bank of Manila v Wallace, 177 Ark 190, 5 SW2d 937, later app 181 Ark
1086, 29 SW2d 297.

ALR2d 834.
Footnote 50. Roth v Wallar (Mo) 462 SW2d 741; Thompson v First State Bank, 109 Tex
419, 211 SW 977.
On the ground that it would be inequitable to deny a liability upon the note, a trustee in
bankruptcy of the corporation was entitled to recover against the maker, who was an
incorporator, director, and the president of the corporation, who put himself in the
position of a stockholder by issuing stock to himself and giving his note in payment.
Backus v Hutson, 136 Misc 290, 240 NYS 610.
Footnote 51. Furlong v Johnston, 239 NY 141, 145 NE 910.
183 Violation of miscellaneous statutes or laws
View Entire Section

Statute or laws, the violation of which has been recognized as involving an illegal
consideration for a bill or note include
bankruptcy or insolvency laws which preclude preferences or secret agreements to

induce acceptance of a composition agreement or provide for the equal distribution of an
insolvent's estate. 52
banking laws governing the right to transact banking business or make loans, 53 and
certain other banking laws. 54
license laws 55 designed for public protection. 56
statutes prohibiting or regulating sales of certain items other than securities, such as
fertilizers 57 or automobiles. 58
exchange regulations of a foreign country and the Articles of Agreement of the

International Monetary Fund. 59
statutes providing for the creation and limitation of the powers of corporations, 60 or
prohibiting foreign corporations from doing business in a state without being authorized
to do so. 61
Footnotes
Footnote 52. Fox v Gardner, 88 US 475, 21 Wall 475, 22 L Ed 685; Hanover Nat'l Bank
v Blake, 142 NY 404, 37 NE 519.
Footnote 53. Miller v Discount Factors, Inc., 1 NY2d 275, 152 NYS2d 273, 135 NE2d
33.
Footnote 54. First Nat'l Bank v Union Trust Co., 158 Mich 94, 122 NW 547 (involving
the certification of a check for a drawer without funds); McGoldrick v Family Finance
Corp., 287 NY 535, 41 NE2d 86, 141 ALR 909 (involving a small-loan provision that no
licensee shall permit a borrower to become indebted to him under more than one contract
of loan).
Footnote 55. Pace v Hanson, 6 Ariz App 88, 430 P2d 434; Vedder v Spellman, 78 Wash
2d 834, 480 P2d 207, 8 UCCRS 1058.
A seller of property was not entitled to recover on a promissory note received from the
buyer as a partial down payment for a lot with a building on which the seller was to
perform substantial remodeling work, where the seller was not a licensed contractor.
Matison v Barassi (App) 118 Ariz 538, 578 P2d 619.
Footnote 56. Douthart v Congdon, 197 Ill 349, 64 NE 348; Rash v Farley, 91 Ky 344, 15
SW 862, affd 159 US 263, 40 L Ed 146, 15 S Ct 1042.
Footnote 57. Florence Cotton Oil Co. v Anglin, 105 Ark 672, 152 SW 295; Swift & Co. v
Aydlett, 192 NC 330, 135 SE 141.
Footnote 58. Ludwig v Steger, 99 Cal App 235, 278 P 494.
Footnote 59. Brill v Chase Manhattan Bank (1st Dept) 14 App Div 2d 852, 220 NYS2d
903.
Footnote 60. Reilly v Clyne, 27 Ariz 432, 234 P 35, 40 ALR 1005; Republican Art
Printery v David, 173 App Div 726, 159 NYS 1010.
Footnote 61. Manufacturers' Commerical Co. v Blitz, 131 App Div 17, 115 NYS 402.
Annotation: Rights of assignee or subsequent holder of negotiable paper executed to a

foreign corporation doing business in state without compliance with local
requirements, 80 ALR2d 465.
184 Violations of public policy or good morals in other respects
View Entire Section

Illegality of consideration on a bill or note, by reason of contravention of public policy or

good morals exists in a variety of contexts, such as where an instrument is given to
influence public officials in the discharge of their official duties 62 or a fiduciary in
discharge of his or her trust. 63 Consideration is likewise illegal where an instrument is
given to effect an obstruction of justice, 64 an unlawful restriction or restraint on trade
and commerce, 65 or free bidding for a contract for public works. 66
Footnotes
344 US 838, 97 L Ed 652, 73 S Ct 25, reh den 344 US 888, 97 L Ed 687, 73 S Ct 181.
Footnote 63. Dickson v Baker, 75 Minn 168, 77 NW 820; Anderson v O'Briant (Tex Civ
App) 3 SW2d 842, writ ref.
Footnote 64. Johnson v McMillion, 178 Ky 707, 199 SW 1070; Liberty Mut. Ins. Co. v
Gilreath, 191 SC 244, 4 SE2d 126, 129 ALR 1148.
Footnote 65. In re Holmes' Estate, 132 Kan 443, 295 P 716, 74 ALR 285.
Footnote 66. Federal Farm Mortg. Corp. v Hatten, 210 La 249, 26 So 2d 735; Northwest
Adjustment Co. v Payne, 173 Or 229, 144 P2d 718.
IV. ISSUANCE OR FIRST DELIVERY OF INSTRUMENT [185-189]
Research References
UCC 1-201; UCC 3-102, 3-306 [1952]; UCC 3-105, 3-305 [1990 Rev]
ALR Index: Account Stated; Banks and Banking; Checks and Drafts; Payment; Uniform
Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms 31-33
5A Anderson, Uniform Commercial Code 3d 3-102:4; 6 Anderson, Uniform
Commercial Code 3d 3-305:126; 6A Anderson, Uniform Commercial Code 3d [Rev]
3-105:4, 3-105:6, 3-105:7, 3-305:14
185 Generally; necessity of delivery
View Entire Section

An instrument is issued by its delivery, meaning the voluntary transfer of possession

thereof, 67 from the maker or drawer to the first taker; the issuance of an instrument,
therefore, is to be distinguished from a transfer or negotiation of the instrument from a
first or subsequent holder to a successor holder. 68
Definitions: "Issue" is defined in the pre-1990 version of the Uniform Commercial

Code (UCC) as the first delivery of an instrument to a holder or remitter. 69 Under
the 1990 Revision of the UCC, the term "issue" means the first delivery, if an
instrument by the maker or drawer to a holder of nonholder for the purpose of giving
rights on the instrument to any person. 70
Comment: The 1990 Revision of the UCC defines the term "issue" more broadly
than the pre-1990 version to include the first delivery to anyone by the drawer or
maker for the purpose of giving rights to anyone on the instrument. 71
An instrument takes effect from the time of its delivery, rather than from its date or the
time of its signature, 72 and delivery of a negotiable instrument, therefore, is essential to
its effectiveness. 73 The payee acquires no rights in the instrument prior to its delivery.
74 In the absence of a valid delivery, for example, a payee has no conversion claim
against a bank for payment of a check on a forged endorsement. 75
Footnotes
Footnote 67. 186.
Footnote 69. UCC 3-102(1)(a) [1952].
Footnote 72. Gentry v Gentry, 123 Ind App 270, 110 NE2d 509; John Hancock Mut. Life
Ins. Co. v Fidelity-Baltimore Nat'l Bank & Trust Co., 212 Md 506, 129 A2d 815.
Footnote 73. Burke v Mission Bay Yacht Sales (4th Dist) 214 Cal App 2d 723, 29 Cal
Rptr 685.
Forms: Complaint, petition, or declarationAllegationDelivery of note. 5 Am Jur Pl

& Pr Forms (Rev), Bills and Notes, Form 31.
Instruction to juryWhat constitutes delivery of note. 5 Am Jur Pl & Pr Forms, (Rev),

Bills and Notes, Form 33.
Footnote 74. City Nat'l Bank v Wernick (Fla App D3) 368 So 2d 934, 26 UCCRS 444,
cert den (Fla) 378 So 2d 350.
Footnote 75. Cook v Great W. Bank & Trust (App) 141 Ariz 80, 685 P2d 145, 39
UCCRS 214.
The payee must prove that the instrument was issued to him or to someone on his behalf
in order to sue for conversion of the instrument. Florida Nat'l Bank v Isaac Industries,
Inc. (Fla App D3) 560 So 2d 1203, 15 FLW D624, 11 UCCRS2d 898.
186 Requirement of voluntariness

View Entire Section
Delivery is the voluntary transfer of possession of an instrument. 76 Whether there has

been a delivery of an instrument sufficient to constitute its issuance, therefore, involves,
as an essential fact, the maker's intention in surrendering the instrument. 77 It must
appear that the maker, in some way, evinced an intention to make the instrument
enforceable, according to its terms, by surrendering control over it and intentionally
placing it under the power of the payee or of some third person for the payee's use. 78
Thus, for example, there is no issue of an instrument when one maker gives the
instrument to a comaker for the latter to sign, or when the instrument is transmitted to the
payee's lawyer for examination; it is only a transmittal to the payee that constitutes an
issuance. 79
Footnotes
Footnote 77. Brown v Newby, 8 Cal App 2d 203, 47 P2d 1076.
Footnote 78. City Nat'l Bank v Wernick (Fla App D3) 368 So 2d 934, 26 UCCRS 444,
cert den (Fla) 378 So 2d 350.
In order for a note or other written agreement to be enforceable, it must have been
delivered for the purpose of giving it effect as a valid existing contract. State Bank of
Newfane v Lautz, 141 Misc 276, 252 NYS 461.
As to delivery to a third person or constructive delivery, see 188.
187 Nondelivery or nonissuance as defense
View Entire Section

The Uniform Commercial Code (UCC) recognizes that a person other than a holder in
due course takes an instrument subject to all defenses which would be available in an
action on a simple contract, including the defense of nondelivery. 80 Under the
pre-1990 version of the UCC, nondelivery of an instrument or delivery for a special
purpose is a defense against any person not having the rights of a holder in due course. 81
Either nondelivery or conditional delivery, normally, must be pleaded as an affirmative
defense. 82 However, while failure to deliver an instrument is a defense to enforcement,
possession of an instrument generally imports delivery. 83

Observation: Under both the pre-1990 version of the UCC and the 1990 Revision,
unless the plaintiff has the rights of a holder in due course recovery on an instrument,
may be barred by proof that the paper was lost or stolen. 84
Under the 1990 Revision of the UCC, an unissued instrument is binding on the maker or
drawer, but nonissuance is a defense 85 as against one who is not a holder in due course.
86 Likewise, an instrument that is conditionally issued or is issued for a special purpose
is binding on the maker or drawer, but failure of the condition or special purpose to be
fulfilled is a defense. 87
An accommodation party may assert defenses, such as nonissuance and conditional

issuance against the person entitled to enforce the instrument to the same extent that the
accommodated party could assert such defenses. 88
Footnotes
Footnote 80. Ryan v Ryan (Del Super Ct) 298 A2d 343, 12 UCCRS 150.
Forms: Answer of nondelivery of incomplete note subsequently lost or stolen. 5 Am

Jur Pl & Pr Forms (Rev), Bills and Notes, Form 32.
Footnote 81. UCC 3-306(c) [1952].
As to conditional delivery or delivery for a special purpose, see 189.
As to the status and rights of holders in due course, see 247 et seq.
Where the guarantors of a promissory note did not raise the defenses of lack of
consideration or lack of delivery, the note was presumed to be valid in those respects.
Lakhaney v Anzelone (SD NY) 788 F Supp 160, 18 UCCRS2d 191.
Footnote 83. Citicorp Int'l Trading Co. v Western Oil & Refining Co. (SD NY) 790 F
Supp 428, 19 UCCRS2d 499 (holding that the makers, as sophisticated business people,
were required to prove an absence of delivery to a holder who produced an original,
executed promissory note).
Where a negotiable instrument is no longer in the possession of a person whose signature

appears thereon, a valid and intentional delivery by that person is presumed until the
contrary is proved. Scherer v Hyland, 153 NJ Super 521, 380 A2d 704, affd 75 NJ 127,
380 A2d 698.

188 Constructive delivery; delivery to third person
View Entire Section

Constructive delivery of an instrument by some act which is equivalent to actual delivery

89 is sufficient to show a voluntary transfer of possession, 90 if it is made with the
intention of transferring title to the instrument. 91 Constructive delivery may occur, for
example, by delivery of the instrument to the payee's agent, 92 or to a co-indorsee 93 or
co-payee. 94 However, constructive delivery occurs only when the maker indicates an
intention to make the instrument an enforceable obligation against him or her by
surrendering control over it and intentionally placing it under the power of the payee or a
third person. 95 Thus, putting an instrument into the hands of the maker's own agent,
even though for delivery to the payee, does not constitute delivery to the payee, because
the principal has control of the agent and such an instrument is revocable and ineffective
until the agent delivers it. 96
If a negotiable instrument is delivered by mail, the deposit of the instrument in the post
office addressed to the payee, with the payee's assent, is a sufficient delivery. 97 But,
such a deposit does not constitute delivery to the other party if the carrier cannot
reasonably be considered to be the agent of the party to whom the instrument is
addressed, as where the payee has no knowledge of the transaction until receipt of the
instrument through the mail; in that event, the instrument is not delivered until it is
received by the payee. 98
Footnotes
Footnote 89. In re Shama's Estate, 245 Iowa 1039, 65 NW2d 360.
Footnote 90. Casto v Martin, 159 W Va 761, 230 SE2d 722.
Footnote 91. Snyder v Town Hill Motors, Inc., 193 Pa Super 578, 165 A2d 293, 1
UCCRS 231.
Where a bank issues checks payable to a payee and delivers them to a party who has an
obligation to the payee, for the use and benefit of the payee, there has been a constructive
delivery of the checks. Florida Nat'l Bank v Isaac Industries, Inc. (Fla App D3) 610 So
2d 57, 17 FLW D2758, 19 UCCRS2d 823.
Footnote 92. Thornton & Co. v Gwinnett Bank & Trust Co., 151 Ga App 641, 260 SE2d
765, 27 UCCRS 1353.
Constructive delivery of notes occurs where an individual, acting as agent or fiduciary for
each of his daughters, makes actual delivery of promissory notes at the time of their
execution to himself as agent for the daughters, and the notes are found after the maker's
death in his desk in two folders which bear the names of the daughters. First Nat'l Bank
v Hunt (Fla App D4) 244 So 2d 481.
Footnote 93. Lund's, Inc. v Chemical Bank (CA2 NY) 870 F2d 840, 8 UCCRS2d 731.
Footnote 94. United States v Bankers Trust Co. (ED NY) 17 UCCRS 136; Burks
Drywall, Inc. v Washington Bank & Trust Co. (2d Dist) 110 Ill App 3d 569, 66 Ill Dec
222, 442 NE2d 648, 35 UCCRS 891.
Footnote 95. Wolfe v Eaker, 50 NC App 144, 272 SE2d 781, 30 UCCRS 574, cert den
302 NC 222, 277 SE2d 69; In re Estate of Balkus (App) 128 Wis 2d 246, 381 NW2d
593, 42 UCCRS 877.
Footnote 96. State v Barclays Bank of New York, N.A., 76 NY2d 533, 561 NYS2d 697,
563 NE2d 11, 12 UCCRS2d 1120 (holding that drawers' delivery of checks to their
accountant did not constitute constructive delivery to the named payee, since the
accountant had no agency or other relationship to the payee).
Footnote 97. People v Larue, 28 Cal App 2d 748, 83 P2d 725.
Footnote 98. Navajo County Bank v Dolson, 163 Cal 485, 126 P 153.
189 Conditional delivery or delivery for special purpose
View Entire Section

Where notes are given subject to conditions upon their delivery, observance of those
conditions is essential to the validity of the notes, and the defense of nonperformance of
any condition precedent is available against one who is not a holder in due course. 99
Likewise, one who is not a holder in due course takes a note subject to the defense that
delivery was for a special purpose only. 1
Observation: The fact that a condition is not satisfied, or that the instrument is not
used for a designated special purpose, does not negate the fact that the instrument was
issued, and the drawer or maker thus cannot assert nonissuance as a defense in those
circumstances; however, if the plaintiff who seeks to enforce the instrument in such a
case does not have the rights of a holder in due course, the plaintiff is subject to the
defense that the condition on which the instrument was issued has not been satisfied or
that the instrument was not used for the purpose for which it was issued. 2
When a promissory note is delivered to an escrow agent to be delivered and become

binding on the happening of a contingency, it is not enforceable until that event takes
place. 3 However, if a note is left in escrow with a third person to be delivered to the
payee on the happening of a contingency, delivery to the payee under the escrow takes
effect instantly upon the performance of the condition. 4

Although parol evidence ordinarily may not be introduced to contradict or vary the terms
of a written note, it may be shown by such evidence that a negotiable instrument which
has been manually delivered to the payee is not to become a binding contract except upon
the happening of a certain event. 5 For example, parol evidence showing an agreement
that any renewal notes are to be indorsed by all of the original indorsers is sufficient to
make the notes unenforceable against persons whose delivery of guarantees was
conditioned upon the procurement of all such indorsements. 6
Footnotes
Footnote 99. Ventures, Inc. v Jones, 101 Idaho 837, 623 P2d 145, 30 UCCRS 1601.
An unconditional delivery of a note by the maker to the payee is presumed from a manual
delivery thereof, until the contrary is shown. Cockrell v Taylor, 122 Fla 798, 165 So
887, 105 ALR 1338.
Where a note executed for deferred payments under a land contract is delivered on the
condition that it be returned if the contract is canceled, and the contract is in fact canceled
but the note is purchased by, and negotiated to, an affiliate of the vendor in the land
contract, the affiliate cannot recover on the note, because he has notice of the conditional
delivery thereof. Coral Gables, Inc. v Wilkinson, 132 Fla 516, 182 So 289.
Footnote 1. Ventures, Inc. v Jones, 101 Idaho 837, 623 P2d 145, 30 UCCRS 1601
(stating that delivery for a special purpose occurs where it the delivery of an instrument is
made with the understanding that the recipient is to use the instrument in a certain way or
for a certain purpose, such as where notes are given as interim security only).
If a note is delivered upon the condition that it is to become the payee's on the happening
of certain events and those events do not happen, there is a conditional delivery
precluding the passing of title in the note; likewise, if a note is delivered for the purpose
of carrying out some particular transaction and that purpose is not accomplished, such
failure prevents the title to the note from passing. Anderson v Ax, 104 Fla 294, 139 So
798.
Footnote 3. Johnson v Bond (Tex Civ App Fort Worth) 540 SW2d 516, writ ref n r e
(Dec 31, 1976).
Where a note is placed in escrow along with the payee's assignment of a land contract
and an agreement for a deed, with instructions to deliver the assignment and agreement to
the maker upon his or her payment of the note, but the note is never paid and remains in
the hands of the escrow agent, there is no delivery of the note entitling the payee to sue
thereon. Aughtry v Keary, 112 Fla 609, 150 So 804.
Footnote 4. Stewart v Santa Rosa Mining Co., 62 Cal App 2d 201, 144 P2d 31.
Footnote 5. Ketchian v Concannon (Fla App D5) 435 So 2d 394, 36 UCCRS 1259
(stating that such evidence is allowed on the theory that it only goes to prove that the
instrument never matured into a valid obligation, and thus, there is no contradiction or

variance of the written agreement as such); McPherson v Longview United Pentecostal
Church, Inc. (Tex Civ App Tyler) 540 SW2d 424, 19 UCCRS 1366, 90 ALR3d 329, writ
ref n r e (Oct 27, 1976) and rehg of writ of error overr (Dec 31, 1976); Scott v Wall, 55
Wash App 404, 777 P2d 581, 9 UCCRS2d 980.
There is a distinction between a parol condition affecting the delivery of an instrument

and one affecting its payment; unlike oral proof of a condition to delivery, a parol
condition or agreement relating to payment of a delivered note is not enforceable if it
operates to add to, take away from, or vary the terms of the written agreement.
McPherson v Longview United Pentecostal Church, Inc. (Tex Civ App Tyler) 540 SW2d
424, 19 UCCRS 1366, 90 ALR3d 329, writ ref n r e (Oct 27, 1976) and rehg of writ of
error overr (Dec 31, 1976).
Footnote 6. Long Island Trust Co. v International Institute for Packaging Education, Ltd.,
38 NY2d 493, 381 NYS2d 445, 344 NE2d 377, 18 UCCRS 705.
Nonfulfillment of the condition that there be 15 accommodation makers cosigning a note,

which condition is shown by parol evidence, establishes the nonliability of nine who have
signed. Danville UAW CIO Local Credit Union v Randle (4th Dist) 58 Ill App 2d 84,
206 NE2d 253.
V. MATURITY OF INSTRUMENT [190-201]
Research References
UCC 3-114, 3-503 [1952]; UCC 3-113 [1990 Rev]; UCC 4-401, 4-404
ALR Digest: Banks 105 et seq.; Bills and Notes 176 et seq.; Uniform Commercial
Code 1 et seq.
ALR Index: Bills and Notes; Maturity; Payment; Uniform Commercial Code
3:19
7 Anderson, Uniform Commercial Code 3d 4-401:4, 4-401:7
190 Demand instruments
View Entire Section

An instrument is payable on demand if (1) it states that it is payable on demand or at

sight, (2) it otherwise indicates that it is payable at the will of the holder, or (3) no time of
payment is stated. 7 Thus, an instrument matures and is payable immediately on its
delivery if no time is fixed for payment and no contingency specified upon which
payment is to be made. 8 However, where a demand instrument other than a check is
antedated or postdated, the instrument is not payable before the date of the instrument. 9

A check is a demand instrument which is ordinarily due and payable on presentation and
demand. 10 While a bank is under no obligation to a customer having a checking
account to pay a check, other than a certified check, which is presented for payment more
than six months after its date, the bank may charge its customer's account for a payment
made thereafter in good faith. 11 Moreover, 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. 12
Observation: An item is properly payable if it is (1) authorized by the customer and

(2) in accordance with any agreement between the customer and the bank. 13
If notice is properly given to the bank that a check is postdated, and the bank pays the
postdated check before its date despite having received that notice, the bank is liable for
the loss resulting from the payment; in addition, the loss may include damages for
wrongful dishonor of subsequent items. 14
Footnotes
Footnote 7. 105.
Footnote 8. Sheehy v Mandeville, 11 US 208, 7 Cranch 208, 3 L Ed 317; Rottman v

Hevener, 54 Cal App 485, 202 P 334; Bryan v First Baptist Church (Fla App D2) 158 So
2d 140; Pine v Okoniewski, 256 App Div 519, 11 NYS2d 13.
Sight instruments are demand instruments and mature, not on the date drawn, but any
time after that date when demand for payment is made. Engine Parts v Citizens Bank, 92
NM 37, 582 P2d 809, 23 UCCRS 1248.
A sight draft is a draft which is payable on demand. First State Bank v Shuford Mills,
Inc. (Tex App Corpus Christi) 716 SW2d 649, 2 UCCRS2d 1032, writ ref n r e (Mar 4,
1987) and rehg of writ of error overr (Apr 15, 1987).
As to instruments payable upon the happening of a contingency, see 192.
Forms: Complaint, petition, or declarationTo recover damages for failure of maker to

pay demand note on demand. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Footnote 9. UCC 3-114(2) [1952]; UCC 3-113(a)[1990 Rev].
Footnote 10. Anderson v Elem 11 Kan 713, 208 P 573, 23 ALR 1202; State v Hardin
(Mo App) 627 SW2d 908; Urick Foundry Co. v Workmen's Compensation Appeal Bd.
(Aarnio), 91 Pa Cmwlth 24, 496 A2d 883, 42 UCCRS 1335.
A draft is a three-party instrument by which the drawer orders the drawee to pay money
to the payee, and is called a check when the drawee is a bank and the instrument is
payable on demand. Tepper by & Through Michelson v Citizens Federal Sav. & Loan
Asso. (Fla App D3) 448 So 2d 1138, 38 UCCRS 528.

Footnote 12. UCC 4-401(c).
Footnote 13. 7 Anderson, Uniform Commercial Code 3d [Rev] 4-401:4.
Footnote 14. 7 Anderson, Uniform Commercial Code 3d [Rev] 4-401:7.
191 Time instruments
View Entire Section

The date stated on the instrument determines the time of payment if the instrument is
payable at a fixed period after the date. 15 An instrument payable on or before a
specified date merely gives the maker an option to pay at an earlier date; the instrument
does not mature until the date specified. 16 An instrument which is payable on or before
a specified date, but sooner on the happening of a stated contingency, is due on the
specified date or on such earlier date on which the contingency occurs. 17 Similarly, if
an instrument which is payable at a fixed date is also payable upon demand before the
fixed date, the instrument is payable on demand until the fixed date; if demand for
payment is not made before that date, the instrument becomes payable at a definite time
on the fixed date. 18
Footnotes
As to instruments payable at a definite time, generally, see 106.
Footnote 16. Third Nat'l Bank v Bowman-Spring, 50 App Div 66, 63 NYS 410;
Herrington v Murphy (Okla) 446 P2d 595; Fortson v Burns (Tex Civ App Waco) 479
SW2d 722, writ ref n r e (Oct 4, 1972).
The phrase "not later than" has the same meaning as "on or before" or "within." Meyer v
Meyer, 10 Or App 371, 499 P2d 823.
Footnote 17. Tilden Lumber & Mill Co. v Bacon Land Co., 116 Cal App 689, 3 P2d 350;
Borton v Weeger, 105 Cal App 552, 288 P 137.
Footnote 18. 104.

192 Instrument payable on happening of contingency
View Entire Section

Where the terms of an instrument indicate that the parties intend the obligation to become
due and payable upon the happening of a future event, condition, or contingency, the
obligation to pay matures only when the event or condition agreed upon occurs. 19
Thus, where a note is given to the payee with instructions that it is to be held until the
maker and his wife have died, the note is subject to a condition precedent; in such a case,
no cause of action accrues until the condition is performed, and the statute of limitations
therefore does not begin to operate until that time. 20
On the other hand, where a future event is fixed merely as a convenient time for payment
but the event does not occur as contemplated, the law implies a promise to pay within a
reasonable time. 21 For example, the obtaining of a construction draw is not a condition
precedent to payment of a promissory note, secured by a mortgage on land, that is
payable in full one year from the date of the first draw against a construction loan for a
condominium project; instead, there is an absolute promise to pay which is postponed for
a reasonable time. 22 Likewise, where an instrument is payable upon the happening of
an event which is wholly or partially within the control of the promisor, and the
surrounding circumstances show that the debt is an absolute one, it is supposed that the
parties intended that a reasonable effort would be made to cause the event to happen
within a reasonable time. 23 Thus, where an obligation is to be performed when certain
property of the obligor is sold, it becomes due when a reasonable time has elapsed for the
making of the sale, even though the property has not yet been sold. 24
Footnotes
Footnote 19. Spencer Cos. v Chase Manhattan Bank, N.A. (DC Mass) 81 BR 194, 6
UCCRS2d 330; Pine v Okoniewski, 256 App Div 519, 11 NYS2d 13.
Annotation: Provision for post-mortem payment or performance as affecting

instrument's character and validity as a contract, 1 ALR2d 1178.
Footnote 20. Washington v Martin (Tex Civ App Amarillo) 503 SW2d 330.
In an action on a promissory note given as part of the purchase price of an apartment

house which was due on the resale of the property, the trial court properly found that
there had been a resale within the condition of the note and, thus, that the note had
matured, where the obligors had voluntarily quitclaimed and delivered possession of the
premises to the holder of a second deed of trust on the property to avoid foreclosure.
Adams v Herman (2nd Dist) 261 Cal App 2d 234, 67 Cal Rptr 707.
Footnote 21. People v Garnett (Colo) 725 P2d 1149; State Bank of Wilbur v Phillips, 11
Wash 2d 483, 119 P2d 664.
Footnote 22. Sharp v Machry (Fla App D2) 488 So 2d 133, 11 FLW 1101 (stating that
the determination of what constitutes a reasonable time for repayment depends upon the
facts and circumstances surrounding the execution of the note, rather than upon the
occurrence of subsequent events, such as a declining condominium market and rising
interest rates).
Footnote 23. Nunez v Dautel, 86 US 560, 19 Wall 560, 22 L Ed 161; Garthofner v

Edmonds, 74 Cal App 2d 15, 167 P2d 789 (disapproved on other grounds by Alexander v
Angel, 37 Cal 2d 856, 236 P2d 561); Hughes v McEwen, 112 Miss 35, 72 So 848.
Footnote 24. Estate of Baird, 59 Cal App 2d 303, 138 P2d 698.
A note made by a mother to her daughter which was payable a specified period of time
after the sale of certain of the mother's property could not be construed to be payable only
if the property was sold during the mother's lifetime; instead, the debt became due when
the mother's surviving spouse disposed of the property. O'Brien v O'Brien (City Ct) 16
NYS2d 799.
193 Computation of time; holidays
View Entire Section

As is true for contracts in general, where an instrument is payable at a fixed period after
its date, or a certain time after the happening of a specified event, the time of payment is
to be determined by excluding the day from which the time began to run and including
the date of payment. 25 When the day for performance of an act required by contract
falls on a Sunday or a legal holiday, the required act may be performed on the next
succeeding business day if it is not commercially reasonable to perform that act on a
nonbusiness day, as where a contract requires notice to be given by mail and the specified
deadline for giving notice falls on a day when there is no mail delivery. 26 Similarly,
under the section of the Uniform Commercial Code (UCC) which governs the
presentment of negotiable instruments, 27 where the last day of the grace period for
payment of an interest installment under a promissory note falls on a Saturday, which is a
nonbusiness day for both parties, the debtor has until the following business day,
Monday, to tender payment. 28
Observation: Under a provision of the pre-1990 version of the UCC, for which there
is no equivalent in the 1990 Revision, where presentment of a negotiable instrument is
due on a day which is not a full business day for either the person making presentment
or the party who is to pay or accept the instrument, presentment is due on the next day
thereafter which is a full business day for both parties. 29
Footnotes
Footnote 25. Official Comment 1 to UCC 3-503 [1952], noting that while this universal
rule of contract law is not expressly stated in the Uniform Commercial Code, it is fully

applicable to negotiable instruments.
Footnote 26. Target Properties, Inc. v Gilbert, 192 Ga App 161, 384 SE2d 188 (also
finding that the required notice could not be hand delivered since only the post-office box
address of the recipient was given).
Footnote 27. UCC 3-503 [1952].
Footnote 28. Reynolds Aluminum & Masonry Contractors, Inc. v Alexander (Fla App
D2) 449 So 2d 357, 38 UCCRS 1315 (stating that it is only reasonable to apply the rule
pertaining to presentment of negotiable instruments for payment to the tender of payment
on a note).
Footnote 29. 323.
B. Acceleration of Maturity [194-197]
Research References
UCC 1-107; UCC 3-108 [1952]; UCC 3-109 [1990 Rev]
ALR Index: Acceleration of Maturity; Bills and Notes; Payment; Uniform Commercial
Code
3:22
Uniform Commercial Code: Article 1General Provisions 253:122-253:124; 19 Am
253:2360, 253:2361
1A Anderson, Uniform Commercial Code 1-208:77, 1-208:86, 1-208:93
194 Generally
View Entire Section

Instruments payable at a fixed time may provide that if an installment of interest or

principal is not paid when due, the holder may declare the whole debt due, 30 thereby
accelerating repayment of the obligation. 31 There can be no acceleration of the
amount due on commercial paper in the absence of an express provision authorizing
acceleration. 32 In the absence of an acceleration clause providing for the entire amount
of a note to be due on default of any one installment, the promisee is entitled to recover
only past-due installments, plus accumulated interest, and cannot unilaterally declare the
note to be accelerated. 33 However, the acceleration clause need not be contained in the
instrument itself; it may be included instead in an agreement executed
contemporaneously with the instrument. 34
If the right to accelerate payment of a note is automatic or absolute, the indebtedness

becomes due and payable upon a default of the maker or at the end of the specified grace
period, subject to a waiver of default by mutual assent or acquiescence. 35 On the other
hand, if acceleration is optional, maturity does not occur until the exercise of such option.
36
The Uniform Commercial Code (UCC) does not govern the validity or interpretation of
acceleration clauses, such matters being governed by the general law of contracts. 37
The UCC does recognize generally, however, that provision may be made for
acceleration of the date of payment of an instrument by providing that an instrument
which is payable at a definite time may be subject to rights of acceleration. 38
Moreover, the UCC limits the right of acceleration of payment by declaring that a
provision that one party may accelerate payment or performance at will or when he
deems himself insecure, or in words of similar import, must be construed to mean that
that party will have power to accelerate payment only if he in good faith believes that the
prospect of payment or performance is impaired. 39
Footnotes
Footnote 30. Jacobs v Automotive Repair Center, Inc. (Fla App D1) 137 So 2d 263; De
Garmo v Aldeco, Inc. (2d Dist) 13 Ill App 3d 403, 300 NE2d 270; Artistic Greetings, Inc.
v Sholom Greeting Card Co. (3d Dept) 36 App Div 2d 68, 318 NYS2d 623, 8 UCCRS
1294.
Footnote 31. United States v Cardinal (DC Vt) 452 F Supp 542 (disapproved on other
grounds by Federal Deposit Ins. Corp. v Cardona (1 Puerto Rico) 723 F2d 132) and
(disapproved on other grounds by Federal Deposit Ins. Corp. v Hinkson (3 Del) 848 F2d
432) and (disapproved on other grounds by Federal Deposit Ins. Corp. v Former Officers
& Directors of Metropolitan Bank (9 Or) 884 F2d 1304); In re Duncan (BC ED Tenn) 10
BR 13, 6 BCD 1310, CCH Bankr L Rptr 67724.
As to the effect of an acceleration clause on the negotiability of an instrument, see 110.
Annotation: Usury as affected by acceleration clause, 66 ALR3d 650.
Right of holder of commercial paper to interest or finance charges applicable to period

after acceleration of maturity of obligation because of debtor's default, 63 ALR3d 10.
Acceptance of past-due interest as waiver of acceleration clause in note or mortgage,

97 ALR2d 997.
Forms: Complaint alleging clause in installment note providing for acceleration of

payments. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Notice of acceleration. 18 Am Jur Legal Forms 2d, Uniform Commercial Code:

Article 1General Provisions 253:122.
Provision for acceleration of maturity on default. 19 Am Jur Legal Forms 2d, Uniform

Provision for acceleration of maturity on sale or transfer of collateral. 19 Am Jur Legal

Footnote 32. Rosenfeld v City Paper Co. (Ala) 527 So 2d 704; Miller v Balcanoff (Fla
App D1) 566 So 2d 1340, 15 FLW D2256; Smith v Union State Bank (Ind App) 452
NE2d 1059, 37 UCCRS 160; Sheet Metal Workers Local 76 Credit Union v Hufnagle
(Minn) 295 NW2d 259, 29 UCCRS 1087.
Footnote 33. American Cyanamid Co. v Roy (Fla App D4) 546 So 2d 1148, 14 FLW
1760; Libeson v Copy Realty Corp. (2d Dept) 167 App Div 2d 376; Williamson v
Dunlap (Tex) 693 SW2d 373, reh overr (Jul 17, 1985).
Footnote 34. 195.
As to the effect on a negotiable instrument of contemporaneously executed written

agreements, see 131.
Footnote 35. Baader v Walker (Fla App D2) 153 So 2d 51, cert den (Fla) 156 So 2d 858.
Footnote 36. Burrill v Robert Marsh & Co., 138 Cal App 101, 31 P2d 823; Baader v
Walker (Fla App D2) 153 So 2d 51, cert den (Fla) 156 So 2d 858.
As to exercise of an option to accelerate, see 196.
Footnote 38. UCC 3-108(b) [1952]; UCC 3-109(b) [1990 Rev].
Footnote 39. 111.
195 Acceleration provision in separate agreement
View Entire Section

An acceleration clause may be contained in an agreement executed contemporaneously

with an instrument, rather than in the instrument itself. 40 Such an acceleration clause
may be based on failure to pay an installment of principal or interest when due, or may be
based on defaults other than nonpayment, such as failure to pay taxes on property serving
as security, failure to keep the property insured, or the sale of the property prior to
maturity of the note. 41 Thus, for example, the payees of a promissory note are entitled
to accelerate and collect any unpaid principal and interest on a note, on the sale by the
makers of the property covered by a contemporaneous purchase money mortgage, where
the mortgage contains a clause permitting acceleration in the event such property is sold;
in such a case acceleration is justified even though the note itself contains no acceleration
clause and is not otherwise in default. 42
Footnotes
Footnote 40. Bradmer v Noesen, 123 Cal App 684, 12 P2d 84 (holding that lessors had
the right to declare a note due where an accompanying lease provided that the note would
be due in full if the rent were not paid).
As to modification or supplementation of an instrument by a contemporaneous written

agreement see 131.
Footnote 41. Stockman v Burke (Fla App D2) 305 So 2d 89; Siciliano v Hunerberg (Fla
App D2) 135 So 2d 750.
Footnote 42. Stockman v Burke (Fla App D2) 305 So 2d 89.
Where there is a variance in acceleration clauses contained in a note and accompanying

mortgage, as where one provides for optional acceleration and the other for automatic
acceleration upon default, the terms of the note prevail. National Shawmut Bank v
Sherbrooke (City Ct) 36 NYS2d 594.
196 Exercise of option to accelerate
View Entire Section

A note or other instrument providing for acceleration at the option of the holder does not
become due and payable by a default alone; rather, some outward manifestation of the
holder's intent to exercise that option is required. 43 The creditor must perform some
clear, unequivocal affirmative act evidencing an intention to take advantage of the
acceleration provision, 44 so as to leave no doubt as to the holder's intention and to
apprise the maker effectively of the fact that the option has been exercised. 45
In some states, an acceleration must be preceded by a demand for payment and a notice
of intention to accelerate; moreover, when there is any doubt as to whether a demand is
required to exercise an option to accelerate, the provision will be interpreted against the
creditor who prepared it. 46 However, the holder's failure to give the debtor notice that
it has accelerated a note does not show that the holder acted in bad faith, when the note
expressly authorizes acceleration without notice. 47
Footnotes
Footnote 43. Green v Carlstrom (4th Dist) 212 Cal App 2d 240, 27 Cal Rptr 850; Wurzler
v Clifford (Sup) 36 NYS2d 516.
Annotation: What is essential to exercise of option to accelerate maturity of bill or

note, 5 ALR2d 968.
Forms: Notice of acceleration. 18 Am Jur Legal Forms 2d, Uniform Commercial
Code: Article 1General Provisions 253:122.
Contract provisionAccelerationOption of promisee. 18 Am Jur Legal Forms 2d,

Uniform Commercial Code: Article 1General Provisions 253:123.
Contract provisionAccelerationCombined optional and automatic clause. 18 Am Jur

Legal Forms 2d, Uniform Commercial Code: Article 1General Provisions 253:124.
Footnote 44. Bauer Dev. Co. v Nu-West, Inc. (Colo App) 757 P2d 1149; Executive Hills
Home Builders, Inc. v Whitley (Mo App) 770 SW2d 507.
Footnote 45. Central Home Trust Co. v Lippincott (Fla App D5) 392 So 2d 931, 31
UCCRS 1028; State Sec. Sav. Co. v Pelster, 207 Neb 158, 296 NW2d 702; Joy Corp. v
Nob Hill North Properties, Ltd. (Tex Civ App Tyler) 543 SW2d 691.
A holder did not take sufficient affirmative action to exercise an option to accelerate a
note in default where an otherwise effective notification was not received by the maker
and the communications between the parties contained no specific language regarding the
holder's intention to accelerate. In re Holiday Mart, Inc. (BC DC Hawaii) 9 BR 99, 24
CBC 79.
In construing ambiguous acceleration provisions in a mortgage note, the court must

construe all of the note's provisions in order to ascertain the party's intentions as
expressed in the note. Olson v Hirschberg (Fla App D1) 145 So 2d 303 (criticized on
other grounds by Olde MacDonald's Farms Inns Corp. v McDill Columbus Corp. (Fla
App D5) 473 So 2d 797, 10 FLW 1902) (decided under former law).
197 Waiver of right to accelerate
View Entire Section

The exercise of an option to accelerate is not irrevocable, and the holder of a note who
has exercised the option of considering the whole amount due may subsequently waive
this right and permit the obligation to continue in force under its original terms for all
purposes. 48 The waiver may be express, since any claim or right arising under an
alleged breach can be discharged, in whole or in part, without consideration by a written
waiver or renunciation signed and delivered by the aggrieved party. 49 The payee of a
note containing a power to accelerate the debt also may impliedly waive that power by
accepting a payment after default, by accepting payment after giving notice of election to
accelerate, or by mere inaction after default. 50 However, mere acceptance of a
payment on a delinquent note does not constitute a waiver or cancel an acceleration
which the creditor has previously initiated, where the acceptance of the payment is
preceded by the filing of suit to collect the entire balance and is followed by notice that
the creditor still considers the acceleration to be in effect. 51 Likewise, where the payee
of a note has given notice of acceleration upon default in accordance with the provisions
of the instrument, the acceptance by the payee of late payments which do not include
required interest does not constitute a waiver of the payee's right to declare the entire
balance to be due and payable. 52
Footnotes
Footnote 48. Mitchell v Federal Land Bank (1943) 206 Ark 252, 174 SW2d 671 (also
stating that such a waiver does not preclude the exercise of a right to accelerate upon a
subsequent default).
Forms: Promissory noteProvisionPayee's waiver of default. 3B Am Jur Legal

Forms 2d, Bills and Notes 41:124.
Footnote 50. Goodwin v District Court for Sixteenth Judicial Dist. (Colo) 779 P2d 837.
A holder of a promissory note, having the right to declare the entire principal balance due
on default of a payment, waives that right by failure to act reasonably and promptly.
Holland v Paddock (2nd Dist) 142 Cal App 2d 534, 298 P2d 587.
Annotation: Acceptance of past-due interest as waiver of acceleration clause in note or

mortgage, 97 ALR2d 997.
Footnote 51. Paul Londe & Associates, Inc. v Rathert (Mo App) 522 SW2d 609.
Footnote 52. Colonie Block & Supply Co. v D. H. Overmyer Co. (3d Dept) 35 App Div
2d 897, 315 NYS2d 713.
C. Extensions and Renewals [198-201]
Research References
UCC 1-107; UCC 3-118 [1952]
5 Am Jur Pl & Pr Forms (Rev) Bills and Notes, Forms 41, 42; 6A Am Jur Pl & Pr
Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:23, 3:24
3A Am Jur Legal Forms 2d, Bills and Notes 41:23; 19 Am Jur Legal Forms 2d,
Uniform Commercial Code: Article 3Negotiable Instruments 253:2357, 253:2364,
253:2365
6 Anderson, Uniform Commercial Code 3d 3-408:45; 6A Anderson, Uniform

198 Generally
View Entire Section

The time for payment of a note may be extended by agreement of the parties. 53 In
order to be valid and enforceable, an agreement to extend the time of payment of a
negotiable instrument must contain all of the elements of a contract. 54 A consent to an
extension set forth in an instrument is, unless specified otherwise, a consent to a single
extension only, and then for no longer a period than that of the original instrument. 55
In addition, for an extension of time for payment of a note to be binding on the parties, it
must be for a definite period of time. 56
Observation: An instrument is payable at a definite time, and is therefore a

negotiable time instrument, if by its terms it is payable at a definite time subject to
extension at the option of the holder, or to extension to a further definite time at the
option of the maker or acceptor, or automatically upon or after a specified act or event.
57
The taking of a new note payable at a future date may take the place of an express
extension agreement, imposing on the payee the duty of waiting until the maturity of the
new note. 58 A renewal note is normally treated as a new contract evidencing the
existing debt, 59 resulting in the re-establishment of a particular contract or obligation
for another period of time rather than in a discharge of the original indebtedness;
however, whether a new note is a renewal of another note depends upon the intention of
the parties. 60
Footnotes
Footnote 53. In re Estate of Giguere (Minn App) 366 NW2d 345; Federal Deposit Ins.
Corp. v Hyer (2d Dept) 66 App Div 2d 521, 413 NYS2d 939, app dismd without op 47
NY2d 951.
Unless otherwise required by statute, a valid extension may be made by oral agreement.
Waugh v Lennard, 69 Ariz 214, 211 P2d 806.
Forms: AnswerDefenseExtension agreement between maker and payee. 5 Am Jur

Pl & Pr Forms (Rev), Bills and Notes, Form 41.
Instruction to juryAcceptance of interest in advance as prima facie evidence of

extension of time. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 42.
Complaint alleging clause permitting holder of note to extend time for payment. 6A
3:23.
Defense that payment is not yet due on note extended by maker. 6A Am Jur Pl & Pr

Provisions with respect to extension of payment. 3A Am Jur Legal Forms 2d, Bills and
Notes 41:23.
Provision in negotiable instrument for payment subject to extension. 19 Am Jur Legal

Provision in negotiable instrument for extension of payment on occurrence of specific

event. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable
Footnote 54. Priest v First Mortg. Co. (Tex App San Antonio) 659 SW2d 869, writ ref n r
e (Apr 4, 1984).
To support the contention that payment of a note has been extended, there must be
adequate consideration and mutual consent. In re Whitehead (BC SD Ohio) 31 BR 381,
8 CBC2d 1351.
Although an agreement to extend the time for payment of a note may be implied from the
circumstances of a transaction, an extension cannot be inferred from a mere failure of the
creditor to sue. Hall v First Nat'l Bank (La App 1st Cir) 490 So 2d 357.
As to consideration for an extension agreement, see 199.
Footnote 55. UCC 3-118(f) [1952].
Footnote 56. In re Whitehead (BC SD Ohio) 31 BR 381, 8 CBC2d 1351; Mitchell v

Peterson (1st Dist) 97 Ill App 3d 363, 52 Ill Dec 817, 422 NE2d 1026 (also noting that
the extension must be supported by consideration); Martin v Fannin Bank (Tex Civ App
Houston (1st Dist)) 389 SW2d 724.
Footnote 57. 106.
Footnote 58. Whelan v Swain, 132 Cal 389, 64 P 560.
Footnote 59. Summit Bank v Creative Cook (Tex App San Antonio) 730 SW2d 343.
As applied to a note, the term "renewal" means the re-establishment of the contract
evidenced by the note for a specified period of time. First Nat'l Bank v Abraham, 97 NM
288, 639 P2d 575.
Annotation: Construction and effect of provision in note for "renewal until paid," and
the like, 35 ALR2d 1090.
Footnote 60. 201.
199 Consideration

View Entire Section
A contract for the extension of the time of payment must ordinarily be based on a
valuable consideration, the same as any other contract. 61 A debtor's promise to pay
interest during the period of extension generally is sufficient consideration for the
creditor's promise to extend the time for payment of a note. 62 However, the accrual of
interest which the obligor is already obligated to pay under the terms of the note after its
maturity does not furnish the requisite additional consideration for an extension of the
time for payment. 63
Observation: Under the gratuitous renunciation principle of the Uniform

Commercial Code, which is applicable to the alleged breach of any obligation under a
commercial contract, the aggrieved party can waive or renounce any right arising out
of the breach without consideration in a writing signed and delivered by that party. 64
No additional consideration is required to support the enforcement of a renewal note

which has been given in payment of a previous note, 65 because payment of the
antecedent debt constitutes sufficient consideration. 66 But, where the prior note is
based on illegal consideration, the note given in renewal thereof cannot be enforced. 67
Footnotes
Footnote 61. Manufacturers Hanover Overseas Capital Corp. v Southwire Co. (SD NY)
589 F Supp 214; Humphreys v Maddox (Ala Civ App) 418 So 2d 909; Smith v Parlier
Winery, Inc., 7 Cal App 2d 357, 46 P2d 170; Manufacturers & Traders Trust Co. v First
Nat'l Bank (Fla App D2) 113 So 2d 869; Mitchell v Peterson (1st Dist) 97 Ill App 3d 363,
52 Ill Dec 817, 422 NE2d 1026; Federal Deposit Ins. Corp. v Hyer (2d Dept) 66 App
Div 2d 521, 413 NYS2d 939, app dismd without op 47 NY2d 951; Martin v Fannin
Bank (Tex Civ App Houston (1st Dist)) 389 SW2d 724.
As to consideration for contracts, generally, see 17A Am Jur 2d, Contracts 113 et seq.
Footnote 62. Hackin v First Nat'l Bank, 101 Ariz 350, 419 P2d 529; Freeman v Truitt,
238 Miss 623, 119 So 2d 765.
Forms: Agreement to pay additional interest in consideration of extension of maturity

date. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article 3Negotiable
Footnote 63. North Bank v Circle Inv. Co. (1st Dist) 104 Ill App 3d 363, 60 Ill Dec 105,
432 NE2d 1004, 33 UCCRS 1430.
Footnote 65. Goldberger v Regency Highland Condominium Ass'n (Fla App D4) 452 So
2d 583.

Footnote 66. 6 Anderson, Uniform Commercial Code 3d 3-408:45; 6A Anderson,
Footnote 67. Plaza Nat'l Bank v Monfrey (Tex App San Antonio) 706 SW2d 714, writ ref
n r e (Jun 4, 1986).
200 Effect on liability of comakers
View Entire Section

The execution of a renewal note by only one of the original comakers does not operate to
release the nonsigners from liability on the original note where they have consented in
advance to any extensions or renewals, as where a provision stipulating such consent is
included in the original note. 68 Furthermore, even in the absence of prior consent,
nonsigning comakers generally will not be released by the execution of a renewal note by
one comaker unless the renewal transaction is intended to constitute a novation,
substituting the new note for the old. 69
Footnotes
Footnote 68. Bonura v Christiana Bros. Poultry Co. (La App 4th Cir) 336 So 2d 881, cert
den (La) 339 So 2d 11 and cert den (La) 339 So 2d 26 and application den (La) 339 So
2d 26; Price v Latimer County Nat'l Bank, 119 Okla 198, 249 P 305; Clark v Bank of
Southwest (Tex Civ App Amarillo) 410 SW2d 191.
As to the effect of extensions on the liability of indorsers and accommodation parties, see
424.
Annotation: Renewal note signed by one comaker as discharge of nonsigning

comakers, 43 ALR3d 246.
Footnote 69. In re Sanders (BC WD Ark) 75 BR 751, later proceeding (BC WD Ark) 75
BR 757, later proceeding (BC WD Ark) 75 BR 761; Hendry v United States (9 Idaho)
305 F2d 515; Haggerty v MacGregor, 9 Mich App 671, 158 NW2d 33; First Dakota Nat'l
Bank v Maxon (SD) 534 NW2d 37.
As to the discharge of instruments by novation, generally, see 398.
201 Effect of renewal note on maturity
View Entire Section

The holder of a note may execute a renewal note which merely extends the time for
payment and does not discharge the original, underlying obligation. 70 A note which is
given merely in renewal of another note, and not in payment, in no way extinguishes the
original debt; it is simply an extension of the time for payment. 71
Observation: A renewal note generally does not operate as a payment or discharge

of the note in renewal of which it is given unless there is an agreement to that effect, 72
or unless an intention to extinguish the prior debt is otherwise revealed by the facts and
circumstances of the transaction. 73
Footnotes
Footnote 70. In re Bogosian (BC DC RI) 114 BR 7.
The effect of accepting a note for a pre-existing contract debt is to postpone the original
date and extend the time of payment until the maturity of the note. Frank v Williams, 36
Fla 136, 18 So 351.
As to discharge of an instrument by renewal, see 398 et seq.
Footnote 71. Lyons Nat'l Bank v Guglielmino (Sup) 22 NYS2d 287, affd 261 App Div
1039, 26 NYS2d 509.
Footnote 72. Houstoun v Albury (Fla App D3) 436 So 2d 224 (also stating that a renewal
note may act to discharge the original obligation, rather than merely extending that
obligation, where the interest rate or other terms of repayment are materially changed in
the renewal note).
Footnote 73. United Bank of Lakewood Nat'l Ass'n v Jefferson Industrial Bank (Colo
App) 791 P2d 1250.
VI. TRANSFER, NEGOTIATION, AND INDORSEMENT [202-234]
A. Transfer, in General [202-211]
Research References
UCC 1-201; UCC 3-116, 3-117, 3-201, 3-202, 3-301, 3-302 [1952]; UCC 3-110,
3-203, 3-204, 3-301, 3-303 [1990 Rev]
ALR Digest: Assignment 1 et seq.; Bills and Notes 52 et seq.
ALR Index: Assignments; Bills and Notes; Checks and Drafts; Delivery; Indorsement;
Uniform Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 54
3B Am Jur Legal Forms 2d, Bills and Notes 41:101 et seq., 41:104, 41:105, 41:107;

9 Am Jur Proof of Facts 573, Promissory Notes and Other Negotiable Instruments
Commercial Code 3d 3-301:5, 3-301:8, 3-303:7, 3-303:22; 6A Anderson, Uniform
202 Generally
View Entire Section

An instrument is transferred when it is delivered by a person other than its issuer for the
purpose of giving the person receiving delivery the right to enforce the instrument. 74
Comment: The foregoing definition excludes the issuance of an instrument, as well

as cases in which a delivery of possession of an instrument is for some purpose other
than giving the transferee a right to enforce it; for example, if a check is presented for
payment by delivering it to the drawee, no transfer occurs because there is no intent to
give the drawee a right to enforce the instrument. 75
Ordinarily, an instrument is transferred by negotiation, which is effected by delivery

alone in the case of a bearer instrument, 76 or by indorsement plus delivery in the case
of an order instrument. 77
Delivery and indorsement, although they may be the only ways to negotiate a promissory
note, are not the only ways to transfer title to such an instrument; ownership of a note or
other instrument may also be transferred, for example, by an assignment for the benefit of
creditors, by a sale as part of the assets of a bank being acquired by another, or by virtue
of an agreement to relinquish rights in the assets of a corporation which holds the note.
78
Footnotes
As to issuance or first delivery of an instrument, see 185 et seq.
Forms: Transfer of bills and notes. 3B Am Jur Legal Forms 2d, Bills and Notes
41:101 et seq.
Observation: The pre-1990 version of the Uniform Commercial Code does not
explicitly define the term "transfer," but instead simply states the rights of the
transferee. UCC 3-201 [1952].

A drawee or payor bank does not take a presented check by negotiation. Brown v Fifth
Third Bank (Hamilton Co) 10 Ohio App 3d 97, 10 Ohio BR 120, 460 NE2d 739, 38
UCCRS 177, motion overr.
Footnote 76. 213.
Footnote 77. 214.
As to the transfer of instruments by indorsement, see 218 et seq.
As to transfer by negotiation, see 212 et seq.
As to the status and rights of a holder, see 238 et seq.
Footnote 78. Frichter v St. Bernard Shooting Center, Inc. (La App 4th Cir) 602 So 2d
116, cert den (La) 608 So 2d 173.
Although negotiation is one form of transfer, it is not the only one. Jerstad v Warren, 73
Or App 387, 698 P2d 1033, 41 UCCRS 149.
As to transfer of title to an instrument by assignment, see 210.
203 Persons who may transfer or negotiate
View Entire Section

The holder of an instrument, whether or not that person is the owner of it, may transfer or
negotiate the instrument. 79 Moreover, an agent may be given authority to indorse or
transfer negotiable instruments on behalf of a principal. 80
Definition: "Holder" means a person who is in possession of an instrument drawn,

issued, or indorsed to that person or his or her order, or to bearer, or in blank. 81
Under the 1990 amendment of the definition, the holder is the person in possession of
the instrument payable to bearer; in the case of an instrument payable to an identified
person, that person is the holder if he or she is in possession. 82
Observation: By definition, possession of the paper in question by an individual is

essential to that person's status as a holder, but possession of an order instrument does
not make the possessor the holder when it is not payable to that person; on the other
hand, in the case of bearer paper, possession alone is sufficient to make the possessor
the holder of the instrument. 83
Since a holder with a right to transfer or negotiate an instrument must be a person who is
in possession of an instrument, an owner without possession may not transfer or negotiate
the instrument. 84 Conversely, the fact that a person is not the owner of an instrument
does not affect his or her status as a holder. 85

An instrument payable to the order of two or more persons in the alternative is payable
to, and may be negotiated by, any one or more of them with possession of it; however, if
an instrument is payable to two or more persons other than in the alternative, it is payable
to all of them and may be negotiated only by all of them. 86
Footnotes
Footnote 79. UCC 3-301 [1952].
Footnote 80. In re JLJ, Inc. (BC ND Ala) 115 BR 324, later proceeding (BC ND Ala)
1990 Bankr LEXIS 1276 and remanded on other grounds (11 Ala) 988 F2d 1112, 7 FLW
Fed C 256; Atlantic Nat'l Bank v Edmund, 108 Ga App 63, 132 SE2d 103; Perdido
Finance Co. v Falgout (La App, Orleans) 77 So 2d 896; Rezapolvi v First Nat'l Bank, 296
Md 1, 459 A2d 183, 35 UCCRS 1559 (also holding that the agent's authority need not be
in writing); Summerlin v National Service Industries, Inc., 72 NC App 476, 325 SE2d 12,
40 UCCRS 1762.
The test for ascertaining an agent's authority to indorse and thereby transfer a negotiable
instrument is whether the agent can perform the duties of the agency without the exercise
of that authority. Helgeson v Farmers Ins. Exchange (App Dep't Super Ct) 116 Cal App
2d Supp 925, 255 P2d 484 (disapproved on other grounds by Navrides v Zurich Ins. Co.,
5 Cal 3d 698, 97 Cal Rptr 309, 488 P2d 637, 49 ALR3d 828).
The authority of an agent to indorse an instrument must be strictly construed, and will
extend only to paper executed or indorsed for the benefit of the principal, particularly
where the principal is a nonprofit organization. Wagner v Nichols (1st Dept) 5 App Div
2d 191, 170 NYS2d 542, reh and app den (1st Dept) 5 App Div 2d 979, 173 NYS2d 243
and app den 5 NY2d 706.
Annotation: Authority of agent to indorse and transfer commercial paper, 37 ALR2d

453.
Footnote 85. In re Cooke, 37 NC App 575, 246 SE2d 801.
Footnote 86. 205.
204 --Instrument payable with words of description
View Entire Section

Where an instrument is made payable to a named person with the addition of some
description such as "agent," "trustee," or "executor," the following rules set forth in the
pre-1990 version of the Uniform Commercial Code (UCC) are directly pertinent to the
question of who may transfer or negotiate the instrument:
(1) an instrument describing the payee as an agent or officer of a specified person is

payable to the principal, but the agent or officer may act as a holder; and 87
(2) where the named person is described as any other fiduciary for a specified person or
purpose, the instrument is payable to the payee and may be negotiated by that person. 88
Observation: The 1990 Revision of the UCC does not explicitly state who may
transfer or negotiate an instrument payable to a person with words of description;
rather, rules specifying to whom such instruments are payable are set forth in a
subsection of the statute governing the identification of payees, 89 which rules
implicitly specify who can deal with an instrument as a holder to the degree that the
person entitled to payment is also a holder. 90
Footnotes
Footnote 87. UCC 3-117(a) [1952].
As to the right of a holder to transfer or negotiate an instrument, see 203.
As to description of parties to instruments as agents, trustees, and the like, see 76.
As to who may discharge instruments payable to agents, trustees, and the like, see 392.
Footnote 88. UCC 3-117(b) [1952].
A bank was not liable for cashing a cashier's check allegedly made out to a client and to
an attorney named and described as a fiduciary, without the client's indorsement, where it
was established that the instrument was properly negotiated by the attorney. Feinstein v
Chemical Bank (1st Dept) 84 App Div 2d 514, 443 NYS2d 356, 32 UCCRS 161, affd
56 NY2d 571, 450 NYS2d 187, 435 NE2d 404.
205 Transfer to and negotiation by multiple payees
View Entire Section

An instrument payable to the order of two or more persons in the alternative is payable to
any one of them and may be negotiated, discharged, or enforced by any of them who has
possession of it. 91 Thus, since commercial paper may be negotiated by only one of
multiple payees named in the alternative, one such payee may pledge the paper as
security for a personal debt and the creditor may apply the full amount of the commercial
paper to the discharge of the debt. 92
Observation: The 1990 Revision of the Uniform Commercial Code (UCC) provides
that if an instrument payable to two or more persons is ambiguous as to whether it is
payable in those persons alternatively, the instrument is payable to them in the
alternative. 93 Although the pre-1990 version of the UCC does not contain an
equivalent provision, the same result has been reached by courts applying that version.
94
If an instrument is payable to two or more persons other than in the alternative, it is

payable to all of them and may be negotiated, discharged, or enforced only by all of
them. 95 A depository or collecting bank may be held liable to a nonendorsing joint
payee for a payment made to one payee without the indorsement of all named payees,
which liability is usually founded on a conversion theory. 96
Footnotes
Footnote 91. UCC 3-116(a) [1952]; UCC 3-110(d) [1990 Rev].
Where the names of two indorsees on a cashier's check were separated by a virgule
symbol or slash only, the check could be negotiated by only one indorsee. Mumma v
Rainier Nat'l Bank, 60 Wash App 937, 808 P2d 767, 14 UCCRS2d 1119, review den 117
Wash 2d 1019, 818 P2d 1098.
As to instruments payable to two or more persons, generally, see 79.
As to the discharge of instruments, generally, see 391 et seq.
Footnote 92. Fifth Third Bank v Lilly (Hamilton Co) 50 Ohio App 3d 67, 552 NE2d 962,
11 UCCRS2d 572.
Footnote 94. In re General Microcomputer (BC ND Ind) 118 BR 96, 13 UCCRS2d 162
(holding that construction of an ambiguous instrument as payable jointly was the most
equitable result, where the court was unable to determine the intended meaning by
looking at the parol evidence presented).
Footnote 95. UCC 3-116(b) [1952]; UCC 3-110(d) [1990 Rev].
Footnote 96. 224.

206 Effect of transfer
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) specifies that the transfer
of an instrument vests in the transferee such rights as the transferor has therein, except
that a transferee who has been a party to any fraud or illegality affecting the instrument,
or who had notice as a prior holder of any defense or claim against it, cannot improve his
or her position by taking from a later holder in due course. 97 A transfer of a security
interest in an instrument vests the foregoing rights in the transferee to the extent of the
interest transferred. 98
Observation: The provision that a prior holder with notice of a defense or claim
cannot improve his or her position by taking back the instrument from a holder in due
course rests on sound logic; otherwise, one who is not a holder in due course could
avoid the limitation under which he or she held the instrument in the first place simply
by a transfer and agreement to repurchase the instrument. 99
Under the similar provisions of the 1990 Revision of the UCC, the 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;
however, 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
illegality affecting the instrument. 1
Comment: Even though transfer of an instrument might mean in a particular case

that title to the instrument passes to the transferee, that result does not follow in all
cases, since the right to enforce an instrument and its ownership are two different
concepts; for example, a thief who steals a check payable to bearer becomes the holder
of the check and a person entitled to enforce it, but does not become the owner of the
check. 2
For the purpose of determining whether the transferee of an instrument is a holder, an

indorsement that transfers a security interest in the instrument is effective as an
unqualified indorsement of the instrument. 3
Comment: If the transferee is not a holder because the transferor did not indorse, the
transferee is nevertheless a person entitled to enforce the instrument under section
3-301 of the UCC, 4 as a nonholder in possession thereof who has the rights of a
holder, if the transferor was a holder at the time of transfer. 5
Except to the extent that a transferor or predecessor in interest has rights as a holder in
due course, a person does not acquire the rights of a holder in due course on an
instrument taken:
(1) by legal process or by purchase in an execution, bankruptcy, or creditor's sale or

similar proceeding;
(2) by purchase as part of a bulk transaction which is not in the ordinary course of
business; or
(3) as the successor in interest to an estate or other organization. 6
Footnotes
Footnote 97. UCC 3-201(1) [1952].
Footnote 98. UCC 3-201(2) [1952].
Footnote 99. Rozen v North Carolina Nat'l Bank (4 NC) 588 F2d 83, 25 UCCRS 173.
As to the status of one who takes an instrument for value as a holder in due course, see
207.
As to transfer of an instrument by negotiation, see 212 et seq.
Practice References Transferee of note or check as holder in due course. 9 Am Jur

Proof of Facts 573, Promissory Notes and Other Negotiable Instruments, Proof 2.
As to transfer of an instrument by indorsement, see 218 et seq.
Footnote 6. 256-258.
207 Transfer for value
View Entire Section

A holder takes an instrument for value:
(1) to the extent that the agreed consideration has been performed or to the extent that he
or she acquires a security interest in or lien on the instrument other than by legal process;
7
(2) when the holder takes the instrument in payment of, or as security for, an antecedent
claim against any person, whether or not the claim is due; or 8
(3) when the holder gives a negotiable instrument in exchange for the instrument
received or makes an irrevocable commitment to a third person. 9
Comment: Whether or not a person takes an instrument for value is relevant only on
the question of whether that person qualifies as a particular kind of holder, 10 that is,
whether the holder is a holder in due course; the distinction between value and
consideration is a very fine one. 11
Caution: The definition of "value" set forth in Article 1 of the UCC 12 does not
determine what constitutes value for a negotiable instrument which is subject to Article
3. 13
A holder takes an instrument for value in payment of, or as security for, an antecedent
claim within the meaning of the statute 14 where
checks are received in partial payment for services rendered by the recipient. 15
a corporation assigns a note to the government as security for payment of tax liens,
thereby making the government a holder in due course. 16
a factor who has purchased antecedent claims of a contractor against various account
debtors takes checks from the debtors in payment of those claims. 17
a bank takes a check constituting the proceeds from the sale of crops in partial payment
of an unsecured promissory note. 18
a farm machinery dealer takes a note from a farmer and his wife as payment for prior
equipment sales. 19
Value is given in the form of a negotiable instrument exchanged for another within the
meaning of the statute 20 where
a check is given in exchange for United States government payment-in-kind certificates.

21
a bank gives the seller of corporate assets a check for the proceeds remaining, after
satisfaction of the corporation's obligations to the bank, from cashier's checks furnished
by the buyer as a down payment. 22
Footnotes
Footnote 7. UCC 3-303(a) [1952]; UCC 3-303(a)(1), 3-303(a)(2) [1990 Rev].
A bank took a promissory note for value, so as to be a holder in due course, when it
deposited loan proceeds into a corporation's checking account in return for a note, which
constituted its performance of the agreed consideration. New Bedford Inst. for Sav. v
Gildroy, 36 Mass App 647, 634 NE2d 920, 25 UCCRS2d 450, review den 418 Mass
1106, 639 NE2d 1082.
As to the effect of a taking of an instrument by judicial sale on holder-in-due-course

status, see 257.
Footnote 8. UCC 3-303(b) [1952]; UCC 3-303(a)(3) [1990 Rev].
Footnote 9. UCC 3-303(c)[1952]; UCC 3-303(a)(4), 3-303(a)(5) [1990 Rev].
1114.
Footnote 14. UCC 3-303(b) [1952].
Footnote 15. Resolution Trust Corp. v Gill (3 Pa) 960 F2d 336, 92-1 USTC 50199, 17
UCCRS2d 541, 69 AFTR 2d 92-1120, on remand (WD Pa) 1992 US Dist LEXIS 15743,
affd (CA3 Pa) 1993 US App LEXIS 11862.
Footnote 16. Coventry Care, Inc. v United States (WD Pa) 366 F Supp 497, 74-1 USTC
9163, 33 AFTR 2d 74-320.
Footnote 17. In re Joe Morgan, Inc. (11 Ala) 985 F2d 1554, 20 UCCRS2d 401, 7 FLW
Fed C 163.
Footnote 18. Farmers State Bank v National Bank of Earlville (3d Dist) 230 Ill App 3d
881, 172 Ill Dec 894, 596 NE2d 173, 18 UCCRS2d 1280 (finding the recipient to be a
holder in due course since there was no allegation that it did not act in good faith or that
it had notice of a security interest in the crop proceeds in favor of another bank).
Footnote 19. McCarthy v Sessions (3d Dept) 170 App Div 2d 25, 572 NYS2d 749, 15
UCCRS2d 933.
Footnote 20. UCC 3-303(c) [1952].
Footnote 21. Allison-Kesley AG Center, Inc. v Hildebrand (Iowa) 485 NW2d 841, 19
UCCRS2d 480.
Footnote 22. Leininger v Anderson (Minn) 255 NW2d 22, 21 UCCRS 1104 (also finding

that the application of the proceeds of the cashier's checks to satisfy the corporation's
liability to the bank constituted a taking for value under the antecedent claim provision of
UCC 3-303(b)).
208 --Bank deposit credit as value
View Entire Section

A bank gives value for a deposited item when it credits the depositor's account and
allows the depositor to withdraw the face amount of that item. 23 Where a bank accepts
a check from its depositor and allows checks to be drawn against a portion of the
deposited amount pending collection, the bank is a holder in due course to the extent of
the advances thus made to its depositor. 24 However, when a check is deposited but no
withdrawal is ever made with respect to the deposited amount, the bank has not given
value for it and, therefore, is not a holder in due course. 25
Observation: An exception to the rule that the mere crediting of an account is not the
giving of value pertains where the depositor is entitled to withdraw against the credit as
of right, even though the depositor has not yet done so. 26
It is well established that the granting of provisional credit, conditioned on payment of

the deposited check, does not constitute a taking for value. 27 On the other hand, a
bank takes an instrument for value when it extends credit, even though provisional, in
reliance on a deposited check drawn on another bank and allows its depositor to make
withdrawals against the uncollected funds. 28 A bank makes a loan to its customer by
allowing an account overdraft, which creates an antecedent claim within the meaning of
section 3-303(b) 29 of the UCC, and by applying credit given for a check to reduce an
existing overdraft in the depositor's account, a bank gives value for the check even if the
credit is provisional. 30 However, a drawee bank which allows a depositor of a check
issued by it to overdraw a checking account does not attain holder-in-due-course status,
notwithstanding the rule that allows a bank which credits a customer with the amount of
a deposited check drawn on another bank to claim such status. 31
Footnotes
Footnote 23. Home Bank of Guntersville v Perpetual Federal Sav. & Loan Asso. (Ala)
547 So 2d 840, 10 UCCRS2d 879; Sun'n Sand, Inc. v United California Bank, 21 Cal 3d
671, 148 Cal Rptr 329, 582 P2d 920, 24 UCCRS 667, 21 UCCRS2d 1003 (criticized on
other grounds in Roy Supply, Inc. v Wells Fargo Bank (3rd Dist) 39 Cal App 4th 1051,
46 Cal Rptr 2d 309, 95 CDOS 8401, 95 Daily Journal DAR 14450, 27 UCCRS2d 1363);
Richardson's Restaurants, Inc. v National Bank of South Carolina (App) 304 SC 289, 403
SE2d 669.
Observation: A bank also gives value by giving cash for an item, or by reducing a
debt owed to it by the amount of the instrument. 5A Anderson, Uniform Commercial

Code 3d 3-303:22.
Footnote 24. St. Cloud Nat'l Bank & Trust Co. v Sobania Constr. Co., 302 Minn 71, 224
NW2d 746, 15 UCCRS 679.
Footnote 25. Rockland Trust Co. v South Shore Nat'l Bank, 366 Mass 74, 314 NE2d 438,
14 UCCRS 1342.
A bank has given value, for purposes of determining its status as a holder in due course,
when it has acquired a security interest in a deposited item by permitting a withdrawal or
credit against the deposit. General Motors Acceptance Corp. v Bank of Carroll County,
138 Ga App 654, 226 SE2d 815, 19 UCCRS 1375 (applying UCC 4-208).
Footnote 26. Marine Midland Bank-New York v Graybar Electric Co., 41 NY2d 703,
395 NYS2d 403, 363 NE2d 1139, 21 UCCRS 1094, 97 ALR3d 1104.
A depositary bank is a holder in due course when it credits the customer's account for
withdrawal as of right or otherwise obtains a security interest in the deposited check,
provided that the check is taken in good faith and without notice that it is overdue or has
been dishonored or of any claim or defense to which any person is entitled. G.F.D.
Enterprises, Inc. v Nye, 37 Ohio St 3d 205, 525 NE2d 10, 6 UCCRS2d 460.
Footnote 27. General Motors Acceptance Corp. v Bank of Carroll County, 138 Ga App
654, 226 SE2d 815, 19 UCCRS 1375; St. Paul Fire & Marine Ins. Co. v State Bank of
Salem (Ind App) 412 NE2d 103, 30 UCCRS 557; Marine Midland Bank-New York v
Graybar Electric Co., 41 NY2d 703, 395 NYS2d 403, 363 NE2d 1139, 21 UCCRS 1094,
97 ALR3d 1104; Lynnwood Sand & Gravel, Inc. v Bank of Everett, 29 Wash App 686,
630 P2d 489, 33 UCCRS 1703.
Where a bank reduced the amount of a depositor's obligation by the face value of a
money order, but later reversed the credit entries with the customer's acquiescence when
the money order was dishonored, the bank did not give value for the money order and
was not a holder in due course of the instrument; in such a case, the credit given the
depositor was provisional and conditioned on payment of the money order. State Bank of
Brooten v American Nat'l Bank (Minn) 266 NW2d 496, 23 UCCRS 935, 97 ALR3d 706.
Footnote 28. First of Am. Bank-Northeast Ill., N.A. v Bocian (2d Dist) 245 Ill App 3d
495, 185 Ill Dec 449, 614 NE2d 890, 23 UCCRS2d 122 (holding that the bank acquired a
security interest in the deposited instrument); St. Paul Fire & Marine Ins. Co. v State
Bank of Salem (Ind App) 412 NE2d 103, 30 UCCRS 557; St. Cloud Nat'l Bank & Trust
Co. v Sobania Constr. Co., 302 Minn 71, 224 NW2d 746, 15 UCCRS 679; Citizens Nat'l
Bank v Ft. Lee Sav. & Loan Asso., 89 NJ Super 43, 213 A2d 315, 2 UCCRS 1029;
Peoples Bank v Haar (Okla) 421 P2d 817, 3 UCCRS 1065; Washington Trust Co. v
Fatone, 104 RI 426, 244 A2d 848, 5 UCCRS 859, app den, app dismd 106 RI 168, 256
A2d 490.
As to payment or credit of a collection item by a bank, including provisional credits and

the right to charge back an account, see 10 Am Jur 2d, Banks 699.
Footnote 29. UCC 3-303(b) [1952].
Footnote 30. Laurel Bank & Trust Co. v City Nat'l Bank, 33 Conn Supp 641, 365 A2d
1222, 20 UCCRS 685; United States Cold Storage Corp. v First Nat'l Bank (Tex Civ App
Fort Worth) 350 SW2d 856, writ ref n r e (Feb 14, 1962); Lynnwood Sand & Gravel, Inc.
v Bank of Everett, 29 Wash App 686, 630 P2d 489, 33 UCCRS 1703.
Footnote 31. West v Federal Deposit Ins. Corp., 149 Ga App 342, 254 SE2d 392, 26
UCCRS 1192, affd 244 Ga 396, 260 SE2d 89, 27 UCCRS 1335.
209 --Value less than amount of instrument; discount
View Entire Section

The fact that the taker of an instrument gives less than the face amount of the paper does
not affect that person's status as a taker for value. 32 Moreover, the fact that the
transferee acquires commercial paper at a discount does not bar suit to recover the face
amount of the paper. 33
Observation: The fact that an instrument is transferred in exchange for an amount

less than its face amount may, however, raise a question as to whether there was to be a
transfer of the entire instrument or merely a partial assignment. 34
Footnotes
Footnote 32. Wilson v Steele (2nd Dist) 211 Cal App 3d 1053, 259 Cal Rptr 851 (also
stating that the amount of the discount may be considered in determining whether the
taker acted in good faith); Illinois Valley Acceptance Corp. v Woodard, 159 Ind App 50,
304 NE2d 859, 13 UCCRS 1058.
Footnote 33. Haeberle v St. Paul Fire & Marine Ins. Co. (Ky App) 769 SW2d 64 (further
holding that the recovery of the face amount of an instrument is not barred by the rule
against unjust enrichment, because the obligor is not thereby deprived of money which he
or she is entitled to keep).
As to partial assignments, see 211.
210 Transfer of title by assignment
View Entire Section

It is possible to transfer title to a note or other negotiable instrument by assignment. 35

An assignment indorsed on a promissory note, without delivery of the instrument, is fully
effective without a transfer of possession. 36 However, an assignee takes only such title
as the assignor had, and is subject to all of the defenses available against the assignor. 37
An assignment will not make the transferee a holder of a negotiable instrument if it
involves only a transfer of title without delivery of possession of the instrument 38
properly indorsed. 39
Comment: The owner of an instrument might not be a person entitled to enforce it,
as where a document is signed which conveys title to the instrument but the seller is
unable to deliver immediate possession of the instrument to the buyer; although the
document might be sufficient to convey ownership of the instrument, the purchaser is
not entitled to enforce it under the Uniform Commercial Code until he or she obtains
possession. 40
Words of assignment accompanying an indorsement do not affect its character as an

indorsement, and an assignment indorsed on an instrument is generally deemed to be an
indorsement sufficient to cause negotiation of the instrument. 41 However, an
indorsement which is not operative to negotiate an instrument may be treated as an
assignment. 42
Footnotes
Footnote 35. Kent v Kent, 6 Cal App 2d 488, 44 P2d 445; Margiewicz v Terco Properties
of Miami Beach, Inc. (Fla App D3) 441 So 2d 1124, 37 UCCRS 804; Illinois State Bank
v Yates (Mo App) 678 SW2d 819, 39 UCCRS 204.
Forms: Complaint with allegation of assignment of note. 5 Am Jur Pl & Pr Forms

AssignmentOf promissory note. 3B Am Jur Legal Forms 2d, Bills and Notes
41:105.
Notice of assignment of promissory noteTo obligor. 3B Am Jur Legal Forms 2d,

Promissory noteProvision authorizing assignment of note to bank. 3B Am Jur Legal

Forms 2d, Bills and Notes 41:104.
Footnote 36. Kirby v Palos Verdes Escrow Co. (1st Dist) 183 Cal App 3d 57, 227 Cal
Rptr 785, 1 UCCRS2d 1386; Kent v Kent, 6 Cal App 2d 488, 44 P2d 445.
Footnote 37. Davis v West (Fla App D2) 114 So 2d 703.
Footnote 38. American Bank of South v Rothenberg (Fla App D5) 598 So 2d 289, 17
FLW D1242 (holding that the unrecorded assignment of a promissory note and mortgage,
coupled with delivery of the original promissory note to an assignee, allows that assignee
to prevail over a subsequent assignee of the mortgage who receives only a copy of the
note, because the second assignee is not a holder in due course of a negotiable instrument
in that he does not possess the instrument).

Footnote 39. Illinois State Bank v Yates (Mo App) 678 SW2d 819, 39 UCCRS 204
(holding that the assignment of a note was a pledge, rather than a negotiation, since the
assignee failed to allege that the note was indorsed).
As to the status and rights of holders, see 238 et seq.
Footnote 41. 218.
Footnote 42. Bailey v Mills, 257 Ala 239, 58 So 2d 446; Blake v Weiden, 291 NY 134,
51 NE2d 677, 149 ALR 1050.
211 --Partial assignments
View Entire Section

If a transferor purports to transfer less than the entire instrument, negotiation of the
instrument does not occur 43 and the transfer operates only as a partial assignment. 44
In that event, the transferee obtains no rights under Article 3 of the Uniform Commercial
Code (UCC) and has only the rights of a partial assignee. 45
Observation: The rights and status of the partial transferee are determined
exclusively by the pre-UCC law relating to partial assignments of contract rights. 46
Footnotes
Footnote 44. UCC 3-202(3) [1952].
By executing a collateral assignment and pledge agreement as to the proceeds of

$180,000 in notes to secure repayment of a $60,000 debt, a debtor did not irrevocably
divest himself of ownership of that portion of the proceeds which were not required to
satisfy the obligation; instead, the transaction created only a partial assignment of such
proceeds. Lipkowitz & Plaut v Affrunti, 95 Misc 2d 849, 407 NYS2d 1010, 25 UCCRS
276.
An indorsement of less than the full amount of a note, which was not an indorsement of
the unpaid balance due on the note, operated only as a partial assignment and the
assignee was not a holder in due course. Hewett v Marine Midland Bank, N.A. (2d Dept)
86 App Div 2d 263, 449 NYS2d 745, 33 UCCRS 1696 (applying the pre-1990 version of
the Uniform Commercial Code).

B. Transfer by Negotiation [212-217]
Research References
UCC 3-201, 3-202, 3-204, 3-207, 3-208, 3-305 [1952]; UCC 3-201 through 3-203,
3-205, 3-207, 3-305, 3-306 [1990 Rev]
ALR Index: Bills and Notes; Cancellation or Rescission; Checks and Drafts; Delivery
Holder in Due Course; Indorsement; Uniform Commercial Code
3:89-3:91, 3:93, 3:94
Instruments 253:2422, 253:2423
3-202:4, 3-207:8
212 Generally
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) provides that negotiation
is the transfer of an instrument in such a form that the transferee becomes a holder. 47
Under the 1990 Revision of the UCC, negotiation occurs by the transfer of possession,
whether voluntary or involuntary, of an instrument by a person other than the issuer to a
person who thereby becomes its holder. 48
If the recipient of an instrument is not a holder, as where a person other than the
identified payee is in possession of an order instrument, there is no negotiation. 49 But,
although the issuance of an instrument is not a negotiation, 50 the person to whom it is
issued is not prevented from being the holder of the instrument if it is payable to him or
her, or if it is in bearer form. 51
Comments: Negotiation is merely a special form of transfer, the importance of

which lies entirely in the fact that it makes the transferee a holder of the instrument
which is transferred. 52 Negotiation always requires a change in possession of the
instrument, because nobody can be a holder without possessing the instrument either
directly or through an agent. 53
A bearer instrument is negotiated by delivery, in the terminology of the pre-1990 version

of the UCC, or by a transfer of possession alone under the 1990 Revision. 54 If the
instrument is payable to order, or is payable to an identified person, negotiation requires
the delivery or transfer of possession of the instrument with any necessary indorsement.
55

Footnotes
Footnote 47. UCC 3-202(1) [1952].
As to the definition of "holder," see 203.
Footnote 50. 202.
As to the issuance or first delivery of an instrument, see 185 et seq.
Footnote 54. 213.
Footnote 55. 214.
As to transfers of instruments by indorsement, see 218 et seq.
213 Negotiation of bearer paper
View Entire Section

If an instrument is payable to bearer, it is negotiated by delivery 56 or by transfer of

possession alone. 57
Observation: Under the 1990 Revision of the Uniform Commercial Code, it is

immaterial whether the transfer of possession is voluntary or involuntary; this
eliminates delivery as an element of negotiation and permits negotiation to occur when
the instrument is stolen or lost and found, assuming that it is in bearer form at such
time. 58
Where bearer paper is specially indorsed, it becomes payable to the order of the special
indorsee and may be further negotiated only by that person's indorsement. 59
Footnotes

Footnote 56. UCC 3-202(1) [1952].
As to the requirement that the delivery of an instrument be voluntary, see 186.
As to negotiation of order instruments, see 214.
As to special indorsements, see 229.
214 Negotiation of order paper
View Entire Section

If the instrument is payable to order, 60 or is payable to an identified person in the

terminology of the 1990 Revision of the Uniform Commercial Code (UCC), 61
negotiation requires the delivery 62 or transfer of possession 63 of the instrument with
any necessary indorsement. 64 However, an instrument payable to order and indorsed
in blank becomes payable to bearer and may be negotiated by delivery 65 or transfer of
possession alone 66 until specially indorsed.
Where the holder of an instrument not then payable to bearer transfers it for value, the
transferee has the specifically enforceable right to have the unqualified indorsement of
the transferor. 67 In such a case, negotiation of the instrument does not occur until the
indorsement is made. 68
Comment: Until the time of negotiation, the transferee does not become a holder;
thus, if earlier notice of a defense or claim is received, the transferee does not qualify
as a holder in due course. 69
Footnotes
Footnote 60. UCC 3-202(1) [1952].
Footnote 62. UCC 3-202(1) [1952].

No negotiation of two promissory notes from the payee bank to the bank's insurer took
place, where the notes were order paper and were never indorsed or delivered to the
insurer. Bank of Danielsville v Seagraves, 167 Ga App 135, 305 SE2d 790.
As to the transfer of instruments by indorsement, see 218.
Footnote 65. UCC 3-204(2) [1952].
As to the negotiation of bearer instruments, see 213.
Footnote 67. 243.
215 Effect of incapacity, fraud, illegality, and similar factors
View Entire Section

Negotiation is effective as a transfer even if it is obtained: (1) from an infant, a

corporation exceeding its powers, or any other person without capacity; (2) by fraud,
duress, or mistake, or (3) in breach of duty or as part of an illegal transaction. 70
Comment: The foregoing statutory provision applies even though the lack of
capacity or illegality is of a character which goes to the essence of the transaction and
makes it entirely void, since it is inherent in the character of negotiable instruments
that any person in possession of an instrument, which by its terms is payable to that
person or to bearer, is a holder and may be dealt with by anyone as a holder; this
principle finds its most extreme application in the well-settled rule that a holder in due
course may take an instrument even from a thief and still be protected against the claim
of the rightful owner. 71
Despite the fact that the negotiation of an instrument is effective under the circumstances
set forth above, the right of a holder, including a holder in due course, to enforce the
obligation of a party to pay the instrument is subject to a defense of the obligor based on:
(1) infancy of the obligor, to the extent that infancy is a defense to a simple contract; (2)
duress, lack of legal capacity, or illegality of the transaction which, under other law,
nullifies the obligation of the obligor; (3) fraud or misrepresentation that has induced the
obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn
of its character or its essential terms; (4) discharge of the obligor in insolvency
proceedings; 72 or (5) any other discharge of which the holder has notice when he or she
takes the instrument. 73

Comment: The foregoing defenses are real defenses, which may be asserted against
any person entitled to enforce the instrument; if under state law the effect is to render
the obligation of the instrument entirely null and void, the defense may be asserted
against a holder in due course, but not if the obligation is merely voidable at the
election of the obligor. 74
Under the pre-1990 version of the Uniform Commercial Code (UCC), a holder in due
course takes an instrument free from all defenses, other than those set forth above, of any
party to the instrument with whom the holder has not dealt. 75 Under the 1990 Revision
of the UCC, the right of a holder in due course to enforce the obligation to pay an
instrument is not subject to simple contract defenses or to defenses of the obligor stated
elsewhere in Article 3 of the UCC; moreover, the enforcement rights of a holder in due
course are not subject to claims in recoupment of the type specified by statute 76 against
a person other than the holder. 77
Comment: In addition to simple contract defenses such as fraud, misrepresentation,

or mistake in the issuance of an instrument, the defenses specifically stated in Article 3
of the UCC which are cut off by a holder in due course include: (1) nonissuance of an
instrument, conditional issuance, and issuance for a special purpose; (2) modification
of the obligation by a separate agreement; (3) failure to countersign a traveler's check;
(4) payment in violation of a restrictive indorsement; (5) issuance of an instrument
without consideration, or for which promised performance has not been given; and (6)
breach of warranty when a draft is accepted. 78
Footnotes
As to remedies for improper negotiation, see 216.

Insanity of maker, drawer, or indorser as defense against holder in due course, 24

ALR2d 1380.
Footnote 72. UCC 3-305(2) [1952]; UCC 3-305(a)(1) [1990 Rev].
Footnote 73. UCC 3-305(2) [1952].
As to defenses to enforcement of instruments, generally, see 546 et seq.
Footnote 75. 547.

As to obvious forgery or alteration of an instrument such as will prevent the assertion of

holder-in-due-course status, see 264.
Defenses arising under UCC 3-306 and 3-307 of fraud, failure of consideration, and
breach of fiduciary duty were of no avail against a bank which was a holder in due
course. Chemical Bank of Rochester v Haskell, 51 NY2d 85, 432 NYS2d 478, 411
NE2d 1339, 29 UCCRS 1529, reh den 51 NY2d 1009 and reh den 51 NY2d 1009 and
reh den 51 NY2d 1009.
As to nondelivery or nonissuance as a defense, see 187.
216 --Remedies for improper negotiation; rescission
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) provides that, except as
against a subsequent holder in due course, a negotiation which is effective despite the
presence of factors such as incapacity, fraud, or illegality is subject to rescission or other
remedies in an appropriate case. 79 Under the 1990 Revision of the UCC, negotiation
likewise may be rescinded or may be subject to other remedies to the extent permitted by
other law; however, those remedies may not be asserted against either (1) a subsequent
holder in due course, or (2) a person paying an instrument in good faith and without
knowledge of facts that are a basis for the rescission or other remedy. 80
Comments: The 1990 Revision of the UCC extends the prohibition against
rescission where certain parties are involved to include payor banks, in addition to
holders in due course; the latter were also protected under the pre-1990 version. 81
Thus, there can be no rescission or other remedy against a holder in due course or a
person who pays in good faith and without notice, even though the prior negotiation
may have been fraudulent or illegal in its essence and entirely void. 82
In an appropriate case, the aggrieved party may rescind an improper negotiation or obtain
any judicial relief that is available under the law of the forum, including pre-UCC
remedies which continue in force because they were not displaced by the enactment of
the UCC. 83
Comment: The potential remedies of a person with a claim to an instrument include:

(1) recovery of it by replevin or otherwise; (2) impound of the instrument or an
injunction against its enforcement, collection, or negotiation; (3) recovery of its

proceeds from the holder; or (4) intervention in any action brought by the holder
against the obligor. 84
Observation: A person taking an instrument, other than a person having the rights of
a holder in due course, is subject to a claim of a property or possessory right in the
instrument or its proceeds, including a claim to rescind a negotiation and to recover the
instrument or its proceeds; a person having the rights of a holder in due course takes
free of the claim to the instrument. 85
Footnotes
Footnote 79. UCC 3-207(2) [1952].
As to the effectiveness of negotiation where incapacity, fraud, illegality, or similar

factors are present, see 215.
As to the effect of holder-in-due-course status on the assertion of defenses to enforcement

of an instrument, see 547.
Forms: Notice of rescissionTo present holder of instrument. 19 Am Jur Legal Forms

2d, Uniform Commercial Code: Article 3Negotiable Instruments 253:2422.
Notice from holder of instrumentRefusal to recognize rescission. 19 Am Jur Legal

As to the status and rights of a holder in due course, see 260 et seq.

Forms: Notice of rescissionTo present holder of instrument. 6A Am Jur Pl & Pr

Notice from holder of instrumentRefusal to recognize rescission. 6A Am Jur Pl & Pr

Forms: Complaint, petition, or declarationFor return of instrument improperly

negotiated, injunction against further negotiation, and impoundment of the instrument.

Instruments 3:91.
217 Reacquisition and negotiation by prior party; canceling indorsements
View Entire Section

Reacquisition of an instrument occurs when it is returned to or reacquired by a prior party

86 or, as stated in the 1990 Revision of the Uniform Commercial Code (UCC), if it is
transferred to a former holder, by negotiation or otherwise. 87 Under the pre-1990
version of the UCC, a former holder who reacquires an instrument may cancel
indorsements which are not necessary to his or her title, and may reissue or further
negotiate the instrument. 88 Upon regaining possession of an instrument in a bona fide
manner and striking intervening indorsements, the original payee may thus recover on the
instrument as if it had never been indorsed. 89
Under the 1990 Revision of the UCC, a former holder who reacquires an instrument may
cancel indorsements made after the reacquirer first became a holder of the instrument,
and if the cancellation causes the instrument to be payable to the reacquirer or to bearer,
the reacquirer may negotiate the instrument. 90
Comment: When an instrument is reacquired by negotiation, the former holder

thereby regains the status of holder; but if the reacquisition is not the result of
negotiation, as where the instrument is delivered without a necessary indorsement, the
former holder can once again attain holder status only by striking his or her own prior
indorsement and any subsequent indorsements. 91
An indorser whose indorsement is canceled is discharged; the discharge is effective

against any subsequent holders, 92 including holders in due course, as well as against the
reacquirer and subsequent holders not in due course. 93 An indorser whose signature is
not canceled by the reacquirer is not affected in any way by the reacquisition of the
instrument by a former holder; however, any subsequent holder whose indorsement is
canceled cannot be held liable for payment of the paper. 94
Footnotes
Footnote 86. UCC 3-208 [1952].
Footnote 87. UCC 3-207 [1990].
Footnote 88. UCC 3-208 [1952].
The Resolution Trust Corporation (RTC), as receiver for a defunct savings and loan
association, was not legally handicapped by the lack of an indorsement on a note by an

insurance company to which the savings and loan had indorsed the instrument, because
the RTC was entitled to cancel the indorsement to the insurance company and thereby
acquired the same rights as holder that the savings and loan had when it earlier possessed
the note. Resolution Trust Corp. v Juergens (7 Ill) 965 F2d 149, 18 UCCRS2d 484.
Footnote 89. Central Optical Merchandising Co. v Estate of Lowe, 249 Miss 61, 160 So
2d 673.
As to the striking of a restrictive indorsement, see 230.
Forms: AnswerDefenseReacquisition of note and cancellation of prior indorsement

discharged defendant from liability. 6A Am Jur Pl & Pr Forms (Rev), Commercial
AnswerDefenseReacquisition by prior indorser a cancellation of prior indorsement.

Instruments 3:94.
Footnote 93. UCC 3-208 [1952].
C. Transfer by Indorsement [218-234]
Research References
UCC 1-201; UCC 3-102, 3-202 through 3-206, 3-402, 3-405, 3-415 [1952]; UCC
3-102, 3-110, 3-204 through 3-206, 3-404, 3-419 [1990 Rev]; UCC 4-105
ALR Digest: Assignment 1 et seq.; Bills and Notes 80, 81, 86, 87, 104-108, 113,
114
ALR Index: Accommodation Party or Paper; Assignments; Bills and Notes; Checks and
Drafts; Delivery; Indorsement; Uniform Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms 52, 53, 55; 6A Am Jur Pl & Pr
Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:78, 3:81, 3:84,
3:86, 3:89, 3:171
3B Am Jur Legal Forms 2d, Bills and Notes 41:106, 41:115; 19 Am Jur Legal Forms
2d, Uniform Commercial Code: Article 3Negotiable Instruments 253:2412,
253:2413, 253:2463
3-206:9; 6 Anderson, Uniform Commercial Code 3d 3-405:3, 3-405:4; 6A Anderson,
Uniform Commercial Code 3d [Rev] 3-204:5 through 3-204:7, 3-205:8, 3-205:9,
3-206:11, 3-206:12, 3-415:7
1. In General [218-225]

218 Generally; purpose and sufficiency of indorsement
View Entire Section

An indorsement is a signature, other that 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 negotiating the instrument, restricting payment of the instrument, or incurring
indorser's liability on the instrument. 95 An indorsement must be written on the
instrument, or on a paper so firmly affixed thereto as to become a part thereof. 96 A
transfer without a necessary indorsement is merely an assignment which does not vest in
the transferee the rights of a holder in due course. 97
Comments: If a blank or special indorsement is made to give rights as a holder to a

transferee of an instrument, the indorsement is made for the purpose of negotiating the
instrument. 98 An instrument indorsed in blank may be further negotiated by delivery
alone, provided that it bears the indorsement of all prior special indorsees. 99
An indorsement is effective for negotiation only when it conveys the entire instrument or
any unpaid residue; otherwise, it operates only as a partial assignment. 1 Nonetheless,
an indorsement that transfers a security interest in an instrument is effective as an
Words of assignment accompanying an indorsement do not affect its character as an

indorsement, 3 and an assignment indorsed on an instrument is generally deemed to be
an indorsement sufficient to cause negotiation of the instrument. 4
Footnotes
As to when there is a presumption that a signature is an indorsement, see 219.
As to negotiation of an instrument, see 212 et seq.
As to restrictive indorsements, see 230.
As to irregular or anomalous indorsements made for the purpose of incurring indorser's

liability, see 234.
As to the liability of an indorser, generally, see 459.
Forms: AnswerDefenseDenial of indorsement of note. 5 Am Jur Pl & Pr Forms


Instruments 3:78.
IndorsementAdditional termsWarranty of title and capacity of party. 19 Am Jur

253:2412.
Comment The pre-1990 version of the Uniform Commercial Code does not define the
term "indorsement." Official Comment 1 to UCC 3-204 [1990 Rev].
Footnote 96. 220.
Footnote 97. Lee v Muller, 200 Ga App 139, 407 SE2d 108, 102-137 Fulton County D R
10B.
As to the necessity of indorsement to the negotiation of instruments payable to order, see

214.
As to transfer by assignment, generally, see 210.
Footnote 1. 211.
Footnote 2. 206.
As to qualified indorsements or indorsements without recourse, see 233.
Footnote 3. UCC 3-202(4) [1952].
Forms: AssignmentOf promissory noteBy indorsement without recourse. 3B Am

Jur Legal Forms 2d, Bills and Notes 41:106.
Indorsement in form of assignment. 19 Am Jur Legal Forms 2d, Uniform Commercial

Footnote 4. Henderson v Hanson (Ala Civ App) 414 So 2d 971, 34 UCCRS 371; Davis v
West (Fla App D2) 114 So 2d 703.

219 Presumption of indorsement; ambiguities

View Entire Section
The pre-1990 version of the Uniform Commercial Code (UCC) provides that unless an
instrument clearly indicates that a signature is made in some other capacity, it is an
indorsement. 5
Comment: The foregoing provision is intended to say that any ambiguity as to the
capacity in which a signature is made must be resolved by a rule of law that it is an
indorsement; parol evidence is not admissible to show any other capacity, except for
the purpose of reformation of the instrument to the extent allowed by the law of the
jurisdiction. 6
Under the 1990 Revision of the UCC, regardless of the intent of the signer, a signature
and its accompanying words is an indorsement unless the accompanying words, terms of
the instrument, place of the signature, or other circumstances unambiguously indicate
that the signature was made for a purpose other than indorsement. 7 A signature thus is
presumed to be an indorsement, unless a contrary intent clearly appears. 8
Observation: In determining whether a signature on an instrument is an

indorsement, factors such as the place where the signature appears and other
circumstances which are apparent on the face of the instrument may be considered, but
not matters extrinsic to the document. 9
Footnotes
Footnote 5. UCC 3-402 [1952].
Where indorsers of a note indorsed the instrument without a clear indication of the
capacity in which they signed or of any intention to qualify their status, they became
indorsers who were liable for payment of the instrument upon dishonor by its payor.
First New Haven Nat'l Bank v Clarke, 33 Conn Supp 179, 368 A2d 613, 20 UCCRS
1228.
220 Sufficiency of indorsement; position
View Entire Section

No particular form of words is required in an indorsement, so long as it is written by or

on behalf of the holder of the instrument 10 and includes the signature of the indorser. 11
Definition: "Written" or "writing" includes printing, typewriting, or other intentional

reduction to tangible form. 12
A signature may be made manually or by means of a device or machine, and may be

made 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 the present intention of authenticating a
writing. 13 A manual signature therefore is not required for an indorsement;
indorsement by means of a rubber stamp is sufficient. 14
The customary place for an indorsement to be made is on the back of an instrument. 15

However, an indorsement made on an instrument may be written at any place on the
instrument; all that is required is that it satisfy the definition of an indorsement. 16
Furthermore, an indorsement may be written on a paper so firmly affixed to an
instrument as to become a part thereof. 17 For the purpose of determining whether a
signature is made on an instrument, a paper affixed to the instrument is a part of the
instrument. 18 However, a purported indorsement on a mortgage or other separate paper
pinned or clipped to an instrument is not sufficient for negotiation. 19
Comments: A paper so firmly affixed to an instrument as to become a part thereof is

known as an allonge. 20 Under the 1990 Revision of the Uniform Commercial Code,
an indorsement on an allonge is effective even if there is sufficient space on the
instrument itself for an indorsement. 21
Footnotes
Footnote 10. UCC 3-202(2) [1952].
An indorsement made on the back of a promissory note payable to a corporation was

insufficient where it did not indicate that the indorser was signing on behalf of the
corporate payee. Wesche v Martin, 64 Wash App 1, 822 P2d 812, 17 UCCRS2d 510.
Footnote 11. Bowles v Billik, 27 Wash 2d 629, 178 P2d 954.
It is not the name, but the signature, of the indorser that is required. Marks v Munson, 59
Colo 440, 149 P 440 (ovrld in part on other grounds by Myrick v Garcia, 138 Colo 298,
332 P2d 900).
As to the warranty of a transferor for value concerning the authenticity of signatures on

an instrument, see 514.
Footnote 13. 61.

Footnote 14. Allenberg v Rapken & Co., 108 Cal App 99, 291 P 281.
Footnote 15. 62.
Footnote 17. UCC 3-202(2) [1952].
Annotation: Indorsement of negotiable instrument by writing not on instrument itself,

19 ALR3d 1297.
Footnote 19. Illinois State Bank v Yates (Mo App) 678 SW2d 819, 39 UCCRS 204.
A bank was a mere transferee of notes, and not a holder in due course, where the
purported indorsements were not made on a valid allonge attached next to the notes
themselves, but were each stapled to the back of another document accompanying the
notes. Crossland Sav. Bank FSB v Constant (Tex App Corpus Christi) 737 SW2d 19, 4
UCCRS2d 1479.
221 --Effect of wrong or misspelled name
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), where an
instrument is made payable to a person under a misspelled name or one other than his or
her own, the payee may indorse the instrument in the name used by the maker or drawer
of the instrument or in the payee's own name, or both; but, signature in both names may
be required by a person who pays or gives value for the instrument. 22 The 1990
Revision of the UCC similarly provides that if an instrument is payable to a holder under
a name that is not the name of the holder, indorsement may be made by the holder in the
name stated in the instrument or in the holder's name or both; however, signature in both
names may be required by a person paying or taking the instrument for value or
collection. 23
Comments: In some cases the name used in an instrument may be a misspelling of

the correct name, and in other cases the two names may be entirely different; while the
payee may indorse in the name used, in the payee's correct name, or in both, the
accepted commercial practice is to indorse in both names so as to avoid questions
concerning the validity of the indorsement. 24 Thus, indorsement in both the wrongly
designated and correct names is desirable, and one who demands such an indorsement
is not in default if the demand is refused. 25
Footnotes
Footnote 22. UCC 3-203 [1952].
Forms: AnswerDefenseName of payee misspelledRefusal to indorse in manner

payable. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:81.
222 Indorsements by impostors
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) provides that an
indorsement by anyone in the name of a named payee is effective if an impostor, by the
use of the mails or otherwise, has induced the maker or drawer to issue the instrument to
the impostor or his or her confederate in the name of the payee. 26 For purposes of the
impostor rule, under which the drawer of a check delivered to an impostor ultimately is
liable for any loss, the person who induces the issuance of the check must actively
impersonate another person. 27
Comment: Any loss resulting from fraud committed by an impostor is placed upon
the maker or drawer of an instrument by the statutory provision concerning the effect
of indorsements by impostors. 28
Under the 1990 Revision of the UCC, where an impostor induces the issuer of an
instrument to issue it to the impostor or to a person acting in concert with the impostor,
either by impersonating the payee of the instrument or a person authorized to act for the
payee, an indorsement of the instrument by anyone in the name of the payee is effective
as the indorsement of the payee in favor of a person who, in good faith, takes the
instrument for value or pays it. 29
Comments: The impostor rule stated in the pre-1990 version of the UCC does not
extend to a false representation that the impostor is the authorized agent of the payee.
30 On the other hand, the 1990 Revision of the UCC allows an impostor to negotiate
a check whether that person impersonates the payee or an agent of the payee, such as
an officer of a corporation. 31
Where the provisions of the 1990 Revision of the UCC concerning impostors and

fictitious payees apply, if a person paying the instrument or taking it for value for
collection fails to exercise ordinary care in paying or taking the instrument, and if that
failure substantially contributes to loss resulting from payment of the instrument, the
person bearing the loss may recover from the person who failed to exercise ordinary care
to the extent that the failure contributed to the loss. 32
Footnotes
Footnote 26. UCC 3-405(1)(a) [1952].
Annotation: Construction and application of UCC 3-405(1)(a) involving issuance of

negotiable instrument induced by impostor, 92 ALR3d 608.
Forms: Complaint, petition, or declarationAllegationImpostor induced issuance of

instrument. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Footnote 27. Dominion Bank, N.A. v Household Bank, F.S.B. (SD Ohio) 827 F Supp
463, 23 UCCRS2d 781 (distinguishing the impostor situation from the forgery of another
person's signature).
A collecting bank was not liable to the drawer of a draft for breach of warranty based on
the lack of genuineness of indorsements of either of two joint payees, where the drawer
delivered the draft to an impostor; under UCC 3-405(1)(a), both indorsements were
effective to relieve the collecting bank of liability. Fair Park Nat'l Bank v Southwestern
Inv. Co. (Tex Civ App Dallas) 541 SW2d 266, 20 UCCRS 454, 92 ALR3d 600, writ ref
n r e (Jan 5, 1977).
As to the transfer of an instrument for value, see 207.
As to fictitious payees, see 223.
Comment: The foregoing provision is intended to reach cases in which the person
taking a check might have detected fraud, and thus have prevented a loss, by the
exercise of ordinary care. Official Comment 3 to UCC 3-404 [1990 Rev].
223 Fictitious payees

View Entire Section
indorsement by anyone in the name of a named payee is effective if:
(1) a person signing as or on behalf of a maker or drawer intends the payee to have no
interest in the instrument; or 33
(2) an agent or employee of the maker or drawer has supplied him or her with the name
of the payee intending the latter to have no such interest. 34
Observation: The foregoing provisions permit anyone to indorse paper made

payable to a fictitious person or to one who was not intended to acquire any interest in
the paper, 35 so as to promote the negotiability and reliability of commercial paper. 36
Under the 1990 Revision of the UCC, if a person whose intent determines to whom an
instrument is payable according to the rules set forth by statute 37 does not intend the
person identified as the payee to have any interest in the instrument, or if the person
identified as payee 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; and
(2) an indorsement by any person in the name of the payee stated in the instrument is
effective as the indorsement of the payee in favor of a person who, in good faith, pays the
instrument or takes it for value. 38 However, where the provisions of the 1990 Revision
of the UCC concerning impostors and fictitious payees apply, if a person paying the
instrument or taking it for value for collection fails to exercise ordinary care in paying or
taking the instrument, and that failure substantially contributes to loss resulting from
payment of the instrument, the person bearing the loss may recover from the person who
failed to exercise ordinary care to the extent that the failure contributed to the loss. 39
Footnotes
Footnote 33. UCC 3-405(1)(b) [1952].
Where an employee of an insurance company who was authorized to draw and sign drafts
in settlement of claims drew drafts to payees selected from inactive claim files who he
intended to have no interest in the instruments, the employee's indorsement of the payees'
names on the back of the drafts when he cashed them at the collecting bank was effective
to pass title to the instruments. General Acci. Fire & Life Assurance Corp. v Citizens
Fidelity Bank & Trust Co. (Ky) 519 SW2d 817, 16 UCCRS 782 (also holding that the
collecting bank, as a good-faith transferee, was entitled to payment from the parties liable
on the instrument).
If an indorsement is effective under UCC 3-405(1)(b), the depositary or collecting bank

becomes a holder in due course and is not liable for money paid on forged checks.

Acrometal Cos. v First American Bank (Minn App) 475 NW2d 487, 15 UCCRS2d 532.
Comment: The application of the foregoing provision is illustrated by the case in

which the drawer of a check, for his or her own reasons, makes it payable to a person
that the drawer knows does not exist; in such a case, an indorsement by anyone in the
name of the payee is effective. Official Comment 3 to UCC 3-405 [1952].
Footnote 34. UCC 3-405(1)(c) [1952].
The "padded payroll" rule creates an exception to the general rule that a drawer is not
liable for an unauthorized indorsement. Retail Shoe Health Com. v Manufacturers
Hanover Trust Co. (1st Dept) 160 App Div 2d 47, 558 NYS2d 949, 13 UCCRS2d 476.
UCC 3-405(1)(c) is an exception to the general rule that a drawee bank is liable to its
customer for payment of a check with a forged indorsement. K & M Constr. v Citizens
Nat'l Bank (Allen Co) 89 Ohio App 3d 157, 623 NE2d 1247, 24 UCCRS2d 591.
Comment: The foregoing provision covers padded-payroll cases, in which an agent

or employee prepares a check for signature or otherwise furnishes the signing officer
with the name of the payee; in that event, the rationale is that the loss should fall on the
employer as a risk of the business enterprise, rather than on a subsequent holder or
drawee. Official Comment 4 to UCC 3-405 [1952].
Footnote 37. UCC 3-110(a), 3-110(b) [1990 Rev].
Comment: The foregoing provision applies both to cases in which an instrument is

payable to a fictitious or nonexistent person and to cases in which the payee is a real
person, but the drawer or maker does not intend the payee to have any interest in the
instrument; while it applies to any instrument, its primary importance is with respect to
checks of corporations and other organizations, and it also applies to forged-check
cases. Official Comment 2 to UCC 3-404 [1990 Rev].
Footnote 39. 222.
224 Effect of missing indorsements
View Entire Section


Payment of an instrument over a missing indorsement is the equivalent of payment on a
forged indorsement; therefore, a bank which pays an item without a necessary
indorsement may be held liable for conversion. 40 Similarly, a depository or collecting
bank may be held liable on a conversion theory to a nonendorsing joint payee for a
payment made to one payee without the indorsement of all named payees. 41 Thus,
where a check is payable to two payees other than in the alternative, a bank which pays
the check on the indorsement of one of the payees only and credits the proceeds to the
account of the indorsing payee is liable in conversion to the nonindorsing payee for the
entire amount of the check. 42 On the other hand, a mortgagee named as a joint payee
on a fire insurance check does not have a cause of action for conversion against a bank
which has allegedly paid the check over a forged indorsement, where the mortgagee has
received satisfaction of the debt and, therefore, has no rights in the insurance proceeds
check. 43
Footnotes
Footnote 40. Kelly v Central Bank & Trust Co. (Colo App) 794 P2d 1037, 12 UCCRS2d
1089; Humberto Decorators, Inc. v Plaza Nat'l Bank, 180 NJ Super 170, 434 A2d 618, 32
UCCRS 494.
A bank may be liable in conversion for paying on a forged indorsement, which can also
mean an incomplete indorsement. Lassen v First Bank Eden Prairie (Minn App) 514
NW2d 831, 23 UCCRS2d 482, review den (Minn) 1994 Minn LEXIS 534 (stating that
the UCC has only added to, and not replaced, the common-law elements of conversion).
A bank was liable to its customer in the amount of a certified check which the bank
improperly exchanged for a cashier's check without requiring the indorsement of the
named payee; since the instrument was payable to order, and not to bearer, it was
nonnegotiable without the missing indorsement. Tonelli v Chase Manhattan Bank, N. A.,
41 NY2d 667, 394 NYS2d 858, 363 NE2d 564, 21 UCCRS 1344.
Footnote 41. Beyer v First Nat'l Bank, 188 Mont 208, 612 P2d 1285, 29 UCCRS 563
(citing cases applying UCC 3-419 [1952]).
As to negotiation of instruments by multiple payees, see 205.
Footnote 42. Peoples Nat'l Bank v American Fidelity Fire Ins. Co. (Md App) 386 A2d
1254, 24 UCCRS 362; Middle States Leasing Corp. v Manufacturers Hanover Trust Co.
(1st Dept) 62 App Div 2d 273, 404 NYS2d 846, 23 UCCRS 1215.
Footnote 43. Bellusci v Citibank N.A. (3d Dept) 204 App Div 2d 843, 611 NYS2d 958,
25 UCCRS2d 840.
225 Effect of indorsement on negotiability
View Entire Section

A restrictive indorsement limiting payment to a particular person or otherwise purporting

to prohibit further transfer or negotiation of the instrument is not effective to prevent
further transfer or negotiation of the instrument. 44 On the other hand, the manner in
which an instrument is negotiable may be changed by indorsement; thus, for example, an
instrument payable to order and indorsed in blank becomes payable to bearer and may be
negotiated by delivery alone until specially indorsed, 45 whereas an instrument
specially indorsed becomes payable to the order of the special indorsee and may be
further negotiated only by his or her indorsement. 46 However, an anomalous
indorsement does not affect the manner in which the instrument may be negotiated. 47
The only effect of an irregular or anomalous indorsement, since it is not in the chain of
title, is to make the signer liable on the instrument as an indorser. 48
Footnotes
Footnote 44. 230.
Footnote 45. 213.
Footnote 46. 214.
Footnote 48. 234.
2. Particular Kinds of Indorsements [226-234]
226 Generally; distinctions
View Entire Section

Indorsements may be broadly categorized as either "regular" or "irregular"; a regular

indorsement is one which is made to transfer title to the instrument, such as a blank 49
special, 50 or restrictive 51 indorsement, whereas an irregular or anomalous
indorsement is one that is not in the chain of title 52 and which gives notice of its
accommodation character. 53 Regular indorsements may be either general, meaning
made without qualification or restriction of liability, or qualified; a qualified indorsement
is the same as an indorsement without recourse. 54
Footnotes
Footnote 49. 227.
Footnote 50. 229.
Footnote 51. 230.
Footnote 52. 234.
Footnote 53. UCC 3-415(4) [1952].
As to what constitutes notice of accommodation, see 301.
Footnote 54. 233.
227 Blank indorsements
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) describes a blank
indorsement as one which specifies no particular indorsee and may consist of a mere
signature. 55 The 1990 Revision of the UCC states that if an indorsement is made by
the holder of an instrument and it is not a special indorsement, it is a blank indorsement.
56
Comment: Although a blank indorsement is usually the signature of the indorser on

the back of an instrument without other words, a blank indorsement is also made where
an intended special indorsement is not completed, as where the indorser writes the
words "Pay to the order of" over his or her signature without writing the name of the
indorsee; such an indorsement is not a special indorsement because it does not identify
the person to whom it is payable. 57
An instrument becomes payable to bearer when indorsed in blank and may be negotiated
by delivery 58 or transfer of possession 59 alone until specially indorsed.
Observation: Because commercial paper may be negotiated by a mere change of

possession so long as it remains in bearer form, it is immaterial whether bearer paper is
lost, stolen, or delivered without authority. 60
Footnotes
Footnote 55. UCC 3-204(2) [1952].
Forms: Complaint, petition, or declarationAllegationIndorsement in blank before

maturity. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 52.

Complaint, petition, or declarationAllegationIndorsement in blank before delivery.
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 53.
Complaint, petition, or declarationAllegationSuccessive blank indorsements. 6A

3:84.
Footnote 58. UCC 3-204(2) [1952].
228 --Conversion to special indorsement
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the holder of an
instrument may convert a blank indorsement into a special indorsement by writing, over
the signature of the indorser in blank, any contract consistent with the character of the
indorsement. 61 The 1990 Revision of the UCC similarly provides that the holder may
convert a blank indorsement that consists only of a signature into a special indorsement
by writing, above the signature of the indorser, words identifying the person to whom the
instrument is made payable. 62 While ordinarily the blank indorsement would be
converted to a special indorsement by the transferee who holds under the blank
indorsement by identifying himself or herself as the indorsee, any subsequent possessor
of an instrument indorsed in blank may make the conversion. 63
The authority to complete a blank indorsement is limited to the right to fill in the
indorsement so as to transfer the legal interest in the instrument to whomever the holder
pleases. 64 It cannot be construed as authority to complete the indorsement with a
contract not contemplated by the parties, such as by changing the contract from one of
indorsement to one of guaranty. 65
Footnotes
Footnote 61. UCC 3-204(3) [1952].

Footnote 65. George F. Lloyd & Co. v Matthews, 223 Ill 477, 79 NE 172.
229 Special indorsements
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) states that a special
indorsement is one which specifies the person to whom or to whose order the instrument
is payable. 66 The 1990 Revision of the UCC provides that if an indorsement is made
by the holder of an instrument, whether payable to an identified person or payable to
bearer, and the indorsement identifies a person to whom it makes the instrument payable,
it is a special indorsement. 67 When specially indorsed, an instrument becomes payable
to the identified person and may be negotiated only by the indorsement of that person. 68
The effect of a special indorsement, therefore, is to give the instrument the character of
order paper at that time. 69
The principles stated in the section of the1990 Revision of the UCC 70 concerning the
identification of the payee of an instrument apply to special indorsements. 71
Comment: The principles concerning the identification of the payee pertain to

indorsements even though that statute refers by its terms to the language used by the
issuer of an instrument. 72
The holder may convert a blank indorsement that consists only of a signature into a
special indorsement by writing, above the signature of the indorser, any contract
consistent with the character of the indorsement or words identifying the person to whom
the instrument is made payable. 73
Footnotes
Footnote 66. UCC 3-204(1) [1952].
The person to whom an instrument is payable need not be identified by name; the payee
may also be identified by bank account number. Spielman v Manufacturers Hanover
Trust Co., 60 NY2d 221, 469 NYS2d 69, 456 NE2d 1192, 37 UCCRS 1.

Footnote 73. 227.
230 Restrictive indorsements
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) states that an indorsement
is restrictive if it is (1) conditional, (2) purports to prohibit further transfer of the
instrument, (3) includes words such as "for collection," "for deposit," or "pay any bank"
signifying a purpose of deposit or collection, or (4) otherwise states that it is for the
benefit or use of the indorser or another person. 74 However, although an indorsement
such as one which provides that the payee agrees by indorsing the check to record a first
lien in favor of the payor bank is restrictive as to the payee, such an indorsement is not a
restrictive indorsement within the meaning of the UCC; an indorsement of that sort
contains no language relating to the purpose of deposit and collection so as to impose a
duty on the depositary bank to pay the check in accordance with a restriction. 75
Observation: Even though an indorsement which purports to prohibit further transfer

of an instrument is restrictive, 76 a restrictive indorsement limiting payment to a
particular person or otherwise purporting to prohibit further transfer or negotiation of
the instrument is not effective to prevent further transfer or negotiation of the
instrument. 77
Comment: A restrictive indorsement can be either a blank indorsement, as where the

words "for deposit only" are followed solely by the signature of the payee, or a special
indorsement which specifies the payee such as "Pay to T, in trust for B." 78
The 1990 Revision of the UCC recognizes the following two types of restrictive
indorsements:
(1) an indorsement for deposit or for the purpose of having the instrument collected by a
bank; and 79
(2) an indorsement using words to the effect that payment is to be made to the indorsee as
agent, trustee, or other fiduciary for the benefit of the indorser or another person. 80
Comment: Indorsements that limit payment to a particular person or are conditioned

upon the satisfaction of a specified condition are not described as restrictive

indorsements in the 1990 Revision of the UCC, since such limitations are no longer
effective as restrictive indorsements. 81
In an action to enforce the obligation of a party to pay an instrument, the obligor has a
defense if payment would violate a restrictive indorsement and the payment is not
permitted by the section of the UCC 82 governing restrictive indorsements. 83
Comment: A restrictive indorsement can be used by a person as a defense if that

person would be liable for paying in violation of the indorsement. 84
The holder of a bill or note may strike out a restrictive indorsement where it is
unnecessary to his or her title, as where the holder is the payee, 85 or where it has been
placed on a check by one with whom the holder deposited it for collection who returned
the check upon dishonor. 86
Footnotes
Footnote 74. UCC 3-205 [1952].
Footnote 75. Fairfax Bank & Trust Co. v Crestar Bank, 247 Va 356, 442 SE2d 651, 24
UCCRS2d 990.
Indorsements on the back of each of two checks stating that they were in partial
repayment of money loaned to the drawer were not restrictive indorsements, since they
did not impose a condition on negotiation, did not prohibit further transfer, did not state
any use or benefit of the indorser or another person, and did not contain terms specifying
a purpose of deposit or collection. Castellano v Bitkower, 216 Neb 806, 346 NW2d 249,
38 UCCRS 561.
As to indorsements for deposit and collection by banks, see 231.
As to the effect of indorsements on negotiability, see 225.
As to blank indorsements, see 227.
Footnote 79. 231.
Footnote 80. 232.

A restrictive indorsement obligates the next transferee to follow the instructions

contained in the indorsement. Sykes Corp. v Eastern Metal Supply (Fla App D4) 659 So
2d 475, 20 FLW D1902, 27 UCCRS2d 504.
Footnote 85. Middleton v Griffith, 57 NJL 442, 31 A 405.
Footnote 86. Gleason v Thayer, 87 Conn 248, 87 A 790.
As to cancellation of indorsements by a holder who reacquires an instrument, see 217.
231 --Indorsement for deposit or collection by bank
View Entire Section

Restrictive indorsements are most frequently used in connection with items that are
deposited in a bank or given to a bank for collection; the problems which arise with such
indorsements relate to situations in which the instrument or its proceeds are diverted from
their intended course in a manner inconsistent with a restrictive indorsement. 87
intermediary bank, or a payor bank which is not the depositary bank, is neither given
notice nor otherwise affected by a restrictive indorsement of any person except the bank's
immediate transferor or the person presenting an instrument for payment. 88 However,
except for an intermediary bank, any transferee under an indorsement which includes
words such as "for collection," "for deposit," or "pay any bank" must pay or apply any
value given by the transferee for or on the security of the instrument consistently with the
indorsement; to the extent that the transferee does so, it becomes a holder in due course.
89
Definitions: "Intermediary bank" means any bank to which an item is transferred in

the course of collection, except the depositary or payor bank; the "depositary bank" is
the first bank to which an item is transferred for collection, and the "payor bank" is the
bank by which an item is payable as drawn or accepted. 90
Under the 1990 Revision of the UCC, if an instrument bears an indorsement with words
such as "pay any bank," 91 or an indorsement in blank or to a particular bank using the
words "for deposit," "for collection," or other words indicating a purpose of having the
instrument collected by a bank for the indorser or for a particular account, 92 the
following rules apply:
(1) a person, other than a bank, who purchases the instrument when so indorsed converts
the instrument unless the amount paid for the instrument is received by the indorser or
applied consistently with the indorsement; 93
(2) a depositary bank that purchases the instrument or takes it for collection when so
indorsed converts the instrument unless the amount paid by the bank with respect to the
instrument is received by the indorser or applied consistently with the indorsement; 94
(3) a payor bank that is also the depositary bank or that takes the instrument for
immediate payment over the counter from a person other than a collecting bank converts
the instrument unless the proceeds are received by the indorser or applied consistently
with the indorsement; and 95
(4) except as otherwise provided by statute, a payor bank or intermediary bank may
disregard the indorsement and is not liable if the proceeds of the instrument are not
received by the indorser or applied consistently with the indorsement. 96
Comment: The depositary bank, or the payor bank if it takes the check for
immediate payment over the counter, must act consistently with a restrictive
indorsement, but an intermediary bank or a payor bank that takes the check from a
collecting bank is not affected by such an indorsement; any other person is also bound
by the indorsement. 97 For example, where a check is payable to X, who indorses it
in blank and writes above the signature the words "For deposit only," the check is
stolen and cashed at a grocery store by the thief, and the grocery store indorses the
check and deposits it in the depositary bank which credits the store's account, the
grocery store and the depositary bank are converters of the check because X did not
receive the amount paid for the check. 98
Footnotes
Footnote 88. UCC 3-206(2) [1952].
The foregoing provision effectively places liability solely on the bank that first takes a
check with a restrictive indorsement. Underpinning & Foundation Constructors, Inc. v
Chase Manhattan Bank, N. A., 46 NY2d 459, 414 NYS2d 298, 386 NE2d 1319, 25
UCCRS 1104.
Footnote 89. UCC 3-206(3) [1952].
The duty to examine a restrictive indorsement and follow its directions may require a
bank to refuse to deposit an item in the account if such conduct would be inconsistent
with the restrictive indorsement, or to investigate rather than accept the item as a matter
of course. Lehigh Presbytery v Merchants Bancorp, Inc., 410 Pa Super 557, 600 A2d
593, 17 UCCRS2d 163; La Junta State Bank v Travis (Colo) 727 P2d 48, 2 UCCRS2d
805.
As to transfer of an instrument for value, see 207.
Footnote 90. UCC 4-105 (made applicable to Article 3 by UCC 3-102(3) [1952] and
UCC 3-102(c) [1990 Rev]).

Annotation: Construction of UCC 4-105, which defines "payor bank," "collecting
bank," and the like, 84 ALR3d 1073.
Footnote 91. UCC 3-206(c)(i) [1990 Rev], referring to an indorsement described in

UCC 4-201(b).
Footnote 92. UCC 3-206(c)(ii) [1990 Rev].
Forms: AnswerDefenseBy depositary bankPayment made consistently with

indorsement. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Footnote 96. UCC 3-206(c)(4) [1990 Rev], referring to UCC 3-206(c)(3) [1990 Rev].
232 --Trust indorsement
View Entire Section

indorsement which states that it is for the benefit or use of the indorser or another person
is a restrictive indorsement. 99 This definition includes any indorsement to the effect
that the negotiation is for, or the proceeds are to be held for or in trust for, the indorser or
another. 1 The immediate transferee or first taker under a trust indorsement must act
consistently with the indorsement 2 and, therefore, must pay or apply any value given by
the transferee or taker for or on the security of the instrument consistently with the
indorsement. 3 However, any later holder of the instrument who takes for value is not
given notice by the trust indorsement and is not affected by it, unless he or she has
knowledge that a fiduciary or other person has negotiated the instrument in any
transaction for his or her own benefit or otherwise in breach of a fiduciary duty. 4
Under the 1990 Revision of the UCC, except for an indorsement for deposit or collection
by a bank, if an instrument bears an indorsement using words to the effect that payment is
to be made to the indorsee as agent, trustee, or other fiduciary for the benefit of the
indorser or another person, the following rules apply:
(1) unless there is notice of breach of fiduciary duty as provided in specified statutory
provisions, a person who purchases the instrument from the indorsee, or who takes the
instrument from the indorsee for collection or payment, may pay the proceeds of payment
or the value given for the instrument to the indorsee without regard to whether the
indorsee violates a fiduciary duty to the indorser; and
(2) a subsequent transferee of the instrument or person who pays the instrument is neither
given notice nor otherwise affected by the restriction in the indorsement, unless the
transferee or payor knows that the fiduciary dealt with the instrument or its proceeds in
breach of fiduciary duty. 5
Observation: The fact that the indorsement reveals the existence of a fiduciary
relationship does not give rise, under the 1990 Revision of the UCC, to any duty to
inquire as to whether there has been any breach of that fiduciary duty. 6
Footnotes
Footnote 99. 230.
Footnote 3. UCC 3-206(4) [1952].
Footnote 4. UCC 3-206(4) [1952].
As to indorsements for deposit or collection by banks, see 231.
Forms: Instruction to juryEffect of indorsement directing payment to agent, trustee,

or other fiduciary. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
233 Qualified indorsement or indorsement without recourse
View Entire Section

A qualified indorsement is one which is made by adding to the indorser's signature the
words "without recourse," or any words manifesting a disclaimer of liability for payment
of the instrument. 7 As a result of such an indorsement, the indorser becomes a mere
assignor of the title to the instrument and does not assume the ordinary liability of an
indorser. 8 However, the signature of a holder on the reverse side of a note constitutes

an unqualified indorsement if words qualifying the liability of the indorser are not
present, even though the signature is accompanied by words of assignment. 9
Caution: While a qualified indorser is not liable as an ordinary indorser, he or she

does warrant certain things about the instrument and may be liable for a breach of
warranty; 10 moreover, liability for fraud or false representations cannot be avoided
by an indorsement without recourse. 11
Footnotes
Footnote 8. Ouachita Industries, Inc. v Anderson, 236 Ark 929, 370 SW2d 811; North
American Factors Corp. v Motty Eitingon, Inc. (Sup) 105 NYS2d 250, affd 279 App Div
719, 108 NYS2d 338, affd 304 NY 901, 110 NE2d 733.
As to transfer of title to an instrument by assignment, see 210.
As to the liability of an indorser, see 459 et seq.
Forms: AssignmentOf promissory noteBy indorsement without recourse. 3B Am

Jur Legal Forms 2d, Bills and Notes 41:106.
Indorsement disclaiming liability. 19 Am Jur Legal Forms 2d, Uniform Commercial

Footnote 9. Potter v Smith (Fla App D3) 152 So 2d 513.
Unless one who places his or her name on an instrument wishes to be bound as an
indorser, that person must clearly indicate the contrary by appropriate words. Northeast
Factor & Discount Co. v Mortgage Invest., Inc., 107 Ga App 705, 131 SE2d 221.
Footnote 10. Eisenman v Vernell (Fla App D3) 114 So 2d 16.
Footnote 11. 512.
234 Irregular or anomalous indorsement for accommodation
View Entire Section

An irregular or anomalous indorsement is one which is made by a person who is not the
holder of the instrument. 12 The anomalous indorser is typically an accommodation
party who, by such indorsement, becomes subject to the liability of an indorser for
payment of the instrument. 13

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
guarantor with respect to the obligation of another party to the instrument. 14
Observation: A guaranty may have the effect of an indorsement if it is written on the

instrument itself or on a paper so firmly affixed thereto as to become a part of the
instrument. 15
Footnotes
As to the liability of accommodation indorsers, see 474, 484.
Footnote 15. Shepherd Mall State Bank v Johnson (Okla) 603 P2d 1115, 27 UCCRS
1019.
Notes 41:115.
VII. PERSONS ENTITLED TO ENFORCE INSTRUMENTS;

STATUS OF TRANSFEREE, HOLDER, OR OWNER [235-312]
Research References
UCC 3-116, 3-102, 3-201, 3-204, 3-301, 3-304, 3-603 [1952]; UCC 1-201, 3-102,
3-104, 3-106, 3-110, 3-201 through 3-204, 3-207, 3-301, 3-305, 3-306, 3-308 [1990 Rev]
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 71; 6A Am Jur Pl & Pr Forms
(Rev), Commercial Code : Article 3Negotiable Instruments 3:73, 3:98, 3:99
1 Anderson, Uniform Commercial Code 3d 1-201:265, 1-201:266; 5A Anderson,
Uniform Commercial Code 3d 3-301:3, 3-301:8; 6A Anderson, Uniform Commercial
Code 3d [Rev] 3-110:15, 3-203:4, 3-203:7 through 3-203:9, 3-203:11, 3-203:12,
3-204, 3-207:4, 3-207:5, 3-207:8, 3-207:9, 3-301:3, 3-301:5, 3-301:8, 3-301:9, 3-306:6
Bailey & Hagedorn, Brady on Bank Checks (7th ed) paras 7.21, 8.3
235 Generally

View Entire Section
The term "persons entitled to enforce" an instrument means:
(1) the holder of the instrument;
(2) a nonholder in possession of the instrument who has the rights of a holder; or
(3) a person not in possession of the instrument who is entitled to enforce the instrument
pursuant to those sections of the Uniform Commercial Code governing lost or destroyed
instruments and payment or acceptance by mistake. 16
Comment: The definition of "persons entitled to enforce" an instrument under

revised Article 3 recognizes that enforcement is not limited to holders. The quoted
phrase includes a person enforcing a lost or stolen instrument. It also includes a person
in possession of an instrument who is not a holder. A nonholder in possession of an
instrument includes a person who has acquired the rights of a holder by subrogation or
by transfer of the instrument under circumstances set forth in the Code. It also includes
any other person who under the applicable law is a successor to the holder or otherwise
acquires the holder's rights. 17
A person may be a person entitled to enforce the instrument even though that person is
not the owner of the instrument or is in wrongful possession of the instrument. 18 A
person who comes within any of the categories listed in the statute is entitled to enforce
an instrument and it is immaterial whether the person is the owner of the instrument, as in
the case of the finder suing on a bearer instrument, or that the possession is wrongful,
either in the sense of being wrongful in itself, as in the case of theft, or being wrongful
because obtained by fraud or in breach of fiduciary duty. 19 These characteristics of
nonownership and wrongful possession are irrelevant to the right of the person to sue. 20
The right to enforce an instrument and ownership of the instrument are two different
concepts. A thief who steals a check payable to bearer becomes the holder of the check
and a person entitled to enforce it, but does not become the owner of the check. If the
thief transfers the check to a purchaser, the transferee obtains the right to enforce the
check. Ownership rights in instruments may be determined by principles of the law of
property, independent of Article 3. 21 In lieu of stating the rights of a holder, as was
done by 3-301 of the prior version of Article 3, the 1990 Revision identifies who may
enforce an instrument and leaves to other sections the question of who may negotiate and
discharge an instrument. 22
Illustration: In a case where the Federal Deposit Insurance Corporation (FDIC)

came into possession of a note from a liquidated bank through a bridge bank, the FDIC
was not a "holder," since the note was not endorsed to the FDIC. Therefore, in order to
enforce the note, the FDIC needed to establish that it was a "nonholder in possession of
an instrument with the rights of a holder" under UCC 3-301, and to do so, according
to the court's reading of Comment 2 of UCC 3-203 regarding transfer and rights
acquired by transfer, the FDIC needed at a minimum (1) to prove sufficient transfer

from a holder to the FDIC, and (2) to produce the note at trial. 23
Footnotes
As to the definition of a holder, see UCC 1-201 [1990 Rev], discussed in 236.
As to the enforcement of lost or destroyed instruments, see UCC 3-309 [1990 Rev],
discussed in 610 et seq.
As to payment or acceptance by mistake, see UCC 3-418 [1990 Rev], discussed in

533.
Footnote 23. FDIC v Houde (CA1 Me) 90 F3d 600, 30 UCCRS2d 549 (decided under
prior Article 3 and holding that result is the same under both versions of Article 3).
236 Holder defined; owner distinguished
View Entire Section

A "holder" for purposes of Article 3 of the Uniform Commercial Code is:
(1) the person in possession, if the instrument is payable to the bearer, or,
(2) in the case of an instrument payable to an identified person, the identified person if he
or she is in possession. 24 Therefore, a negotiable instrument payee is a holder if the
payee retains possession of the instrument. 25 The significance of being a "holder" is
that a person cannot assert or exercise certain rights with respect to instruments under
Article 3 unless he or she is a holder of the instrument. 26 Also, a person cannot have or
exercise the rights of a favored holder such as a holder in due course unless that person is
initially a holder. 27
By definition, possession of the paper by the claimant is essential to the claimant having
the status of holder. 28 A person who is not in possession of an instrument is not a
holder and does not have the right to enforce the instrument. 29 For example, a
secured party's possession of copies, but not originals, of two promissory notes was
insufficient to perfect the party's security interest in the note; the purpose of the
possession requirement is to provide notice that the note is encumbered, and as long as a
debtor company retained the originals of the notes, it was their holder. 30 Likewise, a
person claiming to be the owner of a lost instrument is not a "holder," since the person is
not in possession of the paper, and the person does not have the right to recover as a
holder; the person must establish the terms of the instrument and his or her ownership
and must account for its absence. 31
Comment: The payee's indorsement to the creditor, even though it mentions the
creation of a security interest, is an unqualified indorsement that gives to the creditor
the right to enforce the note as its holder. 32
Although, under certain circumstances, a transferee of an instrument has the specifically

enforceable right to the unqualified indorsement of the transferor, negotiation does not
occur and the transferee does not become a holder until the indorsement is made. 33
Revised Article 3 provides the following specific rules for the purpose of determining the
holder of an instrument: 34
(1) if an instrument is payable to an account and the account is identified only by

number, the instrument is payable to the person to whom the account is payable; 35
(2) if an instrument is payable to an account identified by number and by the name of a

person, the instrument is payable to the named person, whether or not that person is the
owner of the account identified by number; 36
(3) if an instrument is payable to (a) a trust, an estate, or a person described as trustee or

representative of a trust or estate, the instrument is payable to the trustee, the
representative, or a successor of either, whether or not the beneficiary or estate is also
named; (b) a person described as agent or similar representative of a named or identified
person, the instrument is payable to the represented person, the representative, or a
successor of the representative; (c) a fund or organization that is not a legal entity, the
instrument is payable to a representative of the members of the fund or organization; or
(d) an office or a person described as holding an office, the instrument is payable to the
named person, the incumbent of the office, or a successor to the incumbent. 37
While the rules set forth above determine who can deal with an instrument as a holder,
they do not determine ownership of the instrument or its proceeds. 38 It is necessary to
distinguish between "owner" and "holder." The fact that a person is the owner of a paper
does not establish that he or she is its holder. Likewise, the status of a person who
qualifies as a holder is not affected by the fact that third persons, such as a principal, have
superior rights to the document against the holder. Similarly, a person who is a holder
remains a holder although that person has made an assignment of a beneficial interest in
the instrument. 39 A person who has an ownership right in an instrument may be a
person who is not entitled to enforce the instrument. 40
Illustration: If X is the owner and holder of an instrument payable to X, and X sells

the instrument to Y but is unable to deliver immediate possession to Y, so instead signs

a document conveying all of X's right, title, and interest in the instrument to Y,
although the document may be effective to give Y a claim to ownership of the
instrument, Y is not a person entitled to enforce the instrument until Y obtains
possession of the instrument. No transfer of the instrument occurs under 3-203(a)
until it is delivered to Y. 41
Footnotes
Footnote 24. UCC 1-201(20) [1990 Rev].
A payee of an instrument in his possession is always a "holder" under the Uniform

Commercial Code. New Bedford Inst. for Sav. v Gildroy, 36 Mass App 647, 634 NE2d
920, 25 UCCRS2d 450, review den 418 Mass 1106, 639 NE2d 1082.
Footnote 25. Edwards v Mesch, 107 NM 704, 763 P2d 1169, 7 UCCRS2d 801.
As to the definition and rights of a holder in due course, see 247 et seq.
1114.
Footnote 28. Hanalei, BRC, Inc. v Porter, 7 Hawaii App 304, 760 P2d 676, 7 UCCRS2d
1528.
Footnote 29. In re Investors & Lenders (BC DC NJ) 156 BR 145, 24 BCD 685, 29
CBC2d 403, 21 UCCRS2d 358; Troupe v Redner (Fla App D2) 652 So 2d 394, 20 FLW
D395, 25 UCCRS2d 1303 (decided under pre-1990 Article 3).
As to the rights of a holder, generally, see 238.
Forms: Complaint, petition, or declarationAllegationParty in possession as holder of

Instruction to juryHolder of instrument definedRight to enforce payment. 6A Am

Jur Pl & Pr Forms (Rev) Commercial Code : Article 3Negotiable Instruments 3:99.
Footnote 30. In re Investors & Lenders (BC DC NJ) 156 BR 145, 24 BCD 685, 29
CBC2d 403, 21 UCCRS2d 358.
As to an owner's right to sue on a lost, stolen, or destroyed instrument, see 303 et seq.

As to the right of a person granted a security interest in an instrument to recover as a
holder in due course, see UCC 3-302(e), discussed in 261.
As to a transferee's specifically enforceable right to indorsement by a transferor, see UCC

2-203(c), discussed in 243.
Footnote 40. Official Comment to 3-203 [1990 Rev].
237 Events giving rise to status as holder
View Entire Section

A person can become a holder when an instrument is issued to that person, or the status
of holder can arise as the result of an event that occurs after issuance. 42 "Negotiation"
is the term used to describe the event by which a person other than the person to whom
the instrument was issued becomes a holder. 43 For example, where a check made to
the order of an escrow agent was indorsed by the agent, thus converting it into bearer
paper, and was then given to the parties plaintiff, those parties became holders of the
instrument. 44
Even where negotiation is obtained by improper or unlawful means, negotiation is

effective and the status of the taker is that of a holder, until the instrument has been
recovered from that person's possession by the rightful owner. 45
Not everyone who is in possession of a check or other negotiable instrument is a holder

of the instrument. 46 Some persons may take possession by means other than one of the
methods described in the Uniform Commercial Code definition of "holder." 47 At least
five categories of possession do not confer holder status on the possessor: 48
(1) The drawee or payor is not a holder; negotiation does not take place when the
instrument is presented to the drawer or payor for payment and then delivered to that
person upon payment; thus, a bank on which a check is drawn does not become a holder
when it pays a check.
(2) A person taking an instrument lacking a necessary indorsement is not a holder; a

transfer of an order instrument without indorsement is not negotiation and the transferee
is not a holder.
(3) A person taking a check with a forged payee's indorsement is not a holder; essentially,
a check with a forged necessary indorsement is the same as a check that is not indorsed at
all; the forged indorsement is inoperative or ineffective and no negotiation of the
instrument has taken place.
(4) The drawer is not a holder; if a check is made payable to the order of a third person,
the drawer cannot be the holder.
(5) A remitter is not a holder; a person who purchases a cashier's check or teller's check
or like instrument that is made payable to the order of a third person is a remitter but not
a holder. 49
Where a negotiable instrument requires, as a condition to payment, a countersignature by

a person whose specimen signature appears on the instrument, Article 3 provides that the
failure of that person to countersign the instrument does not prevent a transferee from
becoming a holder of the instrument. 50 This provision applies to instruments such as
traveler's checks, the countersignature of which is for the purpose of identification of the
owner of the instrument and is not an indorsement. 51 Therefore, if a thief steals a
traveler's check and cashes it by skillfully imitating the specimen signature so that the
countersignature appears to be authentic, since the countersignature is for the
identification of the owner of the instrument, and since the failure of the owner to
countersign does not prevent a transferee from becoming a holder, the merchant or bank
that cashed the traveler's check therefore becomes a holder when the check is taken, and
the forged countersignature becomes a defense to the obligation of the issuer to pay the
instrument. 52 However, a transferee of a promissory note is not a holder where the
note, an order instrument, has not been indorsed to the transferee, and therefore the
transferee cannot enforce payment. 53
Observation: A person to whom an instrument is merely assigned instead of

negotiated does not become a holder. 54
Footnotes
As to the law regarding negotiation, see 212 et seq.
Footnote 44. Nicola v Burnette (Lorain Co) 27 Ohio App 3d 35, 27 Ohio BR 37, 499
NE2d 368, 2 UCCRS2d 951.

Footnote 46. Bailey & Hagedorn, Brady on Bank Checks (7th ed) para 8.3.
As to the failure to countersign as a defense to the obligation of the issuer, see 595.
As to traveler's checks as negotiable instruments, see 49, 60.
Footnote 53. Carroll v Kennon (Tex App Waco) 734 SW2d 34, 4 UCCRS2d 1309.
Footnote 54. UCC 3-201(a) [1990 Rev], requiring a transfer in the form of negotiation
for the transferee to become a holder.
238 Rights of holder
View Entire Section

Under the prior version of Article 3, the holder of an instrument, whether or not he is the
owner, may transfer or negotiate it and, except as otherwise provided with respect to
payment or satisfaction, 55 discharge it or enforce payment in his own name. 56
Therefore, a bank that received three promissory notes signed by the maker in its
purchase of the assets of an insolvent lender could sue to enforce the notes, since the
instruments were bearer paper, which is negotiated by delivery, and the bank was a
holder, and since the bank had produced the original notes thereby entitling it to payment.
57 Conversely, parties who had indorsed a promissory note to a nonparty bank as
collateral for a debt owed to the bank, where the bank retained the notes and had not
transferred the note back to the parties, were not holders and could not sue to enforce the
note. 58
Under the 1990 version of the Uniform Commercial Code, the holder of an instrument is
among those entitled to enforce the instrument. 59 Because the holder of a negotiable
instrument is also a transferee, the holder is entitled to all the rights of a transferee. 60
Footnotes

Footnote 55. UCC 3-603 [1952].
Footnote 56. UCC 3-301 [1952].
Footnote 57. First Nat'l Bank v Carr (La App 1st Cir) 572 So 2d 1106.
Footnote 58. Apperson v Herx (Mo App) 772 SW2d 17, 9 UCCRS2d 618.
Footnote 60. UCC 3-201(a) [1990 Rev], defining negotiation as the transfer of an
instrument by which the transferee becomes a holder.
As to the rights of a transferee, see 242.
239 --Reacquisition
View Entire Section

Holder status is expressly accorded to a former holder who reacquires the instrument by
negotiation. 61
Definition: "Reacquisition" is the obtaining of possession of an instrument by one

who at one time was the holder of the instrument. 62
A former holder who reacquires the instrument has the ability to cancel indorsements
made after the reacquirer first became a holder of the instrument, and if the cancellation
causes the instrument to be payable to the reacquirer or to bearer, the reacquirer may
negotiate the instrument. 63 In other words, if a former holder reacquires an instrument
and crosses out his or her indorsement and all the indorsements of persons indorsing the
instrument subsequent to his or her indorsement, as permitted under Article 3, he or she
may transfer or negotiate the instrument as though it had never left the holder's
possession. 64
Observation: Revised UCC 3-207 restates former UCC 3-208, and effects no
change in the powers of a holder upon reacquisition. 65
Although the 1990 version of the UCC allows the holder to cancel all indorsements made
after the holder first acquired holder status, cancellation is not necessary. The status of
holder is not effected whether or not cancellation is made. But if the reacquisition is not
by negotiation, cancellation is necessary for the reacquiring holder to regain holder
status. 66
Observation: This ability of the reacquiring holder to cancel subsequent

indorsements is an exception to the general rule that if an instrument is payable to an
identified person, the indorsement of that person is necessary to allow a subsequent

transferee to obtain the status of holder. 67
An indorser whose indorsement is canceled is discharged, and the discharge is effective

against any subsequent holder. 68 However, an indorser whose signature is not canceled
by the reacquirer is not affected in any way by the reacquiring of the instrument by a
former holder. 69
A former holder who reacquires an instrument possesses it in his or her former status, so
if the holder had previously been a holder in due course, the holder is likewise a holder in
due course upon reacquisition. 70
Footnotes
Footnote 64. 6A Anderson, Uniform Commercial Code 3d, [Rev] 3-207:5.
As to the rules of transfer and negotiation, generally, see 202 et seq.
240 Rights of holder not in due course
View Entire Section

While an innocent person who is not himself a holder in due course may, as transferee,
assert the rights of a prior holder in due course, 71 any holder, including one who has
not acquired the rights of a holder in due course by transfer and has not qualified as a
holder in due course in his own right, is entitled to enforce an instrument. 72 Such a
holder not in due course takes an instrument subject to all defenses which would have
been available on an action as between the original parties. 73 The holder not in due
course takes an instrument subject specifically to a claim of a property or possessory
right in the instrument or its proceeds, including a claim to rescind a negotiation and to
recover the instrument or its proceeds. 74 Thus, a person who is merely a transferee of
an instrument or who is an ordinary holder without the rights of a holder in due course is
subject to a claim to the instrument or its proceeds, and such a transferee or holder must
surrender the instrument or its proceeds to the claimant. 75
Comment: Claims to which a holder not in due course is subject include not only
claims to ownership but also any other claim of a property or possessory right. It
includes the claim to a lien or the claim of a person in rightful possession of an
instrument who was wrongfully deprived of possession. 76
The right of a holder not in due course to enforce the obligation of a party to pay an
instrument is also subject to a defense of the obligor based on (1) infancy of the obligor
to the extent it is a defense on a simple contract, (2) duress, lack of legal capacity, or
illegality of the transaction which, under other law, nullifies the obligation of the obligor,
(3) fraud that induced the obligor to sign the instrument with neither knowledge nor
reasonable opportunity to learn its character or its essential terms, (4) discharge of the
obligor in insolvency proceedings, (5) a defense of the obligor stated in Article 3 or that
would be available if the person entitled to enforce the instrument was enforcing a right
to payment under a simple contract, and (6) a claim of recoupment of the obligor against
the original payee of the instrument if the claim arose from the transaction that gave rise
to the instrument. 77 An obligor may further defend an action to enforce an instrument
by a holder not in due course by proving that the instrument is a lost or stolen instrument.
78
Under prior Article 3, unless one has the rights of a holder in due course, a person takes
the instrument subject to:
All valid claims to it on the part of any person 79
All defenses of any party which would be available in an action on a simple contract 80
The defenses of want or failure of consideration 81
Nonperformance of any condition precedent, nondelivery, or delivery for a special

purpose 82
The defense that the person through whom he or she holds the instrument acquired it by
theft 83
The defense that the payment or satisfaction to such holder would be inconsistent with
the terms of a restrictive indorsement 84
The provision establishing the rights of one who is not a holder in due course covers any
person who neither qualifies in his or her own right as a holder in due course or has
acquired the rights of one by transfer. 85 One who is not a holder in due course takes
the instrument subject to all valid claims to it on the part of any holder. 86 In addition, a
holder not in due course takes subject to the defense that the person or one through whom
that person holds the instrument acquired it by theft, or that payment or satisfaction to
such holder would be inconsistent with the terms of a restrictive indorsement; but the
claim of any third person to the instrument is not otherwise available as a defense to any

party liable thereon unless the third person to the instrument himself or herself defends
the action for such party. 87 But an innocent person who is not a holder in due course
may acquire the rights of a prior holder in due course who has transferred the instrument,
due to the so-called "shelter provision" which provides that, generally, transfer vests in
the transferee such rights as the transferor had. 88
Footnotes
Footnote 72. 235.
Footnote 73. Ali, Inc. v Fishman (DC Me) 855 F Supp 440; Resolution Trust Corp. v
Maplewood Invs. (CA4 Va) 31 F3d 1276, 24 UCCRS2d 119; Payne v Mundaca Inv.
Corp. (Ind App) 562 NE2d 51; API Supply Co. v Premier Bank (La App 1st Cir) 593 So
2d 660, 17 UCCRS2d 1185, cert den (La) 594 So 2d 896 (decided under 1990 version of
UCC 3-305); Trueheart v Braselton (Tex App Corpus Christi) 875 SW2d 412, 24
UCCRS2d 580 (decided under pre-1990 UCC 3-306).
As to the enforcement of lost or stolen instruments, see 303 et seq.
Footnote 79. UCC 3-306(a) [1952].
Footnote 80. UCC 3-306(b) [1952].
Footnote 81. UCC 3-306(c) [1952].
Footnote 82. UCC 3-306(c) [1952].
Footnote 83. UCC 3-306(d) [1952].
Footnote 84. UCC 3-306(d) [1952].
As to holders in due course, generally, see 247 et seq.
Footnote 86. In re Valentine (BC ED Va) 146 BR 945, 4 Fourth Cir & Dist Col Bankr Ct
Rep 748, 19 UCCRS2d 174.

Footnote 88. UCC 3-201(1) [1952].
As to the rights of a transferee, see 242.
241 Proof of status as holder
View Entire Section

Unless specifically denied in the pleadings, the authenticity of and the authority to make
each signature on an instrument is admitted in an action with respect to an instrument. 89
If the validity of a signature is denied in the pleadings, the burden of establishing validity
is on the party claiming validity, but the signature is presumed to be authentic and
authorized unless the action is to enforce the liability of the purported signer, and the
signer is dead or becomes incompetent at the time of the trial on the issue of validity of
the signature. 90 If an action to enforce the instrument is brought against a person as the
undisclosed principal of a person who signed the instrument as a party to the instrument,
the plaintiff has the burden of establishing that the defendant is liable on the instrument
as a represented person under the section of Article 3 governing such transactions. 91
If the validity of signatures is admitted or proved, a holder producing the instrument is

entitled to payment, unless the defendant establishes a defense. 92 Thus, once signatures
are proved or admitted, a holder makes out his or her case by mere production of the
instrument, and is entitled to recover in the absence of any further evidence. 93
Comment: The transferee without indorsement of an order instrument is not a holder

and is not able to rely on the UCC presumption that a holder may recover on an
instrument. The terms of the obligation do not run to the transferee without
indorsement of the order paper and he or she must account for his or her possession
thereof by proving the transaction through which the transferee acquired it. However,
proof of a transfer to him or her by a holder is proof that the transferee has acquired the
rights of a holder and that he or she is entitled to the presumption. 94
Footnotes
The purpose of the requirement of a specific denial in the pleadings is to give the plaintiff
notice of the defendant's claim of forgery or lack of authority as to the particular
signature, and to afford the plaintiff an opportunity to investigate and obtain evidence.
Official Comment 1 to UCC 3-308 [1990 Rev].
A debtor's one-sentence general denial of a creditor's petition to enforce a promissory

note was not sufficient to constitute a specific denial of the authenticity of her signature,

and, therefore, the debtor's signature would be deemed admitted under either the old
Article 3 or revised Article 3. Wesla Fed. Credit Union v Henderson (La App 2d Cir)
655 So 2d 691 (decided under pre-1990 Article 3).
Footnote 91. UCC 3-308(a) [1990 Rev], citing UCC 3-402 [1990 Rev].
The provision regarding undisclosed principals was added to the revised section to take
into account UCC 3-402(a) that allows an undisclosed principal to be liable on an
instrument signed by an authorized representative and, in such a case, the person
enforcing the instrument must prove that the undisclosed principal is liable. Official
Comment 1 to UCC 3-308 [1990 Rev].
The mere production of a note entitles the holder to recover unless the maker establishes
a defense; and where the maker did not present any evidence to support its contention of
a lack of consideration, the holder was entitled to recover. Resolution Trust Corp. v
Juergens (CA7 Ill) 965 F2d 149, 18 UCCRS2d 484 (decided under 1952 version of
Article 3).
Practice References Proving a prima facie case on note or check. 9 Am Jur Proof of
Facts 573, Promissory Notes and Other Negotiable Instruments, Proof 1.
242 Rights of transferee of instrument
View Entire Section

A negotiable instrument may be transferred by operation of law, by assignment, or by

negotiation. 95
Definition: An instrument is "transferred" when it is delivered by a person other

than its issuer for the purpose of giving to the person receiving delivery the right to
enforce the instrument. 96
Under Article 3 of the Uniform Commercial Code, the transfer of an instrument, whether
or not the transfer is a negotiation, vests in the transferee such rights as the transferor
had. 97 However, a transferee cannot acquire the 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 illegality affecting the instrument. 98
If there has been a succession of transfers, each transferee acquires the rights of his or her
transferor, with the result that the last transferee acquires all rights held by any party in
the chain of transfers. 99
When the circumstances are such that the transfer of the instrument is not also a
negotiation and the transferee does not qualify as a holder, the possessor will not appear
to be entitled to payment by examining the instrument, even though he is given that right
by the Code. It is therefore necessary for him to prove his right to enforce the
instrument. 1
Comment: The Code states that transfer vests in the transferee any right of the
transferor to enforce the instrument "including any right as a holder in due course." If
the transferee is not a holder because the transferor did not indorse, the transferee is
nevertheless a person entitled to enforce the instrument under Article 3 if the transferor
was a holder at the time of the transfer. Although the transferee is not a holder, the
transferee has obtained the rights of the transferor as holder. Because the transferee's
rights are derivative of the transferor's rights, those rights must be proved. Because the
transferee is not a holder, there is no presumption under the Code that the transferee,
by producing the instrument, is entitled to payment. The instrument, by its terms, is
not payable to the transferee and the transferee must account for possession of the
unindorsed instrument by proving the transaction through which the transferee
acquired it. Proof of a transfer to the transferee by a holder is proof that the transferee
has acquired the rights of a holder. 2
Observation: Where the issue is whether the transferee of an instrument is a holder,

an indorsement that transfers a security interest in the instrument is effective as an
Footnotes
As to the definition of assignment, see 210.
As to the definition of negotiation, see 212.
As to transfer, see 202 et seq.
Footnote 98. 253.
UCC 3-201(1) [1990 Rev] states the same rule as that articulated in 3-203(b) of
revised Article in 3.
A bank was denied summary judgment against limited partners on promissory notes
executed by the limited partners to the partnership and pledged to the bank as collateral,
where the bank indorsed the notes to the partnership and then, acting as the partnership's
agent, indorsed the notes back to itself with knowledge of defenses to the notes, including
the fact that the partnership had defrauded the limited partners. Manufacturers Hanover
Trust Co. v Robinson (Sup) 157 Misc 2d 651, 597 NYS2d 986.
243 --Right to have indorsement
View Entire Section

If an instrument is transferred for value and the transferee does not become a holder
because of a lack of indorsement by the transferor, the transferee has a specifically
enforceable right to the unqualified indorsement of the transferor, but negotiation of the
instrument does not occur until the indorsement is made. 4
Definition: "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 negotiating the instrument, restricting payment of the
instrument, or incurring the indorser's liability on the instrument. But regardless of the
intent of the signer, a signature and its accompanying words are an indorsement unless
the accompanying words, terms of the instrument, place of the signature, or other
circumstances unambiguously indicate that the signature was made for a purpose other
than indorsement. 5
Comment: This provision applies only to a transfer for value and only if the
instrument is payable to order or is specially indorsed to the transferor. 6
The transferee acquires, in the absence of a contrary agreement, the specifically

enforceable right to the indorsement of the transferor. 7 Unless otherwise agreed, it is a
right to the general indorsement of the transferor with full liability as indorser, rather than
to an indorsement without recourse. 8
Where an instrument is transferred without indorsement, and an indorsement is

subsequently obtained, the rights of the transferee as a holder in due course are thus
measured as of the time of the indorsement and not as of the time of the earlier transfer. 9
If the transferee has notice of a claim or defense before the instrument is indorsed, he is
barred from holder-in-due-course status, even though he had no notice at the time of the
original transfer of the instrument. 10 Where the indorsement of the payee is not upon
the instrument at the time of its delivery but is obtained before the holder has notice of
any infirmity in the check, a different situation is presented and the holder is a holder in
due course. 11

The right to obtain the unqualified indorsement may be barred by the agreement of the
parties, and such an agreement may be shown by any evidence as does not contradict the
instrument. 12
Comment: The question may arise if the transferee has paid in advance and the
indorsement is omitted fraudulently or through oversight. A transferor who is willing
to indorse only without recourse or is unwilling to indorse at all should make those
intentions clear before transfer. The agreement of the transferee to take less than an
unqualified indorsement need not be an express one, however, and the understanding
may be implied from conduct, from past practice, or from the circumstances of the
transaction. 13
Under the prerevision Article 3, unless otherwise agreed, any transfer for value of an
instrument not then payable to bearer gives the transferee the specifically enforceable
right to have the unqualified indorsement of the transferor; negotiation takes effect only
when the indorsement is made, and until that time there is no presumption that the
transferee is the owner. 14 This section applies only to a transfer for value or an
instrument payable to order or specially indorsed; it has no application to a gift, or to an
instrument payable or indorsed to bearer or indorsed in blank. 15
Footnotes
As to the negotiation of negotiable instruments by indorsement, see 218 et seq.
As to what constitutes a transfer for value, see 207 et seq.
As to what constitutes an instrument payable to order, see 214.
As to what constitutes an instrument specially indorsed to the transferor, see 229.

Footnote 14. UCC 3-201(3) [1952].
Forms: Complaint, petition, or declarationBy transfereeTo have transferor indorse

check. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:73.
244 --Transferee of partial interest
View Entire Section

Under the revised Article 3 of the Uniform Commercial Code, if a transferor purports to
transfer less than the entire instrument, negotiation of the instrument does not occur. 16
The transferee obtains no rights under Article 3, and has only the rights of a partial
assignee. 17 On the other hand, an indorsement reading merely "Pay A and B" is
effective, since it transfers the entire cause of action to A and B as tenants in common. 18
Footnotes
An indorsement purporting to convey less than the entire instrument does, however,
operate as a partial assignment of the cause of action, although Article 3 makes no
attempt to state the legal effect of such an assignment, leaving that to other law. Official
As to rights to an instrument payable to more than one person, see 246.
245 Transferee of nonnegotiable instrument
View Entire Section

Article 3 of the Uniform Commercial Code by its terms applies to negotiable instruments.
19 The word "instrument" as used in Article 3 is defined as a negotiable instrument, 20
and only writings meeting the basic test of negotiability are governed by Article 3. 21

However, some of the rules of Article 3 may be applied by analogy by a court, which
may arrive at a result similar to that of negotiability. 22 Also, the parties to a
nonnegotiable instrument may provide by agreement that one or more of the provisions
of Article 3 will determine their rights and obligations. 23 For example, a transferee
may be accorded the rights of a holder in due course if the transferee took rights under
the writing in good faith and for value, and without notice of a claim or defense. 24
Ordinarily, however, the purchaser of a nonnegotiable instrument is a mere assignee,

with the same position as the assignor, whether the purchaser holds by assignment or by
indorsement. 25 He or she receives only such title and rights as the assignor
possessed, and ordinarily takes subject to all equities and defenses which would be
available as between the original parties or which could be used against the payee and his
assignor, 26 even though he or she is given the right to sue in his or her own name. 27
The purchaser, though buying in good faith and for value, acquires only the title of the
seller. 28 Thus, all legal or equitable defenses in favor of the makers of the instrument
are usually available against any assignee. 29 As in the case of the transfer of a
negotiable instrument, the assignment of a nonnegotiable note carries with it the original
debt 30 and, as an incident to the transfer, the collateral given for the debt. 31
Footnotes
A negotiable instrument must meet all of the following requirements: (1) it must be
payable to bearer or to order at the time it is issued or first comes into possession of the
holder; (2) it must be payable on demand or at a definite time; and (3) it must not state
any other undertaking or instruction by the person promising or ordering payment to do
any act in addition to the payment of money, but the promise or order may contain any of
the following: (a) an undertaking or power to give, maintain, or protect collateral to
secure payment, (b) an authorization or power to the holder to confess judgment or
realize on or dispose of collateral, or (c) a waiver of the benefit of any law intended for
the advantage or protection of an obligor. UCC 3-104 [1990 Rev], discussed in 53.
As to the definition and rights of a holder in due course, see 247 et seq.
Footnote 25. Cassetta v Baima, 106 Cal App 196, 288 P 830; People's Sav. Bank v Smith,
210 Iowa 136, 230 NW 565, 69 ALR 399; Citizens State Bank v Pauly, 152 Kan 152,
102 P2d 966, 134 ALR 941; Hill v McPherson, 15 Mo 204; Apple v Edwards, 92 Mont
524, 16 P2d 700, 87 ALR 179, later proceeding 123 Mont 135, 211 P2d 138; Persky v

Bank of America Nat'l Ass'n, 261 NY 212, 185 NE 77; National City Bank v Erskine &
Sons, Inc., 158 Ohio St 450, 49 Ohio Ops 395, 110 NE2d 598; American Finance Corp. v
Bourne, 190 Okla 332, 123 P2d 671; Janes v Benson, 155 Pa 489, 26 A 752; Bank of
Am. v Butterfield, 77 SD 170, 88 NW2d 909; Hight v McCulloch, 150 Tenn 117, 263
SW 794.
Footnote 26. Indiana ex rel. Stanton v Glover, 155 US 513, 39 L Ed 243, 15 S Ct 186;
National City Bank v Erskine & Sons, Inc., 158 Ohio St 450, 49 Ohio Ops 395, 110
NE2d 598.
Footnote 27. Farmers Nat'l Bank v Stanton, 191 Iowa 433, 182 NW 647, 17 ALR 857.
Forms: Complaint, petition, or declarationAgainst makerOn nonnegotiable note. 5

Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 71.
Footnote 28. Popp v Exchange Bank, 189 Cal 296, 208 P 113.
Footnote 29. King v Harford, 48 Cal App 405, 191 P 998.
Footnote 30. Knowles v Sandercock, 107 Cal 629, 40 P 1047.
Footnote 31. Seidell v Tuxedo Land Co., 216 Cal 165, 13 P2d 686.
246 Rights in instrument payable to more than one person
View Entire Section

Under both the revised and former Article 3 of the Uniform Commercial Code, if an
instrument is payable to two or more persons alternatively, that is, "Payable to X or Y," it
is payable to any of them and may be negotiated, discharged, or enforced by any or all of
them in possession of the instrument. 32
Comment: Where an instrument is payable to X or Y, either is the payee and if

either is in possession that person is the holder and may enforce the instrument. 33
Courts deciding cases under both the former and revised Article 3 have held that banks
may properly honor a check payable to two payees whose names were separated by a
short, slanting stroke or virgule (/) even though presented with the indorsement of only
one payee, because the virgule or an oblique stroke (/) between two words is used to
indicate separate alternatives. 34 The virgule in modern usage is equivalent to the word
"or"; 35 and since such checks are payable to two payees alternatively, they are payable
to either of them and could be negotiated, discharged, or enforced by whichever of them
had possession of the checks. 36
If an instrument is payable to two or more persons not alternatively, that is, "Payable to X
and Y," it is payable to all of them and may be negotiated, discharged, or enforced only
by all of them. 37
Comment: Where an instrument is payable to X and Y, neither X nor Y acting alone
is the person to whom the instrument is payable, so neither person, acting alone, can be
the holder of the instrument. The instrument is one "payable to an identified person,"
X and Y jointly, and neither individually is the identified person in the instrument so
neither can enforce it. 38
If an instrument payable to two or more persons is ambiguous as to whether it is payable

to the persons alternatively, the instrument is payable to the persons alternatively. 39
Therefore, in the interest of freedom of negotiation, a clear manifestation of
nonalternative character is required under the revised Article 3 and any ambiguity is
decided in favor of the conclusion that the instrument is payable in the alternative. 40
The presumption under revised 3-110(d) reverses the presumption under prior 3-116,
that multiple payees were deemed to be joint unless clearly in the alternative. 41 So,
where a certificate of deposit's designation as "payable to company A, company B" was
ambiguous since a comma, unlike a virgule, does not clearly mean in the alternative, a
court under the prerevised Article 3 ordered joint payment, since it produced the most
equitable result and was consistent with the dictates of 3-116(b), which provides that
instruments not payable in the alternative are payable jointly. 42 But in a jurisdiction
which had adopted the revised Article 3, a bank which paid one of two alternative payees
without the indorsement of the other was not liable for having so paid the check. 43
Footnotes
Footnote 34. Purina Mills v Security Bank & Trust, 215 Mich App 549, 547 NW2d 336,
29 UCCRS2d 1260; Danco, Inc. v Commerce Bank/Shore, N.A. (App Div) 290 NJ Super
211, 675 A2d 663, 29 UCCRS2d 513.
Footnote 35. Danco, Inc. v Commerce Bank/Shore, N.A. (App Div) 290 NJ Super 211,
675 A2d 663, 29 UCCRS2d 513.
Footnote 36. Dynalectron Corp. v Union First Nat'l Bank (DC Dist Col) 488 F Supp 868,
29 UCCRS 131; Ryland Group, Inc. v Gwinnett County Bank, 151 Ga App 148, 259
SE2d 152, 27 UCCRS 717; Purina Mills v Security Bank & Trust, 215 Mich App 549,
547 NW2d 336, 29 UCCRS2d 1260; Kinzig v First Fid. Bank, N.A. (Law Div) 277 NJ
Super 255, 649 A2d 634, 25 UCCRS2d 125; Mumma v Rainier Nat'l Bank, 60 Wash App
937, 808 P2d 767, 14 UCCRS2d 1119, review den 117 Wash 2d 1019, 818 P2d 1098.
As to transfer to and negotiation by multiple payees, see 205.
An insurance check issued in the name of both the insured and the lienholder on his
automobile required the indorsements of both parties because it was an instrument
payable to the order of two or more persons, which could only be negotiated, discharged,
or enforced by all of them. Peavy v Bank South, N.A., 222 Ga App 501, 474 SE2d 690,

96 Fulton County D R 3084, 30 UCCRS2d 1128.
Comment: This provision of the revised Article 3 replaces former UCC 3-116,
which articulates substantially the same rules as those enunciated in UCC 3-110(d).
UCC 3-116 [1952].
Footnote 42. In re General Microcomputer (BC ND Ind) 118 BR 96, 13 UCCRS2d 162.
B. Status and Rights of Holder in Due Course [247-302]
Research References
UCC 1-103, 1-201, 1-201(44); UCC 3-119, 3-201, 3-205, 3-206, 3-302 through
3-307, 3-408, 3-415 [1952]; UCC 3-103, 3-117, 3-201, 3-203, 3-206, 3-302 through
3-308 [1990 Rev]
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms 8, 9, 61 et seq.; 6 Am Jur Pl &
Pr Forms (Rev), Uniform Commercial Code : Article 1General Provisions 1:24; 6A
3:102-3:105, 3:107-3:109, 3:111, 3:113-3:115, 3:117-3:124, 3:132, 3:133, 3:135, 3:136,
3:138-3:143
Instrument 253:2283
9 Am Jur Proof of Facts 573, Promissory Notes and Other Negotiable Instruments, Proof
2
3-302:75; 6A Anderson, Uniform Commercial Code 3d [Rev] 3-103:9, 3-203:12,
3-205:6, 3-205:7, 3-206:5, 3-302:4, 3-302:5, 3-302:7, 3-302:10 through 3-302:12,
3-302:15, 3-302:16, 3-302:21, 3-302:65, 3-303:5, 3-304:3, 3-304:4, 3-304:6, 3-304:7,
3-304:12, 3-305:3, 3-306:5, 3-307:3, 3-308:8, 3-308:9
Bailey & Hagedorn, Brady on Bank Checks (7th ed) paras 6.2-6.5, 9.8, 9.9
1. In General [247-263]
a. What Constitutes Holder in Due Course [247-252]

247 Generally
View Entire Section

A holder in due course is a holder of a negotiable instrument who meets certain

qualifications and is thus entitled to enforce an instrument free of most claims or
defenses. 44 A "holder in due course" means the holder of an instrument if:
(1) the instrument when issued or negotiated to the holder does not bear such apparent
evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call
into question its authenticity; and
(2) the holder took the instrument (i) for value, (ii) in good faith, (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, (iv) without
notice that the instrument contains an unauthorized signature or has been altered, (v)
without notice of any claim to the instrument described in specified statutory provisions,
and (vi) without notice that any party has a defense or claim in recoupment described in
specified statutory provisions. 45
Under the pre-1990 version of Article 3 of the Uniform Commercial Code, a holder in
due course is a holder who takes the instrument for value, 46 in good faith, 47 without
notice that it is overdue or has been dishonored or of any defense against or claim to it on
the part of any person. 48
All of the requirements set forth by either version of Article 3 must be met if one is to
qualify as a holder in due course. 49
The holder-in-due-course concept is an exception to the common-law rule that a

purchaser can acquire no better title than his or her vendor. 50
Observation: Even though a person may not meet the requirements set forth in the
Code so as to qualify as a holder in due course in his or her own right, he or she may
assert the rights of a holder in due course under the shelter rule if the instrument was
obtained by way of transfer and a prior party in the chain of transfer was such a holder.
51
The 1990 Article 3 provision governing holders in due course expressly provides that it is
subject to any law limiting status as a holder in due course in particular classes of
transactions. 52 As no particular definition of the term "law" is given, it is to be
concluded that the word is used generically in its broadest sense to include decisions,
statutes, and administrative regulations. 53
Comment: There is a large body of state statutory and case law restricting the use of
the holder-in-due-course doctrine in consumer transactions as well as some business
transactions that raise similar issues, and this provision subordinates Article 3 to that
law and any other similar law. 54

Both the pre-1990 and Revised Article 3 further provide that persons who take an
instrument by legal process, by purchase in an execution, bankruptcy, or creditor's sale or
similar proceeding, by purchase as part of a bulk transaction not in the ordinary course of
the transferor's business, or as successor in interest to an estate or other organization do
not thereby acquire the rights of a holder in due course. 55
Footnotes
Footnote 44. Bricks Unlimited, Inc. v Agee (CA5 Miss) 672 F2d 1255, 33 UCCRS 989;
Contrail Leasing Partners v Executive Serv. Corp., 100 Nev 545, 688 P2d 765, 40
UCCRS 161; Cadle Co. v Wallach Concrete, 120 NM 56, 897 P2d 1104, 27 UCCRS2d
518; Golden Years Nursing Home v Gabbard (Butler Co) 94 Ohio App 3d 430, 640
NE2d 1186, 25 UCCRS2d 833, motion overr 70 Ohio St 3d 1457, 639 NE2d 795, appeal
after remand, cause remanded on other grounds (Ohio App, Butler Co) 1996 Ohio App
LEXIS 3963.
Footnote 45. UCC 3-302(a) [1990 Rev], referring also to UCC 3-306 [1990 Rev],
with respect to claims against the instrument, and to UCC 3-305(a) [1990 Rev], with
respect to a defense or claim in recoupment.
As to what constitutes a holder, generally, see 236.
As to instruments bearing evidence of forgery or alteration or being otherwise irregular

or incomplete, see 264 et seq.
As to the requirement that the holder took the instrument for value, see 268 et seq.
As to the requirement that the holder took the instrument in good faith, see 276 et seq.
As to the requirement that the holder took the instrument without notice that it contained
an unauthorized signature or had been altered, see 586.
As to the requirement that the holder took the instrument without notice of any claim to
it, see 283 et seq.
As to the requirement that the holder took the instrument without notice of any defenses
to it, see 297 et seq.
Annotation: What constitutes taking instrument in good faith, and without notice of
infirmities or defenses, to support holder-in-due-course status, under UCC 3-302, 36
ALR4th 212.
Notice which has been forgotten as affecting status as holder in due course, 89 ALR2d
1330.

Forms: Status and rights of holder. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes,

Forms 61 et seq.
What constitutes a holder in due course; Generally. 6A Am Jur Pl & Pr Forms (Rev),
Commercial Code : Article 3Negotiable Instruments 3:102 et seq.
Footnote 46. UCC 3-302(1)(a) [1952].
Footnote 47. UCC 3-302(1)(b) [1952].
Footnote 48. UCC 3-302(1)(c) [1952].
Footnote 49. Asian International, Ltd. v Merrill Lynch, Pierce, Fenner & Smith, Inc. (La
App 1st Cir) 435 So 2d 1058, 37 UCCRS 171; Allison Hill Trust Co. v Sarandrea, 236
App Div 189, 258 NYS 299; Arcanum Nat'l Bank v Hessler, 69 Ohio St 2d 549, 23 Ohio
Ops 3d 468, 433 NE2d 204, 33 UCCRS 604.
Forms: Complaint, petition, or declarationAllegationPlaintiff holder in due

courseLack of notice that there was uncured default in payment of other instrument
issued as part of series. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
AnswerDefensePlaintiff not holder in due courseInstrument irregular on face. 6A

3:117.
AnswerDefenseMaterial alteration constituted notice. 6A Am Jur Pl & Pr Forms

AnswerDefenseNotice that signature of maker of note was obtained by fraud. 6A

3:119.
AnswerDefenseNotice of minority of defendant. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefenseKnowledge of defense of failure of consideration. 6A Am Jur Pl &

Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:121.
AnswerDefenseNotice of default under installment note. 6A Am Jur Pl & Pr Forms

AnswerDefenseNotice of lack of capacity. 6A Am Jur Pl & Pr Forms (Rev),

Footnote 50. Swiss Air Transport Co. v Benn (Civ Ct) 121 Misc 2d 129, 467 NYS2d
341, 37 UCCRS 404, revd on other grounds (Sup App T) 128 Misc 2d 657, 494 NYS2d
781.
Footnote 51. 253, 255.
Footnote 52. UCC 3-302(g) [1990 Rev].

Footnote 54. Official Comment 7 to UCC 3-302 [1990 Rev], citing UCC 3-302(g).
Footnote 55. UCC 3-302(3)(a) [1952], UCC 3-302(c) [1990 Rev], discussed in
256 et seq.
248 Status as holder; necessity of negotiation
View Entire Section

A holder in due course must be a holder. 56 Since "holder" is defined as either the
person in possession of bearer paper or the person in possession of an instrument payable
to an identified person if the person in possession is that identified person, 57 and since
negotiation is defined as the transfer of possession of an instrument by a person other
than the issuer to a person who thereby becomes a holder, 58 it follows that a person
cannot be a holder in due course of an instrument by a transfer which does not amount to
a negotiation. 59
When the transfer of commercial paper amounts to only an assignment, the transferee is
by definition not a holder and cannot be a holder in due course. 60
Clearly, a person cannot be a holder in due course who lacks possession of the
instrument. 61
Footnotes
Footnote 57. 236.
Footnote 58. UCC 3-202(1) [1952], UCC 3-201(b) [1990 Rev], discussed in 212
et seq.
Footnote 59. Ederer v Fisher (Fla App D2) 183 So 2d 39 (holding that the plaintiffs failed
to establish genuine indorsement of the note by the payee to the transferee from whom
plaintiffs purchased the note and, therefore, neither payee's transferee nor plaintiffs
acquired the status of holder in due course).
The bank that took a mortgage on assignment without an indorsement of the mortgage
note was not entitled to a claim as holder in due course. Second Nat'l Bank v G.M.T.
Properties, Inc. (Fla App D3) 364 So 2d 59.
A bank could not become a holder in due course of a draft payable to two payees where
there was lacking the necessary indorsement of one of the payees when the other payee
deposited the draft with the bank, there being no valid statutory negotiation. Federal
Deposit Ins. Corp. v Marine Nat'l Bank (5 Fla) 431 F2d 341, 7 UCCRS 1327.
Annotation: Fraud in the inducement and fraud in the factum as defenses under UCC
3-305 against holder in due course, 78 ALR3d 1020.
Footnote 60. Tallahassee Bank & Trust Co. v Raines, 125 Ga App 263, 187 SE2d 320, 10
UCCRS 665; Ballengee v New Mexico Fed. Sav. & Loan Ass'n, 109 NM 423, 786 P2d
37, 11 UCCRS2d 124; Hewett v Marine Midland Bank, N.A. (2d Dept) 86 App Div 2d
263, 449 NYS2d 745, 33 UCCRS 1696.
Footnote 61. Western Nat'l Bank v Rives (Tex App Amarillo) 927 SW2d 681, reh overr
(Tex App Amarillo) 1996 Tex App LEXIS 3651, writ den (Feb 21, 1997) and rehg of
writ of error overr (Apr 10, 1997).
249 Taking under restrictive indorsement
View Entire Section

The presence on an instrument of an indorsement to which the Article-3 provision of the

Uniform Commercial Code dealing with restrictive indorsements applies 62 does not
prevent a purchaser of the instrument from becoming a holder in due course of the
instrument unless the purchaser is a converter under the statute or has notice or
knowledge of a breach of fiduciary duty as stated in the statute. 63
The revised Article 3 makes a conditional indorsement ineffective to prevent further

negotiation of an instrument; therefore, an indorsement which purports to prohibit further
transfer, such as "Pay A only," is without effect for that purpose and has the same effect
as an unrestricted indorsement. 64 Thus, the presence of a restrictive indorsement on an
instrument or the breach of a restriction imposed by such an indorsement does not itself
prevent a person from becoming a holder in due course of the instrument. 65 An
exception is made when the instrument comes within the bank collection provisions on
restrictive indorsements and the taker of the instrument is a converter by virtue of these
provisions or when the taker has notice or knowledge of a breach of fiduciary duty. 66
Footnotes
As to restrictive indorsements, generally, see 230.
Footnote 63. UCC 3-206(e) [1990 Rev], referring to UCC 3-206(c) [1990 Rev], with
respect to the conversion of an instrument bearing a restrictive indorsement, and to UCC
3-206(d) [1990 Rev], with respect to a purchaser's notice or knowledge of a breach of
fiduciary duty.

The pre-1990 Article 3 states that no restrictive indorsement prevents further transfer or
negotiation of the instrument. UCC 3-206(1) [1952].
As to a purchaser's notice or knowledge of a breach of fiduciary duty, see 296.
250 Taking under qualified or "without recourse" indorsement
View Entire Section

If an indorsement is qualified, that is, if it states that it is made "without recourse" or

otherwise disclaims liability of the indorser, 67 the indorser is not liable to pay the
instrument if the note is not paid at maturity on demand or if the parties to the note are
insolvent. 68 Such an indorsement does, however, transfer everything that would be
transferred by a blank indorsement and neither destroys the negotiable character of the
instrument nor prevents the endorsee from taking as a holder in due course. 69
Observation: When an indorsement is not a special indorsement it is classified as a

"blank" indorsement. That is, it is a blank indorsement when it does not identify any
indorsee. The blank indorsement converts the instrument to bearer form.
Consequently, it may be negotiated thereafter by a transfer of possession of the
instrument alone. 70
Moreover, the use of a qualified indorsement does not of itself constitute notice of a
defense or claim against the instrument. 71
Footnotes
Footnote 67. 233.
Footnote 68. Dumont v Williamson, 18 Ohio St 515; Finkelman v Alex (App, Butler Co)
5 Ohio L Abs 184; Cameron v Ham (Fulton Co) 23 Ohio App 359, 4 Ohio L Abs 220,
155 NE 655; Bederman v Otisville State Bank (Stark Co) 5 Ohio App 178; Spencer v
King (CP Ct) 3 Ohio NP 270, 5 Ohio Dec 113; Farmers' Nat. Bank v Squire, 18 OCC
697, 6 OCD 697.
Footnote 69. UCC 3-206(4) [1952]; UCC 3-206(e) [1990 Rev].
A qualified indorsement does not prevent an indorsee from becoming a holder in due
course. Ross v Title Guarantee & Trust Co., 136 Cal App 393, 29 P2d 236; Exchange

Bank v Scholz, 49 Cal App 2d 232, 121 P2d 526.
Footnote 70. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-205:6, 3-205:7.
Footnote 71. Laschinsky v Margolis, 129 App Div 529, 114 NYS 296; First Discount
Corp. v Hatcher Auto Sales, Inc., 156 Ohio St 191, 46 Ohio Ops 87, 102 NE2d 4;
Johnson v Way, 27 Ohio St 374; Bederman v Otisville State Bank (Stark Co) 5 Ohio App
178.
As to qualified indorsements, see 233
As to the negotiation of negotiable instruments by indorsement, see 218 et seq.
251 Payee as holder in due course
View Entire Section

Under both the revised and prior versions of Article 3 of the Uniform Commercial Code,
a payee may qualify as a holder in due course. 72 A holder in due course
may be any holder, including the payee to whom the paper issued, assuming that the
circumstances are such that the other requirements of holder-in-due-course status are
satisfied. 73 A payee may be a holder in due course if he or she satisfies the same
requirements as to value, good faith, and lack of notice as apply to any other party
claiming such status. 74 The former Code provision expressly states that a payee may
be a holder in due course, but this statement was omitted from the revised Article 3
because it was both surplusage and possibly misleading. 75 The payee of an instrument
can be a holder in due course, but use of the holder-in-due-course doctrine by the payee
of an instrument is not the normal situation; in the typical case the holder in due course is
not the payee of the instrument, but rather is an immediate or remote transferee of the
payee. 76
Comment: The primary importance of the concept of holder in due course is with
respect to the assertion of defenses or claims in recoupment and to the assertions of
claims to the instrument. The holder-in-due-course doctrine assumes the following
case as typical. Obligor issues a note or check to Obligee. Obligor is the maker of the
note or drawer of the check. Obligee is the payee. Obligor has some defense to
Obligor's obligation to pay the instrument. For example, Obligor issued the instrument
for goods that Obligee promised to deliver. Obligee never delivered the goods. The
failure of Obligee to deliver the goods is a defense. Although Obligor has a defense
against Obligee, if the instrument is negotiated to Holder and the requirements to
qualify as a holder in due course are met, Holder may enforce the instrument against
Obligor free of the defense. In the typical case the holder in due course is not the
payee of the instrument. Rather, the holder in due course is an immediate or remote
transferee of the payee. If Obligor in the example is the only obligor on the check or
note, the holder-in-due-course doctrine is irrelevant in determining rights between
Obligor and Obligee with respect to the instrument. 77 But in a small percentage of
cases it is appropriate to allow the payee of an instrument to assert rights as a holder in
due course. The cases are those in which conduct of some third party is the basis of the
defense of the issuer of the instrument. 78
Illustrations: The application of the rule permitting a payee to qualify as a holder in

due course is illustrated by the following examples: 79 (1) Buyer pays for goods
bought from Seller by giving to Seller a cashier's check bought from Bank. Bank has a
defense to its obligation to pay the check because Buyer bought the check from Bank
with a check known to be drawn on an account with insufficient funds to cover the
check. If Bank issued the check to Buyer as payee and Buyer indorsed it over to
Seller, it is clear that Seller can be a holder in due course taking free of the defense if
Seller had no notice of the defense. Seller is a transferee of the check. There is no
good reason why Seller's position should be any different if Bank drew the check to the
order of Seller as payee. In that case, when Buyer took delivery of the check from
Bank, Buyer became the owner of the check even though Buyer was not the holder.
Buyer was a remitter. At that point nobody was the holder. When Buyer delivered the
check to Seller, ownership of the check was transferred to Seller who also became the
holder. This transfer is a negotiation. The rights of Seller should not be affected by
the fact that in one case the negotiation to Seller was by a holder and in the other case
the negotiation was by a remitter. Moreover, it should be irrelevant whether Bank
delivered the check to Buyer and Buyer delivered it to Seller or whether Bank
delivered it directly to Seller. In either case Seller can be a holder in due course that
takes free of Bank's defense. 80 (2) X fraudulently induces Y to join X in a spurious
venture to purchase a business. The purchase is to be financed by a bank loan for part
of the price. Bank lends money to X and Y by deposit in a joint account of X and Y
who sign a note payable to Bank for the amount of the loan. X then withdraws the
money from the joint account and absconds. Bank acted in good faith and without
notice of the fraud of X against Y. Bank is payee of the note executed by Y, but its
right to enforce the note against Y should not be affected by the fact that Y was
induced to execute the note by the fraud of X. Bank can be a holder in due course that
takes free of the defense of Y. Case No. 2 is similar to Case No. 1. In each case the
payee of the instrument has given value to the person committing the fraud in exchange
for the obligation of the person against whom the fraud was committed. In each case
the payee was not party to the fraud and had no notice of it. 81 (3) Corporation draws
a check payable to Bank. The check is given to an officer of Corporation who is
instructed to deliver to Bank in payment of a debt owed by Corporation to Bank.
Instead, the officer, intending to defraud Corporation, delivers the check to Bank in
payment of the officer's personal debt, or the check is delivered to Bank for deposit to
the officer's personal account. If Bank obtains payment of the check, Bank has
received funds of Corporation which have been used for the personal benefit of the
officer. Corporation in this case will assert a claim to the proceeds of the check against
Bank. If Bank was a holder in due course of the check it took the check free of the
Corporation's claim. The issue in this case is whether Bank had notice of the claim
when it took the check. If Bank knew that the officer was a fiduciary with respect to
the check, the issue is governed by the provisions treating a holder's notice of a breach
of fiduciary duty as notice of the represented party's claim to the instrument or its
proceeds. 82 (4) Employer, who owed money to X, signed a blank check and
delivered it to Secretary with instructions to complete the check by typing in X's name
and the amount owed to X. Secretary fraudulently completed the check by typing in
the name of Y, a creditor to whom Secretary owed money. Secretary then delivered
the check to Y in payment of Secretary's debt. Y obtained payment of the check. This
case is similar to Case No. 3. Since Secretary was authorized to complete the check,

Employer is bound by Secretary's act in making the check payable to Y. The drawee
bank properly paid the check. Y received funds of Employer which were used for the
personal benefit of Secretary. Employer asserts a claim to these funds against Y. If Y
is a holder in due course, Y takes free of the claim. Whether Y is a holder in due
course depends upon whether Y had notice of Employer's claim. 83
Footnotes
Footnote 72. United States v Second Nat'l Bank (5 Fla) 502 F2d 535, 74-2 USTC 9739,
15 UCCRS 870, 34 AFTR 2d 74-5973, cert den 421 US 912, 43 L Ed 2d 777, 95 S Ct
1567; Exchange Nat'l Bank v Beshara (Fla App D2) 236 So 2d 198, 7 UCCRS 1146;
New Bedford Inst. for Sav. v Gildroy, 36 Mass App 647, 634 NE2d 920, 25 UCCRS2d
450, review den 418 Mass 1106, 639 NE2d 1082; Saale v Interstate Steel Co. (1st Dept)
27 App Div 2d 1, 275 NYS2d 532, 3 UCCRS 1140, affd 19 NY2d 933, 281 NYS2d 340,
228 NE2d 397, 4 UCCRS 1053; South Shore Sec. Co. v Goode, 5 Misc 2d 972, 162
NYS2d 962; Yokohama Specie Bank, Ltd., New York Agency v Milbert Importing
Corp., 182 Misc 281, 44 NYS2d 71 (decided under former law).
Annotation: What constitutes "dealing" under UCC 3-305(2), providing that holder
in due course takes instrument free from all defenses of any party to instrument with
whom holder has not dealt. 42 ALR5th 137.
Payee as holder in due course, 2 ALR3d 1151 ( 9 superseded by Construction and

effect of UCC Art. 3, dealing with commercial paper, 23 ALR3d 932 ( 38 superseded
by Construction and effect of "padded payroll" rule of UCC 3-405, 45 ALR5th 389,
and 22-26.7 superseded by What constitutes "dealing" under UCC 3-305(2),
providing that holder in due course takes instrument free from all defenses of any party
to instrument with whom holder has not dealt, 42 ALR5th 137, and 3 superseded by
3-104(1)(b), 88 ALR3d 1100, and 11 superseded by Construction and application of
UCC 3-403(2) dealing with personal liability of authorized representative who signs
negotiable instrument in his own name, 97 ALR3d 798, and 23 superseded by Who
is holder of instrument for "value" under UCC 3-303, 97 ALR3d 1114, and 24, 25
superseded by What constitutes taking instrument in good faith, and without notice of
ALR4th 212, and 29 superseded by Fraud in the inducement and fraud in the factum
as defenses under UCC 3-305 against holder in due course, 78 ALR3d 1020, and
32(b), 35 superseded by Commercial paper: what amounts to "negligence contributing
to alteration or unauthorized signature" under UCC 3-406, 67 ALR3d 144, and
34(d) superseded by Payee's right of recovery, in conversion under UCC 3-419(1)(c),
for money paid on unauthorized indorsement, 23 ALR4th 855)).
Forms: Complaint, petition, or declarationAllegationPlaintiff holder in due course.

Instruments 3:135.
Footnote 74. United States v Second Nat'l Bank (CA5 Fla) 502 F2d 535, 74-2 USTC
9739, 15 UCCRS 870, 34 AFTR 2d 74-5973, cert den 421 US 912, 43 L Ed 2d 777, 95

S Ct 1567; Exchange Nat'l Bank v Beshara (Fla App D2) 236 So 2d 198, 7 UCCRS 1146.
As to the basic requirements to qualify as a holder in due course, see 247.
252 Purchaser of limited interest
View Entire Section

That provision of Article 3 of the Uniform Commercial Code dealing with holders in due
course declares that a purchaser of a limited interest can be a holder in due course only to
the extent of the interest purchased. 84 Under this provision, if, for example, a payee
negotiates a note of a maker for $1,000 to a holder as security for payment of the payee's
debt to the holder of $600, the holder may assert rights as a holder in due course only to
the extent of $600; with respect to $400 of the note, the maker may assert any rights that
the maker has against the payee. 85 Likewise, in an action on a $75,000 note which a
party took as collateral security for a loan of $23,600, and which the party bought for
$10,000 when it caused the collateral to be sold, the party's recovery was limited to
$23,600 where the note was an accommodation note to the knowledge of the party. 86
Footnotes
The pre-1990 version of Article 3 is substantially the same as the revised version. UCC
3-302(4) [1952].

The purchaser of a limited interest in an instrument, such as a pledgee in a security
transaction, can be a holder in due course only to the extent of the interest purchased.
Audsley v Allen (Mo) 774 SW2d 142, 10 UCCRS2d 413 (decided under pre-1990
Article 3).
Footnote 86. Broad & Wall Corp. v O'Connor, 37 Misc 2d 408, 238 NYS2d 342.
b. Transferee from Holder in Due Course [253-255]
253 Generally; "shelter" rule
View Entire Section

Under the so-called "shelter" rule incorporated in both the pre-1990 and revised Article 3
of the Uniform Commercial Code, a 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 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 illegality affecting the instrument. 87
Observation: The policy of the Code is to assure the holder in due course a free
market for the instrument. 88
The theory behind the shelter provisions is to confer on the holder in due course, who
meets the requirements of good faith and other requirements, the right to transfer the
instrument to whomever he pleases. 89 In other words, the purpose is to benefit the
holder in due course who wishes to market his instrument, not to aid the transferee. 90
Footnotes
Footnote 87. UCC 3-203(b) [1990]; UCC 3-201(1).
As to the rights of transferees, generally, see 242.
A bank was denied summary judgment against limited partners on promissory notes
executed by the limited partners to the partnership and pledged to the bank as collateral,
where the bank indorsed the notes to the partnership and then, acting as the partnership's
agent, indorsed the notes back to itself with knowledge of defenses to the notes, including
the fact that the partnership had defrauded the limited partners. Manufacturers Hanover
Trust Co. v Robinson (Sup) 157 Misc 2d 651, 597 NYS2d 986.
Footnote 88. Finalco, Inc. v Roosevelt (2nd Dist) 235 Cal App 3d 1301, 286 Cal Rptr
616, 91 CDOS 8573, 91 Daily Journal DAR 13196, 16 UCCRS2d 143, reh den (App 2nd
Dist) 3 Cal Rptr 2d 865, 91 Daily Journal DAR 14319.

254 Application of rule
View Entire Section

The shelter provision protecting one who acquires an instrument from a holder in due
course 91 is applicable even though the transferee did not give value for the instrument,
92 or took it with notice or knowledge of infirmities in the paper, or obtained the
instrument after maturity. 93 A purchaser of an instrument from a holder in due course
succeeds to the rights of the holder in due course even though the instrument was not
indorsed to the purchaser by the holder in due course and even though the purchaser is
not, therefore, a holder of the instrument. 94 Likewise, the fact that the possessor of
notes is not the holder because they are payable to order and were not indorsed to the
possessor does not prevent the possessor from having the rights of a holder in due course
if the possessor's transferor had such rights, but the possessor has the burden of proving
that the transferor had such rights. 95 On the other hand, while the transfer of paper
transfers the rights of the transferor to the transferee, it does not transfer the status of
holder of the paper, although the transferor was a holder, the transferee not being a holder
because the transferor did not make the necessary indorsement. 96
Footnotes
Footnote 91. 253.
As to the definition of holder, see 236.
Footnote 95. Northside Bldg. & Inv. Co. v Finance Co. of America, 119 Ga App 131, 166
SE2d 608, 6 UCCRS 345.
Footnote 96. Security Pacific Nat'l Bank v Chess (2nd Dist) 58 Cal App 3d 555, 129 Cal
Rptr 852, 19 UCCRS 544.
255 Exceptions to rule

View Entire Section
A 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 illegality
affecting the instrument. 97
Comment: The exception in the Uniform Commercial Code which prevents a

transferee from acquiring the rights of a holder in due course when the transferee
engaged in fraud or illegality affecting the instrument prevents the transferee from
washing the instrument clean by passing it into the hands of a holder in due course and
then repurchasing it. This rule would apply if a payee, by fraud, induced a maker to
issue a note to payee which the payee negotiated to a third party who took the note as a
holder in due course and who subsequently sold it back to the payee. While the payee
has obtained the note by transfer from a holder in due course, he does not succeed to
the third party's rights as a holder in due course and is subject to the maker's defense of
fraud. 98
Illustration: The application of the exception to the shelter provision is illustrated by

the following example: Payee, by fraud, induced Maker to issue a note to Payee.
Under the Code, the fraud is a defense to the obligation of Maker to pay the note.
Payee negotiated the note to X who took as a holder in due course. Payee then
repurchased the note from X. Payee does not succeed to X's rights as a holder in due
course and is subject to Maker's defense of fraud. 99
The exclusion of a transferee who engaged in fraud or illegality affecting the instrument
applies to a person acquiring the instrument "directly or indirectly from a holder in due
course." 1 This reference to "directly or indirectly" does not refer to situations of actual
and constructive receipt but to the situations in which the transferee receives the
instrument directly from the holder in due course or through one or more persons
acquiring the instrument as holders in due course. 2
Footnotes
Footnote 97. National Union Fire Ins. Co. v Woodhead (2 NY) 917 F2d 752, 12
UCCRS2d 1076 (applying UCC 3-201(1) [1952], predecessor to UCC 3-203(b)[1990
Rev]).
But see National Union Fire Ins. Co. v Woodhead (2 NY) 917 F2d 752, 12 UCCRS2d
1076 (a surety's rights as the transferee of a promissory note were not affected by the
payee's negotiation of the note to a holder in due course, or by an alleged
misrepresentation in a "private placement memorandum" which should have been issued
to the note's makers concerning the ultimate holder of the note, where the makers knew
that their note would be assigned to a possible holder in due course, since the makers
never actually received the memorandum, and thus they could not have relied on any
alleged misrepresentation therein; the surety was therefore not "a party to any fraud or
illegality" by reason of assignment of the note to a holder in due course and was entitled
to the rights of a transferee unless, as the prior holder, it had notice of a defense or claim

against the note).
As to the rights of a transferee, generally, see 242.
c. Transfer by Operation of Law or to Mere Successor in Interest [256-259]
256 Generally
View Entire Section

Except to the extent a transferor or predecessor in interest has rights as a holder in due
course, a person does not acquire the rights of a holder in due course of an instrument
taken by legal process or by purchase in an execution, bankruptcy, or creditor's sale or
similar proceeding, by purchase as part of a bulk transaction not in the ordinary course of
the business of the transferor, or as the successor in interest to an estate or other
organization. 3
Comment: The Uniform Commercial Code provision is intended to state existing

case law. It covers a few situations in which the purchaser takes an instrument under
unusual circumstances. The purchaser is treated as a successor in interest to the prior
holder and can acquire no better rights. But if the prior holder was a holder in due
course, the purchaser obtains rights of a holder in due course. 4
Footnotes
Footnote 3. UCC 3-302(3)(a) [1952]; UCC 3-302(c) [1990 Rev].
257 Transfer by judicial sale or from estate
View Entire Section

It is a well-settled rule that transfers by operation of law, such as those that ensue under
the bankruptcy laws, insolvency laws, or laws pertaining to receiverships, are not in the
usual course of business, and no better title is acquired by the transferee than that claimed
by the previous holders. 5 Accordingly, it is the general rule that a receiver, trustee in
bankruptcy, or assignee for the benefit of creditors does not take as a holder in due course
so as to preclude defenses which could be asserted against the person whom he succeeds,
and a purchaser at a receiver's sale takes subject to all defenses and is not a holder in due
course. 6
The above principles apply under the Uniform Commercial Code, where it is provided
that a holder does not become a holder in due course of an instrument by purchase in an
execution, bankruptcy, or creditor's sale or similar proceeding, or by taking it under legal
process. 7
Comment: The statutory exception applies to a purchaser at an execution sale or a

sale in bankruptcy. It applies equally to an attaching creditor or any other person who
acquires the instrument by legal process or to a representative, such as executor,
administrator, receiver or assignee for the benefit of creditors, who takes the instrument
as part of an estate. In the absence of controlling state law to the contrary, the
exception applies to a sale by a state bank commissioner of the assets of an insolvent
bank. However, the statute may be pre-empted by federal law if the Federal Deposit
Insurance Corporation (FDIC) takes over an insolvent bank. Under the governing
federal law, the FDIC and similar financial institution insurers are given
holder-in-due-course status and that status is also acquired by their assignees under the
shelter doctrine. 8
Article 3 of the Code also provides that a person does not acquire rights of a holder in
due course of an instrument taken as the successor in interest to an estate or other
organization. 9 Also, where a bank that is not a holder in due course is absorbed by
merger by another bank, such other bank is not a holder in due course. 10
Comment: This exception would apply to a new partnership taking over for value all
of the assets of an old one after a new member has entered the firm, or to a reorganized
or consolidated corporation taking over the assets of a predecessor. 11
However, a holder in due course does not destroy its status as such by reacquiring title to
a negotiable instrument through the judicial sale process, so long as the holder has not
lost the right to such status in the interim. 12
Footnotes
Footnote 5. In re Cochise College Park (9 Ariz) 703 F2d 1339, CCH Bankr L Rptr
69327 (criticized on other grounds by Yadkin Valley Bank & Trust Co. v McGee (In re
Hutchinson) (CA4 NC) 5 F3d 750, 5 Fourth Cir & Dist Col Bankr Ct Rep 985, 24 BCD
1111, 29 CBC2d 1312, CCH Bankr L Rptr 75439); Young v Victory, 112 Fla 66, 150
So 624 (decided under former law); Holly v Dayton View Terrace Improv. Corp., 25
Ohio Misc 57, 53 Ohio Ops 2d 393, 263 NE2d 337; Miller v Diversified Loan Serv. Co.,

181 W Va 320, 382 SE2d 514.
Footnote 6. In re Cochise College Park (CA9 Ariz) 703 F2d 1339, CCH Bankr L Rptr
69327 (criticized on other grounds by Yadkin Valley Bank & Trust Co. v McGee (In re
Hutchinson) (CA4 NC) 5 F3d 750, 5 Fourth Cir & Dist Col Bankr Ct Rep 985, 24 BCD
1111, 29 CBC2d 1312, CCH Bankr L Rptr 75439); Young v Victory, 112 Fla 66, 150
So 624 (decided under former law); Holly v Dayton View Terrace Improv. Corp., 25
Ohio Misc 57, 53 Ohio Ops 2d 393, 263 NE2d 337; Miller v Diversified Loan Serv. Co.,
181 W Va 320, 382 SE2d 514.
A stranger to the paper cannot become a holder in due course by purchasing at a judicial
sale. Finance Co. of America v Wilson, 115 Ga App 280, 154 SE2d 459, 4 UCCRS 312.
A person who buys a promissory note at an execution sale is not a holder in due course,
but acquires a title that is subject to the personal defenses that could have been asserted
against the payee. Boswell v Reid (3rd Dist) 199 Cal App 2d 705, 19 Cal Rptr 29.
Footnote 7. UCC 3-302(3)(a) [1952]; UCC 3-302(c) [1990 Rev].
Forms: AnswerDefensePurchaser at creditor's sale not holder in due course of

As to the protection afforded a transferee from a holder in due course under the shelter
doctrine, see 253 et seq.
Footnote 9. UCC 3-302(3)(b) [1952]; UCC 3-302(c) [1990 Rev].
A successor corporation which continues the business, takes over the assets, and retains
many of the officers of the original corporation is not a holder in due course of paper
transferred by the original corporation. HawthornMellody, Inc. v Driessen, 213 Kan
791, 518 P2d 446.
Forms: AnswerDefenseAdministrator acquiring note by taking over assets of estate

not holder in due course. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Footnote 10. Carolina First Nat'l Bank v Douglas Gallery of Homes, Ltd., 68 NC App
246, 314 SE2d 801.
Footnote 12. Finance Co. of America v Wilson, 115 Ga App 280, 154 SE2d 459, 4
UCCRS 312.
258 Bulk purchase

View Entire Section
A person does not acquire the rights of a holder in due course of an instrument taken by
purchase as part of a bulk transaction not in the ordinary course of business of the
transferor; 13 therefore, this rule applies to situations where a new business organization
takes over, for value, the assets of an old one. 14 This provision operates regarding
those bulk transfers incident to the cessation, liquidation, or reorganization of the
transferor's business where the circumstances indicate that the transferee is a mere
successor in interest to the transferor. 15 Whether a transaction is a bulk transaction
within the Uniform Commercial Code is not to be determined solely on the basis of
volume; the essential element is that the transaction is not in the ordinary course of
business. 16 The exception does not bar holder-in-due course status where there is no
evidence that in making the bulk transfer the transferor was acting outside of the ordinary
course of its business. 17
Comment: This provision also applies to the purchase by one bank of a substantial
part of the paper held by another bank which is threatened with insolvency and seeking
to liquidate its assets. In the absence of controlling state law to the contrary, this
provision also applies to a sale by a state bank commissioner of the assets of an
insolvent bank, unless pre-empted by federal law. 18
In other words, where there has been a bulk transfer incident to the liquidation of a going
enterprise or a transfer of a business of which the negotiable instruments represent part of
the assets transferred, the transferee acquires no more protected interest than the
transferor had, but where in the course of an ongoing business there is a substantial
transfer as a matter of regular commercial dealing, the transferee is not put on notice that
the paper transferred is not fully and freely negotiable, and, in the absence of any notice
of the insolvency of the transferor, the transferee is a holder in due course. 19
Taking a note as security for a loan is not "purchase" within the meaning of the statute
denying status as a holder in due course of a note taken by purchase as part of a bulk
transaction. 20 A transferee of a note from a liquidating trust does not take the note as
part of a bulk transaction so as to preclude it from being a holder in due course, where the
transferee acquires a single promissory note from the trust. 21
Footnotes
Footnote 13. UCC 3-302(c)(ii) [1990 Rev]; UCC 3-302(3)(c) [1952].
A bulk transferee cannot be a holder in due course. P P, Inc. v McGuire (DC NJ) 509 F
Supp 1079, 31 FR Serv 2d 379, 31 UCCRS 606.
As to the law governing bulk transfers, see 37 Am Jur 2d, Fraudulent Conveyances
238-279.
Footnote 14. First Nat'l Bank v Lohman (Colo App) 827 P2d 583, 16 UCCRS2d 1098.

Footnote 15. First Alabama Bank v Hunt (Ala Civ App) 402 So 2d 992, 31 UCCRS 151,
cert den (Ala) 402 So 2d 995.
Also, a factual issue existed as to whether a payee's sale of promissory notes to purchaser
was a bulk transaction which would negate the purchaser's status as a holder in due
course under Article 3, and thus would permit the maker to assert the defense that an
understanding between the maker and the payee relieved the maker of the requirement
that he sign notes in his representative capacity to avoid individual liability, where the
maker asserted that the payee, as a jewelry company, was not a financial institution
regularly engaged in the business of selling notes at a discount. Combine Int'l v Berkley
(1st Dept) 141 App Div 2d 465, 529 NYS2d 790, 8 UCCRS2d 64.
Footnote 17. Northwestern Nat'l Ins. Co. v Maggio (CA7 Wis) 976 F2d 320, 18
UCCRS2d 808, related proceeding (CA7 Wis) 15 F3d 660 (decided under pre-1990
Article 3).
As to the federal holder-in-due-course doctrine, see 259.
Footnote 19. Pugatch v David's Jewelers, 53 Misc 2d 327, 278 NYS2d 759, 4 UCCRS
202 (decided under pre-1990 Article 3).
Where an instrument is acquired by the plaintiff in what appears to be a bulk transaction,

the plaintiff has the burden of establishing that the transaction is in the regular course of
business of the transferor. Credit Industrial Corp. v Di Nanno, 29 Mass App Dec 40, 5
UCCRS 877.
Footnote 20. Groner v Regency Fed. Sav. & Loan Ass'n (1st Dist) 248 Ill App 3d 574,
188 Ill Dec 64, 618 NE2d 634, 23 UCCRS2d 127.
Footnote 21. First Nat'l Bank v Lohman (Colo App) 827 P2d 583, 16 UCCRS2d 1098.
259 Federal holder-in-due-course and D'Oench, Duhme doctrines
View Entire Section

It has been noted that the Federal Deposit Insurance Corporation (FDIC) generally cannot
qualify as a holder in due course of notes acquired in a purchase and assumption
transaction from a failed bank, because it does not technically qualify as a holder under
the Uniform Commercial Code's revised definition of that term, and because it often
acquires such notes through bulk transactions. 22 However, precluding the FDIC and
other government receivers such as the Federal Savings and Loan Insurance Corporation
(FSLIC) and their assignees or transferees from having the rights of a holder in due
course would hamper the FDIC's statutory function of resolving bank failures. To avoid
this result, the so-called "federal holder in due course doctrine" has arisen. This doctrine
affords federal bank regulatory agencies the same defenses accorded a holder in due
course under state law, even where such agencies do not meet the state-law requirements
for status as a holder in due course. 23
Closely related to the federal holder-in-due-course doctrine is the D'Oench, Duhme

doctrine, which protects the FDIC from personal defenses on notes that are not evidenced
by an examination of the books and records of the failed bank. 24 The D'Oench,
Duhme doctrine prohibits borrowers from using secret or unrecorded side agreements to
defend against efforts by the FDIC or its assigneesto collect on notes acquired from a
failed bank. 25 Under the doctrine, a subsequent holder who acquires notes from the
FDIC may also be afforded special status as a holder in due course, as long as the note is
properly negotiated to it. 26 In other words, to preserve the resale market for notes
acquired by the FDIC from a failed bank, the federal holder-in-due-course doctrine
affords one who purchases notes from the FDIC special status as a holder in due course,
even though the requirements of state law are not technically met. 27 However, the
special protection of the federal holder-in-due-course doctrine is afforded only when
necessary to further the policy of promoting the stability of the nation's banking system
by facilitating the FDIC's smooth acquisition of bank assets. 28
As a precondition to the ability to claim holder-in-due-course status, the note must have
been properly negotiated to the purchaser by the FDICwhich means that if the note is
specially indorsed it must carry the indorsement of the person indicated therein. 29
Thus, where a note acquired from a failed bank was indorsed with the words "Pay to the
order of the Federal Reserve Bank" but the FDIC never obtained the indorsement of the
Federal Reserve Bank prior to transferring the note to the purchaser, the purchaser was
not a holder in due course. 30 Also, the FDIC must take the note in good faith and
without actual knowledge of the defenses in order for the doctrine to apply. 31
Caution: The D'Oench, Duhme doctrine has been at least partly codified by a federal
statute that immunizes the FDIC from any agreement that tends to diminish or defeat
its interest in any asset unless such agreement (1) is in writing; (2) was executed by the
depositary institution and any person claiming in adverse interest thereunder, including
the obligor, contemporaneously with the acquisition of the asset by the depositary
institution; (3) was approved by the board of directors of the depositary institution or
its loan committee (which approval must be reflected in the minutes of the board or
committee); and (4) has been, continuously, from the time of its execution, on official
record of the depositary institution. 32 According to some authority, the Financial
Institutions Reform, Recovery, and Enforcement Act (FIRREA), of which the
above-mentioned statute is a part, has wholly superseded the D'Oench, Duhme
doctrine. 33 However, other authority, by stating that the statute is not necessarily
coextensive with federal common law under the D'Oench, Duhme doctrine, appears to
support the view that at least some of the doctrine is distinct from and has survived the
enactment of the statute. 34
Footnotes
Footnote 22. Cadle Co. v Wallach Concrete, 120 NM 56, 897 P2d 1104, 27 UCCRS2d
518.

Footnote 23. Resolution Trust Corp. v Kennelly (CA9 Alaska) 57 F3d 819, 95 CDOS
4455; Cadle Co. v Wallach Concrete, 120 NM 56, 897 P2d 1104, 27 UCCRS2d 518.
by statute on other grounds as stated in Gunter v Hutcheson (11 Ga) 674 F2d 862, CCH
Fed Secur L Rep 98654) and (superseded by statute on other grounds as stated in
DAR 2241); Federal Sav. & Loan Ins. Corp. v Cribbs (CA5 Tex) 918 F2d 557; Sunbelt
Sav., FSB v Amrecorp Realty Corp. (ND Tex) 742 F Supp 370, 13 UCCRS2d 176.
Footnote 25. Re Miraj & Sons, Inc. (BC Mass) 192 BR 297; Resolution Trust Corp. v
Kennelly (CA9 Alaska) 57 F3d 819, 95 CDOS 4455.
518; De La Fuente v Home Sav. Asso. (Tex App Corpus Christi) 669 SW2d 137, 38
UCCRS 196 (disapproved on other grounds by Home Sav. Asso. v Guerra (Tex) 733
SW2d 134).
518.
518.
The federal holder-in-due-course doctrine was not applicable to bar a defense on a note
acquired by the FDIC in a purchase and assumption transaction where the defense was
based on the FDIC's own conduct allegedly breaching an implied promise to the
guarantor on the note to liquidate the collateral before taking action under the guaranty
agreement. Cadle Co. v Wallach Concrete, 120 NM 56, 897 P2d 1104, 27 UCCRS2d
518.
518.
518.
Footnote 31. Federal Sav. & Loan Ins. Corp. v Mackie (CA5 Tex) 949 F2d 818, 16
UCCRS2d 1097, op withdrawn, substituted op, on reh (CA5 Tex) 962 F2d 1144, reh den
(CA5) 1992 US App LEXIS 21625 and (criticized on other grounds in New Rock Asset
Partners, L.P. v Preferred Entity Advancements (CA3 NJ) 101 F3d 1492).
Footnote 32. 12 USCA 1823(e)(1).
Footnote 33. DiVall Insured Income Fund Ltd. Pshp. v Boatmen's First Nat'l Bank (CA8
Mo) 69 F3d 1398 (holding that FIRREA has superseded the federal holder-in-due-course
doctrine as well); Murphy v FDIC (App DC) 314 US App DC 24, 61 F3d 34.
Footnote 34. Bateman v FDIC (CA1 Me) 970 F2d 924 (stating that although the court
read the statute as informed by the purposes of the doctrine, it did not mean to imply any
particular limitation upon the common law that has developed under the doctrine).
d. Rights of Holder in Due Course; Proof of Status [260-263]
260 Protection afforded by holder-in-due-course status
View Entire Section

The right to enforce the obligation of a party to pay an instrument is subject to a claim of
a property or possessory right in the instrument or its proceeds, including a claim to
rescind negotiation and to recover the instrument or its proceeds, but a person having the
rights of a holder in due course takes free of such a claim to the instrument. 35 Thus,
the owner of a lost or stolen instrument in bearer form cannot establish that he or she is
the owner and recover the instrument when it is in the possession of a holder in due
course. 36 Likewise, a person who under general principles of contract law would be
entitled to rescind his negotiation of the instrument can no longer do so if the instrument
is held by a holder in due course or a person having the rights of such a holder. 37
A party's right to enforce the obligation of another to pay an instrument is also subject to
a defense of the obligor based on (1) infancy of the obligor to the extent it is a defense on
a simple contract, (2) duress, lack of legal capacity, or illegality of the transaction which,
under other law, nullifies the obligation of the obligor, (3) fraud that induced the obligor
to sign the instrument with neither knowledge nor reasonable opportunity to learn its
character or its essential terms, and (4) discharge of the obligor in insolvency
proceedings. 38 These defenses are sometimes referred to as "real" or "universal"
defenses, 39 and the right of a holder in due course to enforce the obligation of a party to
pay an instrument, like the right of a holder not in due course, is subject to these
defenses. 40 The right to enforce the obligation of a party to pay an instrument is
ordinarily subject to a defense of the obligor stated in Article 3 of the Uniform
Commercial Code or that would be available if the person entitled to enforce the
instrument was enforcing a right to payment under a simple contract, 41 and is also
subject to a claim of recoupment of the obligor against the original payee of the
instrument if the claim arose from the transaction that gave rise to the instrument. 42
However, the right of a holder in due course to enforce an instrument is not subject to
defenses of the obligor under Article 3 or that would be available in an action on a simple
contract and is also not subject to claims in recoupment against a person other than the
holder. 43
A holder in due course holds a title which is valid against all the world. The protection
accorded a holder in due course operates to cut off equities and personal defenses.
Pursuant to the policy of freedom of negotiability, courts are averse to the adoption of
rules which would place upon a holder in due course a burden which would unduly
hamper the transferability of the negotiable paper, and are inclined to adopt and support
rules and doctrines which bolster the position of the holder in due course. 44

Footnotes
Footnote 35. UCC 3-306(a) [1952]; UCC 3-306 [1990 Rev].
As to the assertion of a claim of a property or possessory right in an instrument against a

holder not in due course, see 240.
As to defenses that may be asserted in an action on a negotiable instrument, see 546

et seq.
As to the rights of a holder not in due course, see 240.
Forms: Instruction to juryDefenses available against holder in due course. 6A Am

Jur Pl & Pr (Rev), Commercial Code: Article 3Negotiable Instruments 3:133.
A holder in due course takes a negotiable instrument free from defense of fraud in
inducement. National Union Fire Ins. Co. v Woodhead (CA2 NY) 917 F2d 752, 12
UCCRS2d 1076.
Forms: Instruction to juryDefenses not available against holder in due course. 5 Am

Instruction to juryBreach of contract by original payee is not available as defense

against holder in due course. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form
66.
Defenses against one not a holder in due course. 6A Am Jur Pl & Pr Forms (Rev),
Footnote 44. Valley Bank & Trust Co. v American Utilities, Inc. (ED Pa) 415 F Supp
298, 19 UCCRS 857; American Bank of South v Rothenberg (Fla App D5) 598 So 2d
289, 17 FLW D1242; Contrail Leasing Partners v Executive Serv. Corp., 100 Nev 545,
688 P2d 765, 40 UCCRS 161; First Nat'l Bank v Jones (Tex App Eastland) 635 SW2d
950, writ ref n r e (Nov 3, 1982) and rehg of writ of error overr (Dec 15, 1982).

261 Holder with security interest in instrument
View Entire Section

If the person entitled to enforce an instrument has only a security interest in the
instrument and the person obliged to pay the instrument has a defense, claim in
recoupment, or claim to the instrument that may be asserted against the person who
granted the security interest, the person entitled to enforce the instrument may assert
rights as a holder in due course only to an amount payable under the instrument which, at
the time of the enforcement of the instrument, does not exceed the amount of the unpaid
obligation secured. 45 Accordingly, when a secured creditor is a holder in due course of
an instrument, he or she may enforce the obligation of the obligor on the instrument and
he is not subject to any defense or adverse claim to the instrument that cannot be asserted
against a holder in due course. 46 But this immunity only extends to the amount of the
secured debt that remains due; the secured creditor cannot recover more than the secured
debt because as to any excess he does not have the immunity of a holder in due course
and the instrument obligor may therefore assert the defenses that would be barred as
against a holder in due course. 47
Practice guide: The statute establishing the rights of a secured creditor as holder in
due course makes no provision for enforcement of the instrument with respect to the
surplus to which the debtor will be entitled nor for enforcement of the instrument when
the instrument obligor has no defense or claim of recoupment against the debtor. To
avoid the uncertainties thus generated, it is suggested that the creditor and debtor join
as coplaintiffs to enforce the instrument against the instrument obligor. 48
Footnotes
Footnote 45. UCC 3-302(e), 3-302(4) [1990 Rev].
262 Holder of instrument given for promise of performance which has been
partially performed
View Entire Section


If the promise of performance that is the consideration for an instrument has been
partially performed, the holder may assert rights as a holder in due course of the
instrument only to the fraction of the amount payable under the instrument equal to the
value of the partial performance divided by the value of the promised performance. 49
Comment: This provision was added at the time of the revision of Article 3 of the
Uniform Commercial Code to clarify a matter not specifically addressed in the former
Article 3 and would apply, for example, where a payee negotiates a $1,000 note to a
holder who agrees to pay $900 for it. After paying $500, holder learns that the payee
defrauded the maker in the transaction giving rise to the note. Under this provision, the
holder may assert rights as a holder in due course to the extent of $555.55 ($500
divided by $900 and then multiplied by $1,000). This formula rewards the holder with
a ratable portion of the bargained-for profit. 50
Footnotes
Attorneys who acquired a note as payment for services performed by them for the
corporate payee could be holders in due course only to the extent of the value of services
performed; in the absence of evidence of the value of such services, summary judgment
for the attorneys was error. Fernandez v Cunningham (Fla App D3) 268 So 2d 166, 11
UCCRS 805.
263 Proof of holder-in-due-course status
View Entire Section

In an action to enforce an instrument, if the validity of signatures is either admitted or

proved and there is compliance with the Uniform Commercial Code provision relating to
proof of the authenticity of, and authority to make, each signature on the instrument, a
plaintiff producing the instrument is entitled to payment if the plaintiff proves that he is a
person entitled to enforce the instrument under the Code, unless the defendant proves a
defense or claim in recoupment. 51
Comment: If a plaintiff producing the instrument proves entitlement to enforce the

instrument, either as a holder or a person with the rights of a holder, the plaintiff is
entitled to recovery unless the defendant proves a defense or claim in recoupment.
Until proof of a defense or claim in recoupment is made, the issue as to whether the
plaintiff has rights of a holder in due course does not arise. In the absence of a defense
or claim in recoupment, any person entitled to enforce the instrument is entitled to
recover. 52

If a defense or claim in recoupment is proved, the right to payment of the plaintiff is
subject to the defense or claim, except to the extent the plaintiff proves that the plaintiff
has rights of a holder in due course which are not subject to the defense or claim. 53
The question of whether a holder of a note is a holder in due course becomes one of fact
to be determined by the trier of the facts if clearly put in issue. 54
Comment: If a defense or claim in recoupment is proved, the plaintiff may seek to

cut off the defense or claim in recoupment by proving that the plaintiff is a holder in
due course, or that the plaintiff has rights of a holder in due course under the Code
provision governing transfers of instruments or by subrogation or succession. All
elements related to the plaintiff's status as a holder in due course under the Code must
be proved. 55
The party claiming that it is a holder in due course has the burden affirmatively to
establish such status. 56 Thus, whether the plaintiff has the rights of a holder in due
course only becomes relevant when the defendant raises a claim of recoupment or
defense that may be asserted against any ordinary holder but cannot be asserted against a
plaintiff who has the rights of a holder in due course. 57 In that case, the plaintiff has
the burden of proving that he has the rights of a holder in due course and that the defense
or claim in recoupment is one which cannot be asserted against such a favored holder. 58
Nothing in the statute is intended to say that a plaintiff must necessarily prove rights as a
holder in due course. The plaintiff may elect to introduce no further evidence, in which
case a verdict may be directed for the plaintiff or the defendant, or the issue of the
defense or claim in recoupment may be left to the trier of fact, according to the weight
and sufficiency of the defendant's evidence. The plaintiff may elect to rebut the defense
or claim in recoupment by proof to the contrary, in which case a verdict may be directed
for either party or the issue may be for the trier of fact. The statute means only that if the
plaintiff claims the rights of a holder in due course against the defense or claim in
recoupment, the plaintiff has the burden of proof on that issue. 59 In other words, where
a holder sues for the amount of an instrument, the defendant or obligor may raise a
defense. Since the defendant has the burden of proof of a defense, the holder has the
option of doing nothing (if it is believed that the defendant cannot establish the defense).
60 A second option of the holder is to rebut the defense, with the defendant still having
the burden of establishing the defense. 61 A third option is for the holder to prove
holder-in-due-course status and cut off the defense, if it is a personal or limited defense.
But the holder this time has the burden of showing that he is entitled to
holder-in-due-course status. 62
Footnotes
Footnote 51. 241.
As to the definition of persons entitled to enforce an instrument, see 235.
Forms: AnswerDefensePlaintiff not holder in due course. 5 Am Jur Pl & Pr Forms

Footnote 54. Vernon v Yanks (Fla App D3) 303 So 2d 375 (wherein the trial judge,
sitting as the trier of the facts in the case, determined that the plaintiff was a holder in due
course, and the appellate court declined to disturb this determination on appeal).
The question of whether the holder of a note is a holder in due course becomes one of
fact to be determined by the trier of the facts if clearly put in issue; and where the
pleadings and depositions clearly put in issue whether the holder is a holder in due
course, summary judgment for the holder must be reversed. A. B. G. Invest., Inc. v
Selden (Fla App D4) 336 So 2d 444 (decided under former law).

Forms: Instruction to juryBurden of proof as to holder in due course. 5 Am Jur Pl &

Pr Forms (Rev), Bills and Notes, Form 64.
Instruction to juryBurden of proving status as holder in due course. 6A Am Jur Pl &

Complaint, petition, or declarationAllegationPlaintiff holder in due course. 6A Am

Jur Pl & Pr Forms Rev ), Commercial Code: Article 3Negotiable Instruments
3:135.
As to a party acquiring the rights of a holder in due course by a transfer of an instrument,

see 253 et seq.
Footnote 56. Seinfeld v Commercial Bank & Trust Co. (Fla App D3) 405 So 2d 1039, 32
UCCRS 1137.
2. Instruments Bearing Apparent Evidence Calling into Question Authenticity [264-267]
264 Instruments bearing apparent evidence of forgery or alteration or otherwise

irregular or incomplete
View Entire Section

A holder may qualify as a holder in due course if the instrument when issued or
negotiated to the holder does not bear such apparent evidence of forgery or alteration or
is not otherwise so irregular or incomplete as to call into question its authenticity. 63
A taker of an instrument cannot be a holder in due course if at the time that he takes the
instrument there is anything on the face or back of the instrument that raises a question as
to the authenticity of the instrument; the essential element here involved is that there is
nothing on the instrument that indicates that it may not be what it purports to be. 64
Comment: The revised version of Article 3 of the Uniform Commercial Code

represents a return to the former rule that the taker of an irregular or incomplete
instrument is not a person the law should protect against defenses of the obligor or
claims of prior owners. This reflects a policy choice against extending the
holder-in-due-course doctrine to an instrument that is so incomplete or irregular "as to
call into question its authenticity. "The term "authenticity" is used to make it clear that
the irregularity or incompleteness must indicate that the instrument may not be what it
purports to be. Persons who purchase or pay for such instruments should do so at their
own risk. Under the corresponding section of the prior statute, irregularity or
incompleteness gave a purchaser notice of a claim or defense. But it was not clear
from that provision whether the claim or defense had to be related to the irregularity or
incomplete aspect of the instrument. This ambiguity is not present in the revised
statute. 65
Not every irregularity need preclude status as a holder in due course. 66 An instrument
may be blank in some unnecessary particular, may contain minor erasures, or even have
an obvious change in date, without even exciting suspicion; for example, the correction
of a mistaken dating of an instrument in early January where it is forgotten that a new
year has begun would not give rise to a question of whether the document is authentic. 67
Also, the fact that some of the papers are dated one day after other papers, or that some
have typed entries and others have handwritten entries, does not constitute such
"irregularity" as to constitute notice of any matter that would bar a taker from being a
holder in due course. 68
Observation: Under the "shelter" provision of the Code, a holder who acquires an
instrument from a holder in due course or from a successor in interest of a holder in
due course, may assert the rights of a holder in due course even if the instrument bears
such apparent evidence of forgery or alteration or is otherwise so irregular and
incomplete that the holder does not qualify as a holder in due course in his or her own
right. 69
Footnotes

A plaintiff finance company which purchased from a broker in the business of selling
commercial paper to finance companies at a profit a note in the face amount of $16,260
for $11,000 had "reason to know" that there was a good defense, i.e., usury, against the
note. Winter & Hirsch, Inc. v Passarelli (1st Dist) 122 Ill App 2d 372, 259 NE2d 312, 7
UCCRS 1210.
As to instruments bearing apparent evidence of incompleteness, see 266.
As to instruments bearing apparent evidence of other irregularity, see 267.
Forms: Complaint, petition, or declarationAllegationParty holding instrument is

holder in due course where instrument did not contain apparent evidence of forgery or
alteration. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:103.

3:117.
Footnote 68. Indemnity Ins. Co. of N. Am. v American Deseret Ltd. Partnership (SD NY)
887 F Supp 521, affd (CA2 NY) 56 F3d 460.
265 Alteration
View Entire Section

An altered instrument is irregular on its face and a purchaser thereof is not a holder in
due course if the marks upon the instrument are of such a character as fairly to put a
prudent purchaser upon inquiry, if the alteration plainly appears, or if a mere inspection
of the instrument shows that it has been altered. 70 If a reasonable inspection of the
instrument would disclose a material alteration in its terms and the appearance of the
alteration indicates that it was probably made by someone other than the original
draftsman, it is not regular on its face and one who takes it in that condition has not the
rights of a holder in due course. The extent of the alteration is not so important as its
obviousness. 71 Thus, the mere fact that a holder knows that a blank has been filled in
does not bar holder-in-due-course status, even where the holder himself filled in a blank
for the payee's name pursuant to a letter of instructions accompanying the instrument. 72
Footnotes
Footnote 70. Angle v North-Western Mut. Life Ins. Co., 92 US 330, 92 Otto 330, 23 L
Ed 556.
Footnote 71. New Rochelle Sec. Co. v International Thrift. Soc., 270 NY 52, 200 NE 71.
As to the duty to make inquiry, see 279.
Forms: Instruction to juryMaterial alteration defined. 5 Am Jur Pl & Pr Forms (Rev),

Instruction to juryRatification of alteration of note. 5 Am Jur Pl & Pr Forms (Rev),

Footnote 72. Riggs Nat'l Bank v Dade Federal Sav. & Loan Asso. (5 Fla) 268 F2d 951.
266 Incompleteness
View Entire Section

An instrument is not complete and regular on its face, and there can be no due-course
holder thereof, where, at the time of taking, the instrument contains blanks or omissions
rendering it incomplete, that is, material blanks or omissions. 73 This is the case where
an instrument is signed in blank, or there is an omission or blank as to amount payable,
the name of the payee, or the time of payment or due date. But the mere fact there is an
omission in an instrument does not preclude holder-in-due-course status if the omission is
not material enough to make the instrument incomplete. 74 Thus, a bank could not be a
holder in due course of a check which was not complete and regular on its face. 75 But
the mere fact that there is an omission in an instrument does not preclude
holder-in-due-course status if the omission is not material enough to make the instrument
incomplete. 76 Also, the fact that a check was drawn on a customer's draft form and had
an unfilled blank space for the payee did not decorate it with a danger signal so as to
require one acquiring it for value to investigate whether the drawer's name thereon was
forged. 77
Footnotes
Footnote 73. Wilkins v Reliance Equipment Co., 259 Ala 348, 67 So 2d 16.
Footnote 74. Atkinson v Englewood State Bank, 141 Colo 436, 348 P2d 702.
Footnote 75. Goff v Morgan County Nat'l Bank, 144 Fla 671, 198 So 484 (decided under
former law).
Footnote 76. SFC Acceptance Corp. v Spain, 251 La 902, 207 So 2d 364 (wherein the
schedule of payment section was left blank in a note attached to the bottom of a sale and
chattel mortgage instrument).
267 Other irregularities
View Entire Section

Apart from incompleteness, other irregularities on the face of an instrument which are
material preclude holder-in-due-course status, as where the instrument contains apparent
notations, insertions, or erasures having such effect as, for example, recitals or
memoranda of collateral restricting its negotiability, or the apparent alteration of the
name of the payee, the date, the amount, or the interest rate. However, notations, marks,
words, and recitals of an immaterial character not making the instrument irregular do not
prevent it from being taken by one as a holder in due course. 78 Thus, while
indorsements on a note of partial payments made on the date of the note by persons not
parties to the note may be somewhat unusual, such indorsements do not necessarily make
the note other than complete and regular on its face so as to prevent a holder from
qualifying as a holder in due course. 79
Footnotes
Footnote 78. Parsons v Jackson, 99 US 434, 99 Otto 434, 25 L Ed 457.
3. Taking Instrument for Value [268-275]
268 Generally
View Entire Section

In order to be a holder in due course of a negotiable instrument, the holder must have
taken the instrument for value. 80
Observation: Under the shelter provision, a person who has not given value for an
instrument and who therefore does not qualify as a holder in due course may have the
rights of a holder in due course if he or she or a predecessor in interest obtained the
instrument through a transfer from a holder in due course. 81
Footnotes
Footnote 80. UCC 3-302(1)(a) [1952]; UCC 3-302(a)(2)(i) [1990 Rev].
A real-estate brokerage company, acting as escrow agent, which accepted tender of

deposit check from prospective purchaser, did not qualify as a holder in due course
because it did not take the instrument for value. Liebowitz v Wright Properties, Inc. (Fla
App D4) 427 So 2d 783, 35 UCCRS 862, petition den (Fla) 440 So 2d 352.
269 What constitutes value
View Entire Section

Article 3 of the Uniform Commercial Code specifically defines the term "value" with
respect to the issuance or transfer of a negotiable instrument. 82 An instrument is
issued or transferred for value under the revised and pre-1990 Article 3 if:
(1) the instrument is issued or transferred for a promise of performance, to the extent the
promise has been performed; 83
(2) the transferee acquires a security interest or other lien in the instrument other than a
lien obtained by judicial proceeding; 84
(3) the instrument is issued or transferred as payment of, or as security for, an antecedent
claim against any person, whether or not the claim is due; or 85
(4) the instrument is issued or transferred in exchange for a negotiable instrument. 86
Revised Article 3 also provides that an instrument is issued or transferred for value where
the instrument is issued or transferred in exchange for the incurring of an irrevocable
obligation to a third party by the person taking the instrument. 87
Comment: The definition of value has primary importance in cases in which the
issue is whether the holder of an instrument is a holder in due course and particularly
to cases in which the issuer of the instrument has a defense to the instrument. Suppose
Buyer and Seller signed a contract on April 1 for the sale of goods to be delivered on
May 1. Payment of 50 percent of the price of the goods was due upon signing of the
contract. On April 1, Buyer delivered to Seller a check in the amount due under the
contract. The check was drawn by X to Buyer as payee and was indorsed to Seller.
When the check was presented for payment to the drawee on April 2, it was dishonored

because X had stopped payment. At that time Seller had not taken any action to
perform the contract with Buyer. If X has a defense on the check, the defense can be
asserted against Seller who is not a holder in due course because Seller did not give
value for the check. The policy basis for this provision is that the holder who gives an
executory promise of performance will not suffer an out-of-pocket loss to the extent
the executory promise is unperformed at the time the holder learns of dishonor of the
instrument. When Seller took delivery of the check on April 1, Buyer's obligation to
pay 50 percent of the price on the date was suspended, but when the check was
dishonored on April 2 the obligation revived. If payment for goods is due at or before
delivery and the buyer fails to make the payment, the seller is excused from performing
the promise to deliver the goods. Thus, Seller is protected from an out-of-pocket loss
even if the check is not enforceable. Holder-in-due-course status is not necessary to
protect Seller. 88
Illustrations: The application of the provisions defining value where an instrument is

issued or transferred for a promise of performance or as payment of an antecedent
claim are demonstrated by the following examples: 89
(1) X owes Y $1,000. The debt is not represented by a note. Later X issues a note to Y
for the debt. Under Article 3, X's note is issued for value and is also issued for
consideration whether or not, under contract law, Y is deemed to have given
consideration for the note. 90
(2) X issues a check to Y in consideration of Y's promise to perform services in the

future. Although the executory promise is consideration for issuance of the check, it is
value only to the extent the promise is performed. 91
(3) X issues a note to Y in consideration of Y's promise to perform services. If at the date
of the note Y's performance is not yet due, Y may enforce the notice because it was
issued for consideration. But if at the due date of the note, Y's performance is due and
has not yet been performed, X has a defense. 92
Footnotes
1114.
Forms: Complaint in federal courtDiversity of citizenshipNote taken as collateral

for existing indebtedness. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Complaint, petition, or declarationAllegationValue given by seller for check payable

to order of buyer. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Complaint, petition, or declarationAllegationCheck given in payment of antecedent

debt. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:109.

Footnote 83. UCC 3-303(a) [1952]; UCC 3-303(a)(1) [1990 Rev].
Footnote 86. UCC 3-303(c) [1952]; UCC 3-303(a)(4) [1990 Rev].
270 Distinction between "value" and "consideration"
View Entire Section

The term "consideration" is defined in revised Article 3 of the Uniform Commercial

Code as any consideration sufficient to support a simple contract. 93 If an instrument is
issued for value, according to revised Article 3, it is also issued for consideration. 94
Comment: The distinction between value and consideration in Article 3 is a very

fine one. Whether an instrument is taken for value is relevant to the issue of whether a
holder is a holder in due course. If an instrument is not issued for consideration, the
issuer has a defense to the obligation to pay the instrument. 95 The definition of value
in Article 1, 96 which includes any consideration sufficient to support a simple
contract, does not apply to Article 3. Thus, outside Article 3, anything that is
consideration is also value. A different rule applies in Article 3, which states that if an
instrument is issued for value it is also issued for consideration. 97
The terms consideration and value appear interchangeable where the relationship of
parties dealing with each other on a check, such as the drawer and payee or indorsee and
immediate indorser, is involved. 98 But the terms might be regarded as not of identical
application where the relationship between parties who have not dealt directly with each
other is involved, that is, as between the drawer and a subsequent holder to whom the
payee has indorsed the instrument. 99 In other words, consideration is important as to
whether the obligation of a party can be enforced against him; value is important in
determining whether a holder who has acquired the instrument is or is not a holder in due
course. 1 The UCC makes this basic distinction between value and consideration. 2
Illustration: Assume that drawer, D, signs a check to the order of payee, P. P then
negotiates to holder, H. The check is dishonored upon presentment and H sues D on
the instrument. D might defend on the basis that he issued the check without
consideration or that the consideration for the check had failed. H might counter the
defense by claiming that he is a holder in due course. To be a holder in due course, he
had to take the check from P for value. Stated another way, D might argue that he got
nothing in return for the check for P. H might seek to cut off D's argument by showing
that he (H) gave value to P for the check and, thus, became a holder in due course. 3
Footnotes
Forms: Provision in negotiable instrumentRecital of consideration received. 19 Am

253:2283.
271 Promise of performance as value
View Entire Section

An instrument is issued or transferred for value if the instrument is issued or transferred

for a promise of performance, to the extent the promise has been performed. 4 The
application of this concept means that if the performance has not been rendered in full,
the taker is holder in due course only as to a fraction of the instrument; this fraction is the
amount payable under the instrument equal to the value of the partial performance

divided by the value of the promised performance. 5
It follows from the language of the Uniform Commercial Code that a mere executory
promise given by a person who takes a check is not value; in other words, a promise to do
something in the future is not the giving of value for a check. 6 The reason for this
approach is that when the purchaser of a check or other instrument learns of a defense
against the instrument or a defect in the title, he or she is not required to enforce the
instrument but is free to rescind the transaction. 7 The policy basis for the rule is that the
holder who gives an executory promise of performance will not suffer an out-of-pocket
loss to the extent the executory promise is unperformed at the time the holder learns of
dishonor of the check. 8
Footnotes
Attorneys who acquired a note as payment for services performed by them for the
corporate payee could be holders in due course only to the extent of the amount of the
value of services performed. Fernandez v Cunningham (Fla App D3) 268 So 2d 166, 11
UCCRS 805.
272 Acquiring security interest in or lien on instrument as value
View Entire Section

An instrument is issued or transferred for value if the transferee acquires a security

interest or other lien in the instrument other than a lien obtained in a judicial proceeding.
9
Comment: The Uniform Commercial Code equates value with the obtaining of a
security interest or nonjudicial lien in the instrument. The term "security interest"
covers Article 9 cases in which an instrument is taken as collateral as well as bank
collection cases in which a bank acquires a security interest under Article 4. The
acquisition of a common-law or statutory banker's lien is also value under the Code.
An attaching creditor or other person who acquires a lien by judicial proceedings does
not give value for the purposes of Article 3. 10

Footnotes
As to the nature of security interests, generally, see 68A Am Jur 2d, Secured
Transactions 117-122.
Footnote 10. Official Comment 3 to UCC 3-303 [1990 Rev], referring to the lien
granted a bank in a collection item under UCC 4-210.
273 Taking instrument for antecedent debt or claim as value
View Entire Section

An instrument is issued or transferred for value if the instrument is issued or transferred

as payment of, or as security for, an antecedent claim against any person, whether or not
the claim is due. 11 This provision creates a presumption that consideration exists in
such an exchange, and places the burden on the maker to overcome that presumption. 12
Therefore, the pre-existing debt of a corporation is valid consideration for the personal
note of its principal stockholders. 13 Likewise, a bank's application of the proceeds of a
deposited negotiable instrument to the depositor's antecedent debt owed to the bank is a
giving of value for the instrument and constitutes the bank a holder in due course thereof.
14
Comment: The rule that an instrument taken for an antecedent debt is taken for
value applies even though there is no extension of time or other concession, and
whether or not the claim is due. The rule also applies to any claim against any person;
there is no requirement that the claim arise out of contract. In particular, the provision
is intended to apply to an instrument given in payment of or as security for the debt of
a third person, even though no concession is made in return. 15
The rule that an antecedent or pre-existing debt constitutes value for a negotiable
instrument differs from the general law of contracts, which rejects a promise that is based
on past consideration in many instances. The rule that an antecedent debt constitutes
value fills a real business need, since it would be absurd to suppose that a check or other
instrument given to pay a lawful and existing debt is not given for value. 16
Footnotes
A taker by indorsement of a negotiable instrument for a pre-existing debt is a holder for

value. Crystal River Lumber Co. v Consolidated Naval Stores Co., 63 Fla 119, 58 So
129 (decided under former law).

A factor which purchased a bankrupt's receivables at a five-percent discount of the face
value of each account gave value for the checks it subsequently collected from account
debtors, since the factor purchased from the bankrupt an antecedent claim that the
bankrupt had against each account debtor, and then took the checks in payment of those
antecedent claims which had been assigned to it by the bankrupt. In re Joe Morgan, Inc.
(11 Ala) 985 F2d 1554, 20 UCCRS2d 401, 7 FLW Fed C 163.
An investor who was assigned a mortgage by an investment corporation in payment of a

claim against an affiliate company was a holder in due course of the promissory note
which was executed with the mortgage where the note was taken for value; even though
the investment preceded the note, the assignee took the note in payment of her claim
against a bankrupt mortgage corporation arising from her investment, and, therefore, she
took the note for value since it was in payment of an antecedent claim pursuant to statute.
Thomas v State Mortg., Inc., 176 Mich App 157, 439 NW2d 299, 9 UCCRS2d 1276, app
den 433 Mich 913 (referring to UCC 3-303(b) [1952]).
Forms: Complaint in federal courtDiversity of citizenshipNote taken as collateral

for existing indebtedness. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Complaint, petition, or declarationAllegationCheck given in payment of antecedent

debt. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:109.
Footnote 12. Sverdrup Corp. v Politis (Mo App) 888 SW2d 753, 25 UCCRS2d 857.
Footnote 13. Southern Frozen Foods, Inc. v Hill, 241 SC 524, 129 SE2d 420.
Footnote 14. Exchange Nat'l Bank v Beshara (Fla App D2) 236 So 2d 198, 7 UCCRS
1146.
274 Exchange of instrument for other instrument or for irrevocable obligation to

third party as value
View Entire Section

The issuance of a negotiable instrument, including a bank draft, check, promissory note,
or certificate of deposit, has been regarded as value in the taking of an instrument, at least
if the new instrument has been paid or issued to a holder in due course. 17 The same has
been true where a holder acquires an instrument upon the surrender of a note, even
though such paper is held only as collateral security, or where he makes an exchange of
negotiable paper, including a substitution of collateral, or indorses other paper in return
for an instrument. 18
Under the Uniform Commercial Code, an instrument is issued or transferred for value if
the instrument is issued or transferred in exchange for a negotiable instrument, 19 or if it
is issued or transferred in exchange for the incurring of an irrevocable obligation to a
third party by the person taking the instrument. 20
Comment: These provisions state generally recognized exceptions to the rule that an
executory promise is not value. A negotiable instrument is value because it carries the
possibility of negotiation to a holder in due course, after which the party who gives it is
obliged to pay. The same reasoning applies to any irrevocable commitment to a third
person, such as a letter of credit issued when an instrument is taken. 21
With respect to the exchange of instruments, no limitation or restriction is made in terms

of the relative face amounts of the instruments involved or of the credit standing of the
parties to them. 22
Footnotes
Footnote 17. Andrew v Peterson, 214 Iowa 582, 243 NW 340; Miller v Marks, 46 Utah
257, 148 P 412.
An appeals court found that there was substantial evidence to support the trial court's
determination that a purchaser took negotiable instruments consisting of United States
government payment-in-kind certificates for value under Article 3 where the purchaser
issued what was a negotiable instrument in exchange for the certificates, namely, its
check. Allison-Kesley AG Center, Inc. v Hildebrand (Iowa) 485 NW2d 841, 19
UCCRS2d 480.
Footnote 18. Gunnison County Comm'rs v E.H. Rollins & Sons, 173 US 255, 43 L Ed
689, 19 S Ct 390.
275 Value less than amount of instrument
View Entire Section

The payment of the full face value of a bill or note is not necessary to make one a holder

for value. 23 One may be a holder for value and in due course even though he does not
pay the full face amount of the instrument, and this fact alone does not preclude his
recovery of the full amount. 24 In other words, the fact that a check is acquired at a
discount or less than face value does not, of itself, establish lack of value for purposes of
determining whether a holder is a holder in due course. 25 However, paying
substantially less than the face amount or taking an instrument at a large discount is
considered on the question whether the holder takes in good faith and without notice so
as to qualify as a holder in due course. 26
Footnotes
Footnote 23. Sample v Hundred Lakes Corp., 107 Fla 568, 145 So 193 (decided under
former law).
Footnote 24. King v Doane, 139 US 166, 35 L Ed 84, 11 S Ct 465; Szczotka v Idelson
(2nd Dist) 228 Cal App 2d 399, 39 Cal Rptr 466.
Footnote 26. 281.
4. Taking Instrument in Good Faith [276-282]
276 Generally
View Entire Section

A holder, in order to be a holder in due course, must have taken the instrument in good
faith. 27
Observation: Under the "shelter" doctrine incorporated in Article 3, even if a person

taking an instrument does not act in good faith and, therefore, does not qualify as a
holder in due course in his or her own right, such person may still have the rights of a
holder in due course if a predecessor in interest qualified as a holder in due course. 28
Footnotes
Acquisition of the instrument in good faith is an absolutely necessary prerequisite to

becoming a holder in due course. McCarthy v Kasperak (Cuyahoga Co) 3 Ohio App 3d
206, 3 Ohio BR 234, 444 NE2d 472, 35 UCCRS 540.

In order to qualify for the status of a holder in due course, a plaintiff must show that he
took the instrument in good faith. Seamans v Miller, 142 Ga App 147, 235 SE2d 542, 21
UCCRS 1378.
The act of a bank depositing a check of its debtor directly to his account rather than in a
special account over which the bank had control did not constitute bad faith on the part of
the bank, and the bank became a holder in due course when it honored checks drawn by
the depositor exceeding the amount of the check, notwithstanding that some of the checks
were payable to the bank as partial liquidation of an indebtedness. Exchange Nat'l Bank
v Beshara (Fla App D2) 236 So 2d 198, 7 UCCRS 1146.
Questions of fact existed as to whether a holder took a note in good faith and without
notice of certain defenses and, thus, put in issue the question whether the holder was a
holder in due course. A. B. G. Invest., Inc. v Selden (Fla App D4) 336 So 2d 444
(decided under former law).
ALR4th 212.
Forms: Complaint, petition, or declarationAllegationPlaintiff holder in due course

where possession acquired in good faith. 6A Am Jur Pl & Pr Forms (Rev),
277 Standard of good faith in revised Article 3
View Entire Section

The phrase "good faith" is defined generally in revised Article 3 of the Uniform
Commercial Code as honesty in fact as well as the observance of reasonable commercial
standards of fair dealing. 29 The definition of "good faith" in revised Article 3 is
expanded beyond that applied under the 1952 Article 3 by adding the limitation of
"reasonable commercial standards of fair dealing." 30 In the 1952 Article 3, "good
faith" was a purely subjective element, but the 1990 Revision imposes an objective
qualification. 31
Comment: The revised version of Article 3 introduces a definition of good faith

specifically to apply to Articles 3 and 4. The former Articles 3 and 4 used the
definition set forth in Article 1. The definition in revised Article 3 is consistent with
the definitions of good faith applicable to Articles 2, 2A, 4, and 4A. The definition
requires not only honesty in fact but also the "observance of reasonable commercial
standards of fair dealing." Although fair dealing is a broad term that must be defined
in context, it is clear that it is concerned with the fairness of conduct rather than the
care with which an act is performed. Failure to exercise ordinary care in conducting a
transaction is an entirely different concept than failure to deal fairly in conducting the
transaction. Both fair dealing and ordinary care are to be judged in the light of
reasonable commercial standards, but those standards in each case are directed to
different aspects of commercial conduct. 32
Footnotes
Footnote 29. UCC 3-103(4) [1990 Rev].
This element is not present in the pre-1990 version of Article 3. New Bedford Inst. for
Sav. v Gildroy, 36 Mass App 647, 634 NE2d 920, 25 UCCRS2d 450, review den 418
Mass 1106, 639 NE2d 1082.
278 Standard of good faith in 1952 Article 3
View Entire Section

Under the 1952 version of Article 3 of the Uniform Commercial Code, there is no
specific definition of "good faith" for use in the article, so the definition of good faith
found in UCC 1-201(19) applies. 33 Under this definition, "good faith" means
honesty in fact in the conduct or transaction concerned. 34 Good faith entails the
absence of bad faith. 35
Under the 1952 Article 3, a subjective test of good faith is employed, and good faith as a
requirement for holder-in-due course status requires honesty only, and not the exercise of
due care. 36 The subjective test focuses on the state of mind of the person in question,
37 and requires honesty of intent rather than the absence of circumstances which would
put an ordinarily prudent holder on inquiry. 38 Therefore, a taker acts in good faith as
long as he or she does not have actual knowledge of some fact which would prevent a
commercially honest person from taking the instrument. 39 Thus, where a payee
negotiated a note to a bank which took it with neither notice of any defect nor knowledge
of facts making acceptance of the note an act of bad faith, the bank was a holder in due
course though it had agreed to act as escrow agent in dealings between the maker and the
payee. 40
A lack of good faith must be the result of actual, not constructive, knowledge of
wrongdoing tantamount to dishonesty or bad faith, 41 and the absence of fidelity to the
obligations of morals and honor. 42 Bad faith is nothing less than guilty knowledge or
willful ignorance. 43

Footnotes
Footnote 33. Von Gohren v Pacific Nat'l Bank, 8 Wash App 245, 505 P2d 467, 12
UCCRS 133.
Forms: Instruction to jury"Good faith" defined. 6 Am Jur Pl & Pr Forms (Rev),

Uniform Commercial Code : Article 1General Provisions 1:24.
Footnote 35. Antonacci v Denner (Fla App D3) 149 So 2d 52, cert den (Fla) 155 So 2d
617.
The granting of summary judgment in favor of a bank was error where there was a
question of fact raised as to the bank's status as a holder in due course in that the bank
gave immediate clearance to a check upon the request of the account holder, although the
account was chronically overdrawn, and also failed to observe the normal commercial
practice of waiting for the checks to clear before paying on them. Seinfeld v Commercial
Bank & Trust Co. (Fla App D3) 405 So 2d 1039, 32 UCCRS 1137.
Footnote 36. First Nat'l Bank v Creston Livestock Auction, Inc. (Iowa) 447 NW2d 132, 9
UCCRS2d 1281; Unbank Co. v Dolphin Temporary Help Services, Inc. (Minn App) 485
NW2d 332, 19 UCCRS2d 810; Taves v Griebel (Minn App) 363 NW2d 73, 40 UCCRS
514; Dubin v Hudson County Probation Dep't (Law Div) 267 NJ Super 202, 630 A2d
1207, 22 UCCRS2d 558; Bank of New York v Welz (Sup) 118 Misc 2d 645, 460
NYS2d 867, 35 UCCRS 1600; Merrick v Peterson, 25 Wash App 248, 606 P2d 700, 28
UCCRS 1387.
Footnote 37. Bowling Green, Inc. v State Street Bank & Trust Co. (1 Mass) 425 F2d 81,
7 UCCRS 635; Community Bank v Ell, 278 Or 417, 564 P2d 685, 21 UCCRS 1349, reh
den 279 Or 245, 566 P2d 903.
Footnote 38. Leininger v Anderson (Minn) 255 NW2d 22, 21 UCCRS 1104; Eldon's
Super Fresh Stores, Inc. v Merrill Lynch, Pierce, Fenner & Smith, Inc., 296 Minn 130,
207 NW2d 282, 12 UCCRS 490; Sanitary & Improv. Dist. No. 32 v Continental Western
Corp., 215 Neb 843, 343 NW2d 314, 38 UCCRS 516.
UCCRS2d 461, 42 ALR5th 771; Scarsdale Nat'l Bank & Trust Co. v Toronto-Dominion
Bank (SD NY) 533 F Supp 378, 33 UCCRS 996; Mann v Leasko (2nd Dist) 179 Cal App
2d 692, 4 Cal Rptr 124; Chemical Bank of Rochester v Haskell, 51 NY2d 85, 432
NYS2d 478, 411 NE2d 1339, 29 UCCRS 1529, reh den 51 NY2d 1009 and reh den 51
NY2d 1009 and reh den 51 NY2d 1009; Banco Mercantil de Sao Paulo S.A. v Nava
(Sup) 120 Misc 2d 517, 466 NYS2d 198, 37 UCCRS 165.
Footnote 40. Baraban v Manatee Nat'l Bank (Fla App D2) 212 So 2d 341.
Footnote 41. First Federal Sav. Bank v Tazzia (SD NY) 696 F Supp 904; Barnett Bank of
Palm Beach County, N.A. v Regency Highland Condominium Asso. (Fla App D4) 452
So 2d 587, 38 UCCRS 1289, review dismd (Fla) 458 So 2d 273.

Footnote 42. Vandam Check Cashing Corp. v David J. Askin, Jr., Inc. (NY Civ Ct) 10
UCCRS 839.
Footnote 43. Phoenix Mortg. & Loan Co. v Martin, 102 Fla 1061, 136 So 673; First Nat'l
Bank v Fazzari, 10 NY2d 394, 223 NYS2d 483, 179 NE2d 493, 89 ALR2d 1324; Hall v
Bank of Blasdell, 306 NY 336, 118 NE2d 464.
279 Duty of inquiry
View Entire Section

Although the definition of notice in Article 1 of the Uniform Commercial Code includes
not only actual knowledge but also reason to know that a fact exists, 44 the definition of
good faith under the pre-1990 Article 3 means honesty in fact and rejects the objective
standard of good faith and a prudent person's duty of inquiry. 45 Under the pre-1990
Article 3, in the absence of the actual knowledge of wrongdoing tantamount to bad faith
as contemplated by Article 3, a holder of a note holds in due course unfettered by any
duty to undertake an elaborate inquiry into underlying transactions. 46 However, bad
faith may be presumed from a reckless refusal to inquire. 47 A duty of inquiry will be
implied only if circumstances revealed a deliberate desire by the holder to evade
knowledge of a claim by the maker. 48 Therefore, for example, the holder of a
promissory note is not obligated to make any inquiry into the nature of the transaction or
the ability of the makers to pay, and thus will be deemed to have taken the note in good
faith and without notice of any defense or claim as a holder in due course, where the
holder has no knowledge of purported inconsistency between financial information
provided on the makers' subscription application to the payee of the note and financial
information reported on the makers' tax return. 49 Ordinarily, under the pre-1990
Article 3, when an instrument appears regular on its face, the holder should not be under
a duty of inquiry unless, under the circumstances, there are suspicions so cogent and
obvious that to remain passive would amount to bad faith. 50
But Revised Article 3 has moved away from the former subjective test of good faith and
adopts a standard that is at least on its face both objective and subjective. 51 Revised
Article 3 is concerned with the fairness of conduct rather than the care with which an act
is performed. 52
Observation: Presumably, then, if the observance of reasonable commercial

standards of fair dealing would dictate that under the circumstances there exists a duty
to make inquiry, then the holder would have a duty to make inquiry in order to take the
instrument in good faith and thereby attain holder-in-due-course status.
Footnotes
Footnote 44. 284.

Footnote 45. 278.
Footnote 46. Barnett Bank of Palm Beach County, N.A. v Regency Highland
Condominium Asso. (Fla App D4) 452 So 2d 587, 38 UCCRS 1289, review dismd (Fla)
458 So 2d 273; Mid-Continent Nat'l Bank v Bank of Independence (Mo App) 523 SW2d
569, 16 UCCRS 1286.
Footnote 47. 280.
Footnote 48. Schwegmann Bank & Trust Co. v Simmons (CA5 La) 880 F2d 838, 9
UCCRS2d 602, reh den (CA5) 1989 US App LEXIS 15188; Mid-Continent Nat'l Bank v
Bank of Independence (Mo App) 523 SW2d 569, 16 UCCRS 1286.
Footnote 49. National Union Fire Ins. Co. v Woodhead (2 NY) 917 F2d 752, 12
UCCRS2d 1076.
Footnote 50. Hollywood Nat'l Bank v International Business Machines Corp. (2nd Dist)
38 Cal App 3d 607, 113 Cal Rptr 494, 14 UCCRS 782.
Footnote 51. 277.
280 Negligence
View Entire Section

Under the pre-1990 Article 3 of the Uniform Commercial Code, the test of a holder's
good faith is knowledge of facts, not due care or negligence. 53 Mere negligence or lack
of diligence on the part of the purchaser of a negotiable instrument for value and before
maturity, with respect to infirmities in the paper or defects in the title to it, will not defeat
a holder's title or right of recovery; even gross negligence is not sufficient, although it
may be considered, with other circumstances, as evidence of bad faith. 54
However, negligence, and particularly gross negligence, may be considered with other
circumstances as evidence of bad faith. 55 Bad faith may be presumed from a reckless
refusal to inquire. 56 Bad faith sufficient to deny holder-in-due-course status is a
conscious state which can include deliberate avoidance of inquiry by one who fears what
inquiry would bring to light. 57 Protection afforded a holder in due course cannot be
used to shield one who simply refuses to investigate when facts known to him or her
suggest an irregularity concerning the commercial paper that the holder purchases. 58
Observation: The definition of good faith in revised Article 3 requires not only
honesty in fact but also "observance of reasonable commercial standards of fair
dealing." Although fair dealing is a broad term that must be defined in context, it is
clear that it is concerned with the fairness of conduct rather than the care with which an
act is performed. Failure to exercise ordinary care in conducting a transaction is an
entirely different concept than failure to deal fairly in conducting the transaction. 59
Footnotes
Footnote 53. Barnett Bank of Palm Beach County, N.A. v Regency Highland
Condominium Asso. (Fla App D4) 452 So 2d 587, 38 UCCRS 1289, review dismd (Fla)
458 So 2d 273; Baraban v Manatee Nat'l Bank (Fla App D2) 212 So 2d 341; Industrial
Nat'l Bank v Leo's Used Car Exchange, Inc., 362 Mass 797, 291 NE2d 603, 11 UCCRS
917.
Footnote 54. Valley Nat'l Bank v Porter (8 Iowa) 705 F2d 1027, 83-1 USTC 9352, 36
UCCRS 207, 52 AFTR 2d 83-5092; Money Mart Check Cashing Center, Inc. v Epicycle
Corp. (Colo) 667 P2d 1372, 36 UCCRS 1255; Industrial Nat'l Bank v Leo's Used Car
Exchange, Inc., 362 Mass 797, 291 NE2d 603, 11 UCCRS 917; St. Cloud Nat'l Bank &
Trust Co. v Sobania Constr. Co., 302 Minn 71, 224 NW2d 746, 15 UCCRS 679.
Footnote 55. Industrial Nat'l Bank v Leo's Used Car Exchange, Inc., 362 Mass 797, 291
NE2d 603, 11 UCCRS 917.
Footnote 56. Saka v Sahara-Nevada Corp., 92 Nev 703, 558 P2d 535, 20 UCCRS 958.
UCCRS2d 808, related proceeding (CA7 Wis) 15 F3d 660.
Footnote 58. Stewart v Thornton, 116 Ariz 107, 568 P2d 414, 22 UCCRS 990.
Footnote 59. 277.
281 Taking at discount or purchasing at less than face value
View Entire Section

Although the Uniform Commercial Code has no express provision dealing with the effect
of discount or purchase of an instrument at less than its face value, the rules of pre-Code
law have been applied. 60 The mere fact that a note is purchased for an amount less than
its face value is not of itself sufficient to charge the purchaser with notice of existing
equities. 61 However, the fact that an instrument is discounted or purchased at less than
its face value is a circumstance to be considered with all the evidence in determining
whether the purchaser acquired the instrument in good faith and without notice. 62 A
discount of nine percent, for example, although large, was not so great under the
circumstances as to support an inference that the plaintiff holder knew the notes had been
dishonestly or improperly acquired. 63
The fact that a note was offered and purchased at an unusual and unbusinesslike discount,
or at a grossly inadequate price, on the other hand, may be sufficient to put the purchaser
upon a duty of inquiry and, taken together with other facts, might bar the
holder-in-due-course status of the purchaser. 64 Therefore, where a purchaser has an
anticipated return representing the equivalent of an annual interest rate of 203 percent,
the extraordinarily favorable terms of the note clearly indicate that this is an unusual type
of commercial transaction, and a subsequent purchaser will be denied
Footnotes
Footnote 60. UCC 1-103, stating that the general principles of law and equity
supplement the UCC unless displaced by particular provisions of the Code.
While an offer to sell a secured note for two-thirds its value is not itself sufficient to raise
an inference that the instrument is tainted, it is a circumstance fairly to be considered in
determining the question of a buyer's good faith. Wilson v Steele (2nd Dist) 211 Cal App
3d 1053, 259 Cal Rptr 851, mod (Cal App 2nd Dist) slip op.
UCCRS2d 808, related proceeding (CA7 Wis) 15 F3d 660; Chemical Bank of Rochester
v Ashenburg, 94 Misc 2d 64, 405 NYS2d 175.
Footnote 62. Chemical Bank of Rochester v Ashenburg, 94 Misc 2d 64, 405 NYS2d
175; Kitchen v Loudenback, 48 Ohio St 177, 26 NE 979.
Footnote 63. Overseas Credit Corp. v Cal-Tech Systems, Inc. (1st Dept) 20 App Div 2d
355, 247 NYS2d 252, motion den 14 NY2d 757 and motion den 14 NY2d 758 and affd
14 NY2d 909, 252 NYS2d 316, 200 NE2d 859.
Footnote 64. In re Nusor (BAP9 Cal) 123 BR 55, 91 CDOS 844, 91 Daily Journal DAR
1019, 13 UCCRS2d 773; First American Nat'l Bank v Christian Foundation Life Ins. Co.,
242 Ark 678, 420 SW2d 912, 4 UCCRS 287; Sample v Hundred Lakes Corp., 107 Fla
568, 145 So 193 (decided under former law); Security Cent. Nat'l Bank v Williams
(Franklin Co) 52 Ohio App 2d 175, 6 Ohio Ops 3d 167, 368 NE2d 1264, 22 UCCRS
1196.
Footnote 65. In re Nusor (BAP9 Cal) 123 BR 55, 91 CDOS 844, 91 Daily Journal DAR
1019, 13 UCCRS2d 773.
282 Question for court or jury
View Entire Section

Under both the revised and pre-1990 Article 3 of the Uniform Commercial Code, it is
generally for the jury to determine whether the holder of an instrument took it in good
faith. 66
All of the circumstances must be considered in determining whether the transferee took
the paper in good faith so as to satisfy that element of being a holder in due course. 67
In determining the issue of good faith regarding the status of one as a holder in due
course, the jury must decide whether the circumstances under which the purported holder
acquired the instrument were such that a reasonable person could have participated in the
transaction and been honest "in fact" in believing that the sale of the instrument to such
person was legitimate; this conclusion depends upon an assessment of the purported
holder's credibility. 68 Where there is no evidence that the taker failed to act in good
faith, it is to be concluded that the taker did act in good faith. 69 Where the evidence is
undisputed and conclusive, it is the court's duty to decide the point as a matter of law,
since any other rule would impair the negotiability of instruments and seriously impair
commercial transactions. 70
Footnotes
Footnote 66. Manufacturers & Traders Trust Co. v Murphy (WD Pa) 369 F Supp 11, 13
UCCRS 1064; Sample v Hundred Lakes Corp., 107 Fla 568, 145 So 193 (decided under
former law); McCarthy v Kasperak (Cuyahoga Co) 3 Ohio App 3d 206, 3 Ohio BR 234,
444 NE2d 472, 35 UCCRS 540.
Footnote 67. McCarthy v Kasperak (Cuyahoga Co) 3 Ohio App 3d 206, 3 Ohio BR 234,
444 NE2d 472, 35 UCCRS 540.
Footnote 68. McCarthy v Kasperak (Cuyahoga Co) 3 Ohio App 3d 206, 3 Ohio BR 234,
444 NE2d 472, 35 UCCRS 540.
Footnote 69. Ashland State Bank v Elkhorn Racquetball, 246 Neb 411, 520 NW2d 189,
24 UCCRS2d 968.
Footnote 70. Manufacturers & Traders Trust Co. v Murphy (WD Pa) 369 F Supp 11, 13
UCCRS 1064.
5. Taking Instrument Without Notice of Claims and Defenses [283-302]
283 Generally
View Entire Section

In order to be a holder in due course, a holder must take the instrument without notice
that the instrument is overdue or has been dishonored, without notice that the instrument
contains an unauthorized signature or has been altered, without notice of any claim to the
instrument, and without notice of any defense or claim in recoupment. 71

With respect to the requirement that a holder in due course take without notice of any
third-party claim to the instrument, such a claim may be based on ownership, right to
possession, or rescission of a negotiation. 72 Thus, a transferee who takes a note with
notice of a defense on the part of any person is not a holder in due course. 73 But the
taker of a note was a holder in due course when it had no notice that there was a defense
against the original debtor in that the latter had withheld certain amounts from an escrow
account. 74
Footnotes
Footnote 71. UCC 3-302(1)(c) [1952]; UCC 3-302(a)(2)(iii), 3-302(a)(2)(iv),

3-302(a)(2)(v) [1990 Rev].
Notice of defenses or infirmities in a note defeats holder-in-due-course status. Federal

Deposit Ins. Corp. v World University, Inc. (CA1 Puerto Rico) 978 F2d 10, 23 FR Serv
3d 1373.
As to notice that an instrument is overdue or has been dishonored, see 290 et seq.
As to notice that the instrument contains an unauthorized signature or has been altered,
see 586.
As to notice of any claim to the instrument, see 283, 276 et seq.
As to notice of defense or claim in recoupment, see 297 et seq.
ALR4th 212.

courseDraft purchased without notice of defect or defense. 6A Am Jur Pl & Pr Forms
Footnote 73. Arcanum Nat'l Bank v Hessler, 69 Ohio St 2d 549, 23 Ohio Ops 3d 468, 433
NE2d 204, 33 UCCRS 604.
Footnote 74. Dupuis v Federal Home Loan Mortgage Corp. (DC Me) 879 F Supp 139.
284 What constitutes notice to person or organization; when is notice received
View Entire Section

As generally defined in the Uniform Commercial Code, a person has "notice" of a fact
when either: 75
He or she has actual knowledge of it
He or she has received a notice or notification of it
From all the facts and circumstances known to the party at the time in question he or
she has reason to know that it exists
A person "knows" or has "knowledge" of the fact when that person has actual knowledge
of it; the term "discover" or "learn," or a word or phrase of similar import, refers to
knowledge rather than to reason to know. 76
A person "notifies" or "gives" a notice or notification to another person by taking such

steps as may be reasonably required to inform the other in ordinary course, whether or
not such other person actually comes to know of it. 77 A person "receives" a notice or
notification when it comes to his attention, or when it is duly delivered at the place of
business through which the contract was made or at any other place held out by him as
the place for receipt of such communications. 78
Notice, knowledge, or a notice or notification received by an organization is effective for

a particular transaction from the time when it is brought to the attention of the individual
conducting the transaction, and in any event from the time when it would have been
brought to his attention if the organization had exercised due diligence. 79 An
organization exercises due diligence if it maintains reasonable routines for
communicating significant information to the person conducting the transaction and there
is reasonable compliance with the routines. 80
Definition: The term "organization" includes a corporation, government or

governmental subdivision or agency, business trust, estate, trust, partnership or
association, two or more persons having a joint or common interest, or any other legal
or commercial entity. 81
Comment: This definition encompasses every type of entity or association,

excluding an individual, acting as such. The definition of "organization" includes a
number of entities or associations not specifically mentioned in the prior definition of
"person," namely, government, governmental subdivision or agency, business trust,
trust and estate. 82
Due diligence does not require an individual acting for the organization to communicate
information unless such communication is part of his regular duties or unless he has
reason to know of the transaction and that it would be materially affected by the
information. 83
Comment: This provision makes clear that reason to know, knowledge, or a

notification, although "received" for instance by a clerk in Department A of an
organization, is effective for a transaction conducted in Department B only from the
time when it was or should have been communicated to the individual conducting that
transaction. 84

Footnotes
In order to have "notice" of a defense so as to preclude holder-in-due-course status, the

taker of the instrument must have actual knowledge of the defense. Depew Dev. v AT &
A Trucking Corp. (4th Dept) 210 App Div 2d 974, 621 NYS2d 242, 26 UCCRS2d 1166.
A person must have "subjective, actual knowledge" of the claim or defense in order to be
barred from being a holder in due course because of such matter. Bankers Trust v 236
Beltway Inv. (ED Va) 865 F Supp 1186, 26 UCCRS2d 776.
285 General notoriety or publication; record notice
View Entire Section

Article 3 of the Uniform Commercial Code provides that the public filing or recording of
a document does not of itself constitute notice of a defense, claim in recoupment, or
claim to the instrument. 85 Thus, "notice" in the context of what bars a taker from being
a holder in due course requires actual knowledge of the facts that give notice. 86 These
provisions manifest a reluctance to tie negotiable instruments to the doctrine of
constructive notice. 87 In other words, the constructive notice arising from a recording
is not the notice required by these provisions of the Uniform Commercial Code. 88
Therefore, for example, the fact that a bank subscribes to a service which reports the
filing of financing statements does not establish that the bank had notice that a check
which it cashed represents the proceeds from the sale of collateral covered by a security
interest where so many months intervened that the "notice" may have been forgotten. 89

Footnotes
One taking a negotiable instrument is not precluded from taking it as a holder in due
course by the operation of a record notice. Taylor v American Nat'l Bank, 64 Fla 525, 60
So 783.
Footnote 86. Indyk v Habib Bank, Ltd. (CA2 NY) 694 F2d 54, 35 UCCRS 158.
Footnote 87. Saloga v Central Kansas Credit Union, 245 Kan 668, 783 P2d 339, 10
UCCRS2d 866.
Footnote 88. National Sec. Fire & Casualty Co. v Mazzara, 289 Ala 542, 268 So 2d 814,
11 UCCRS 1006.
Footnote 89. McCook County Nat'l Bank v Compton (CA8 SD) 558 F2d 871, 21 UCCRS
1360, cert den 434 US 905, 54 L Ed 2d 191, 98 S Ct 302.
286 Close business association of payee and holder
View Entire Section

The view has been taken by some courts that a close business association between the
payee and one who purchases an instrument from the payee implies the knowledge of
such facts as to show bad faith or renders the purchaser such a participant in the
transaction between the payee and the maker as to preclude the purchaser's being a holder
in due course of the instrument. 90 The typical example is a finance company which
customarily purchases paper issued to a particular seller of goods or services and usually
furnishes the seller with forms of notes and contracts. 91 Thus, a finance company
which arranges with a dealer to finance his sales of goods, and furnishes him with printed
forms for conditional sales contracts and promissory notes, bearing the company's name
and, subsequently, following a sale by the dealer, pays him and takes the note of his
customer, takes the note with notice of its infirmities, for the finance company is so
closely connected with the entire transaction that it cannot be said to be an innocent
purchaser of the note. 92
Observation: The holder-in-due-course doctrine has been abolished with respect to

many consumer credit transactions as a matter of both state and federal law. 93
Footnotes
Footnote 90. Arcanum Nat'l Bank v Hessler, 69 Ohio St 2d 549, 23 Ohio Ops 3d 468, 433
NE2d 204, 33 UCCRS 604 (holding that the general rule in Ohio is that a transferee does
not take an instrument in good faith and is therefore not a holder in due course where

there are sufficient facts to indicate that the transferee, by virtue of its unusually close
relationship with the transferor, had reason to know or should have known of infirmities
in the underlying transaction from which the instrument originated).
Where a holder has aided and counseled the payee in its business matters to such an
extent that the holder is bound to know the circumstances surrounding the instrument, the
holder cannot be regarded as a holder in due course and is bound by the maker's defense
against the payee). Commercial Credit Corp. v Orange County Machine Works, 34 Cal
2d 766, 214 P2d 819.
Footnote 91. Vasquez v Superior Court of San Joaquin County, 4 Cal 3d 800, 94 Cal Rptr
796, 484 P2d 964, 9 UCCRS 11, 53 ALR3d 513; Morgan v Reasor Corp., 69 Cal 2d 881,
73 Cal Rptr 398, 447 P2d 638 (superseded by statute on other grounds as stated in Prunty
v Bank of America (1st Dist) 37 Cal App 3d 430, 112 Cal Rptr 370).
Footnote 92. Mutual Finance Co. v Martin (Fla) 63 So 2d 649, 44 ALR2d 1.
Annotation: Transferee of commercial paper given by purchaser of chattel and secured

by conditional sale, retention of title, or chattel mortgage, as subject to defenses which
chattel purchaser could assert against seller, 44 ALR2d 8 ( 25 superseded by
against seller, 39 ALR3d 518).
Footnote 93. 5A Anderson, Uniform Commercial Code 3d 3-302:69, 3-302:75.
287 Imputation of knowledge to principal
View Entire Section

It is a fundamental principle of law that a principal is bound by the acts of his or her
agent, so far, at least, as the acts are within the scope of his authority, or so far as what
the agent does is within the ordinary and usual scope of the business which he is
authorized to transact. 94 Instruments executed by a principal through an agent acting
within the scope of his authority are the acts of the principal. 95 Under the Uniform
Commercial Code, notice to an agent is ordinarily notice to the principal. 96 Also, under
the Code, notice, knowledge, or a notice or notification received by an organization is
effective for a particular transaction from the time when it is brought to the attention of
the individual conducting the transaction, and in any event, from the time when it would
have been brought to his attention if the organization had exercised due diligence. 97
An organization exercises due diligence if it maintains reasonable routines for
communicating significant information to the person conducting the transaction and there
is reasonable compliance with the routine, but due diligence does not require an
individual acting for the organization to communicate information unless such
communication is part of his or her regular duties or unless he or she has reason to know
of the transaction and that the transaction would be materially affected by the
information. 98
Comment: This provision removes any basis for the fear that a large business
organization would be required to make an extensive investigation before purchasing
commercial paper to determine whether it had notice of an adverse claim. 99
However, notice will not be imputed to a principal where the evidence shows that the
agent is acting adversely to the principal, or is acting for himself or herself. 1
Conversely, notice to a corporation is notice to its directors, 2 officers, and agents. 3
But where no agency relationship exists, of course, knowledge will not be imputed;
therefore, where the relationship between the Government National Mortgage
Association and a mortgage company from which the association purchased notes was
not that of principal and agent so as to impute knowledge of the company to the
association, the association will not be prevented from becoming a holder-in-due-course.
4
Footnotes
Footnote 94. Bliss v California Cooperative Producers, 112 Cal App 2d 507, 247 P2d 85.
Footnote 95. 3 Am Jur 2d, Agency 89 et seq.
Footnote 96. Red River Commodities v Eidsness (ND) 459 NW2d 805, 13 UCCRS2d
1076, related proceeding (ND) 459 NW2d 811, 13 UCCRS2d 1084.
Footnote 97. 284.
Footnote 98. UCC 1-201(27)
Footnote 1. Corporacion Peruana De Aeropuertos y Aviacion Comercial v Boy (Fla App

D2) 180 So 2d 503 (decided under former law); Matteawan Mfg. Co. v Chemical Bank &
Trust Co., 244 App Div 404, 279 NYS 495, mod on other grounds 272 NY 411, 3 NE2d
845.
Footnote 2. Greenville Gas Co. v Reis, 54 Ohio St 549, 44 NE 271.
Footnote 3. McCurdy v Stevens (Hamilton Co) 30 Ohio App 545, 165 NE 855.
Footnote 4. Midfirst Bank v C.W. Haynes & Co. (DC SC) 893 F Supp 1304, 27
UCCRS2d 1292, affd (CA4 SC) 1996 US App LEXIS 12567.
288 Time of notice
View Entire Section

The proper time for determining whether a recipient of a negotiable instrument has notice
of a claim or defense so as to preclude the recipient's status as a holder in due course is
the time of negotiation of the instrument to the holder. 5 The Uniform Commercial
Code provides that in order to be effective, notice to a purchaser must be received at such
time and in such manner as to give a reasonable opportunity to act on it. 6 Knowledge
or notice that is acquired after the taker has become the holder of the instrument is
immaterial; otherwise stated, subsequently acquired knowledge does not operate
retroactively so as to disentitle the holder from the status as a holder in due course. 7 So
it is immaterial to one's status that the transferee of a note learns of his or her transferor's
fraud after the instrument has been negotiated to the transferee under circumstances
making the transferee a holder in due course. 8 Therefore, notice received by the
president of a bank one minute before the bank's teller cashes a check is not effective to
prevent the bank from becoming a holder in due course. 9
Whether a holder of notes in a series has such knowledge as bars the holder from being a
holder in due course must be determined with respect to each note as of the time that it
was taken and the knowledge which had been acquired by the time the last note was
taken cannot be imputed to the taking of the earlier notes and, therefore, the
later-acquired knowledge did not bar holder-in-due-course status with respect to a note
which had been taken before such knowledge was acquired. 10
When a later note transaction is such that the original note is discharged, the creditor's
due-course status with respect to the original note does not carry over to the subsequent
note and the creditor must establish that he or she is a favored holder of the later note
when the defense is raised. 11
Footnotes
Footnote 5. Allison-Kesley AG Center, Inc. v Hildebrand (Iowa) 485 NW2d 841, 19

UCCRS2d 480 (decided under 1952 Article 3).
Footnote 6. UCC 3-304(6) [1952]; UCC 3-302(f) [1990 Rev].
Forms: Instruction to juryNotice ineffective unless holder afforded reasonable

opportunity to act. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code, Negotiable
Instruments 3:124.
Footnote 7. Mann v Andrus (2nd Dist) 169 Cal App 2d 455, 337 P2d 473; Kroh v Pronto
Petroleum Co. (Colo App) 536 P2d 860, 17 UCCRS 804; Tipton v Heeren, 109 Nev 920,
859 P2d 465.
Footnote 10. Slaughter v Jefferson Federal Sav. & Loan Asso., 176 US App DC 49, 538

F2d 397, 19 UCCRS 171, 19 UCCRS 534.
Footnote 11. Lazere Financial Corp. v Crystal Mart, Inc., 78 Misc 2d 379, 357 NYS2d
973, 14 UCCRS 1173.
289 Forgotten notice
View Entire Section

Where one taking an instrument contends that he did not have notice of the claim or
defense at the time of negotiation although he had notice at a prior time, the doctrine of
"forgotten notice" may be applicable; if it is found by the trier of fact that the earlier
notice had in fact and in good faith been forgotten by the later time when the paper was
taken, the forgotten notice is not effective as notice. 12 In other words, it may be a
jury question as to whether the taker had forgotten the notice or inadvertently omitted to
look for the notice, and that such a lapse of memory and omission to look for the notice,
if established, would constitute mere negligence and not bad faith which would destroy
the taker's status as a holder in due course. 13 However, application of the doctrine
has been denied where its strict application would be unrealistic, and it is applied with
great caution in the case of a simple note as contrasted with a bond of general issue. 14
Comment: The Uniform Commercial Code leaves open the time and circumstances
under which notice may cease to be effective. Therefore, cases such as one holding
that it was a jury question whether a dealer in bonds could take as a holder in due
course of negotiable bonds, where the dealer received notice that they had been stolen
but purchased them some weeks after receiving the notice, are not overruled. 15
Footnotes
Footnote 12. McCook County Nat'l Bank v Compton (CA8 SD) 558 F2d 871, 21 UCCRS
1360, cert den 434 US 905, 54 L Ed 2d 191, 98 S Ct 302.
Footnote 13. Graham v White-Phillips Co., 296 US 27, 80 L Ed 20, 56 S Ct 21, 102
ALR 24.
Footnote 14. First Nat'l Bank v Fazzari, 10 NY2d 394, 223 NYS2d 483, 179 NE2d 493,
89 ALR2d 1324.
Footnote 15. Official Comment 25 to UCC 1-201, referring to Graham v White-Phillips

Co., 296 US 27, 80 L Ed 20, 56 S Ct 21, 102 ALR 24 (decided under former law).
Annotation: Notice which has been forgotten as affecting status as holder in due
course, 89 ALR2d 1330.

b. Notice that Instrument is Overdue or has been Dishonored [290-293]
290 Generally
View Entire Section

In order to be considered a holder in due course under the Uniform Commercial Code,
one must have taken an instrument without notice that it is overdue or has been
dishonored or that there is an uncured default with respect to the payment of another
instrument issued as part of the same series. 16 However, the fact that a transferee took
an instrument after an installment was overdue does not show that he did not act in good
faith when there is nothing to show that he knew that it was overdue or that he knew of
any defense at the time of the transfer to him. 17 Also, the fact that the holder took
several notes at the time when the first was overdue does not prevent the holder from
being a holder in due course as to those notes which were not overdue. 18
Practice guide: The transferee of a note is not required to establish affirmatively that
the instrument was not in default at the time that it was transferred to him. 19
Under the "shelter" doctrine incorporated in Article 3, a holder who acquires an

instrument from a holder in due course or from a successor in interest of a holder in due
course, even with notice that it is overdue or has been dishonored, may assert the rights
of a holder in due course. 20
Footnotes
Footnote 16. UCC 3-304(3)(a) [1952]; UCC 3-302(a)(2)(iii) [1990 Rev].
Requiring a garnishee to pay a garnishor's obligation represented by a note held by the

judgment debtor as to which one or more payments have matured could not subject the
garnishee to liability to a holder in due course to whom the judgment debtor subsequently
negotiates the note because, as to the overdue payments, there can be no holder in due
course. Coleman Music & Games Co. v McDaniel (Fla App D5) 411 So 2d 193.
An assignee taking notes and mortgages after the instruments were in default took the
instruments as a holder not in due course and subject to all equities and defenses in the
instruments, including an equitable lien vested in a prior pledgee for value to whom the
instruments had been informally assigned as security for a debt but to whom the
instruments had never physically been delivered. Guaranty Mortg. & Ins. Co. v Harris
(Fla App D1) 182 So 2d 450, revd on other grounds (Fla) 193 So 2d 1.
A corporation which took a note from a payee after maturity and while the note was in
default was not a holder in due course, and any defense which would have been available
to the indorsers against the payee was available against the corporation. L & S
Enterprises, Inc. v Miami Tile & Terrazzo, Inc. (Fla App D3) 148 So 2d 299.

As to what constitutes notice, see 284.

courseLack of notice that there was uncured default in payment of other instrument
issued as part of series. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Footnote 17. DH Cattle Holdings Co. v Smith (1st Dept) 195 App Div 2d 202, 607
NYS2d 227, 22 UCCRS2d 799.
An investor, assigned a mortgage by an investment corporation in payment of a claim

against an affiliate company, was a holder in due course of the promissory note which
was executed with the mortgage where the note was taken without notice that it was
overdue or dishonored and without notice of any claim to or defense against it by any
person. Thomas v State Mortg., Inc., 176 Mich App 157, 439 NW2d 299, 9 UCCRS2d
1276, app den 433 Mich 913.
Footnote 18. Farmers & Merchants State Bank v Mann, 87 SD 90, 203 NW2d 173.
Footnote 19. First Nat'l Bank v Lohman (Colo App) 827 P2d 583, 16 UCCRS2d 1098
(decided under 1952 Article 3).
Footnote 20. 253, 255.
291 When instrument is overdue
View Entire Section

The Uniform Commercial Code defines when an instrument is overdue, which would bar
a taker from being a holder in due course. 21 The Code treats demand and time
instruments separately. 22 Within the category of demand instruments, checks and
nonchecks are treated separately, 23 while within the category of time instruments,
instruments payable at a definite time and instruments payable in installments are treated
separately. 24
An instrument payable on demand becomes overdue at the earliest of the following times:
25
(1) on the day after the day demand for payment is duly made;
(2) if the instrument is a check, 90 days after its date;
(3) if the instrument is not a check, when the instrument has been outstanding for a
period of time after its date which is unreasonably long under the circumstances of the
particular case in light of the nature of the instrument and usage of the trade. 26

Comment: Under the 1952 version of Article 3, a holder that took a demand note
had notice that it was overdue if it was taken "more than a reasonable length of time
after its issue. "In substitution for this test, the revised provision requires the trier of
fact to look at both the circumstances of the particular case and the nature of the
instrument and trade usage. Whether a demand note is stale may vary a great deal
depending on the facts of the particular case. 27
Should the unlikely situation arise in which a noncheck demand instrument is overdue by
a lapse of time and a demand is thereafter made, it is the earlier overdue date based on the
lapse of time that controls. 28
With respect to an instrument payable at a definite time, the instrument is overdue in

accordance with the following rules:
(1) if the principal is payable in installments and a due date has not been accelerated, the
instrument becomes overdue upon default under the instrument for nonpayment of an
installment, and the instrument remains overdue until the default is cured;
(2) if the principal is not payable in installments and the due date has not been
accelerated, the instrument becomes overdue on the day after the due date; and
(3) if a due date with respect to principal has been accelerated, the instrument becomes
overdue on the day after the accelerated due date. 29
Unless the due date of principal has been accelerated, an instrument does not become
overdue if there is default in payment of interest but no default in payment of principal.
30 This rule is based on the premise that there has only been a default of interest and
that this default is not accompanied by a default in the payment of principal or by any
subsequent acceleration of the instrument because of the default in payment of interest.
When there is also a default in payment of principal or there is also an acceleration of the
instrument, the instrument is overdue in accordance with the rules governing such
defaults. 31
Comment: The provisions covering time instruments follow the distinction made
under former Article 3 between defaults in payment of principal and interest. 32
Footnotes
Annotation: What constitutes, under the Uniform Negotiable Instruments Law or

Commercial Code, a reasonable time for taking a demand instrument, so as to support
the taker's status as holder in due course, 10 ALR3d 1199.
Forms: AnswerDefensePlaintiff not holder in due courseNotice of default under

installment note. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
292 --When instrument overdue under 1952 Article 3
View Entire Section

Under the 1952 version of Article 3 of the Uniform Commercial Code, a purchaser has
notice that an instrument is overdue if he or she has reason to know that any part of the
principal amount is overdue or that there is uncured default in payment of another
instrument of the same series; 33 that acceleration of the instrument has been made; 34
or that he or she is taking a demand instrument after demand has been made or more than
a reasonable length of time after its issue; a reasonable time for a check drawn and
payable within the states and territories of the United States and the District of Columbia
is presumed to be thirty days. 35
As with the revised Article 3, the prior version declares that knowledge that there has
been default in payment of interest on the instrument or in payment of any other
instrument, except one of the same series, does not of itself give the purchaser notice of a
defense or claim. 36
Footnotes
Footnote 33. UCC 3-304(3)(a) [1952].
Footnote 34. UCC 3-304(3)(b)v [1952].
Footnote 35. UCC 3-304(3)(c) [1952].

Footnote 36. UCC 3-304(4)(f) [1952].
293 Note purchased after maturity
View Entire Section

A holder is not a holder in due course when the note is purchased after maturity. 37
Therefore, a federal agency taking over a failed financial institution is not a holder in due
course of paper that had already passed its maturity prior to the exercise of federal
control. 38 The rationale for the rule that a taker after maturity cannot be a holder in due
course is that the age of the paper is a circumstance which should put the taker upon
inquiry that there must be some matter of defense, even though the mere maturity of the
paper does not in itself give any indication of any specific defense. 39
Footnotes
Footnote 37. St. Bernard Sav. & Loan Ass'n v Cella (ED La) 826 F Supp 985, motion gr
(ED La) 1993 US Dist LEXIS 13283, summary judgment gr, summary judgment den,
partial summary judgment den, claim dismissed (ED La) 856 F Supp 1166, affd without
op (CA5 La) 55 F3d 632 (decided under 1952 Article 3).
Footnote 38. St. Bernard Sav. & Loan Ass'n v Cella (ED La) 826 F Supp 985, motion gr
(ED La) 1993 US Dist LEXIS 13283, summary judgment gr, summary judgment den,
partial summary judgment den, claim dismissed (ED La) 856 F Supp 1166, affd without
op (CA5 La) 55 F3d 632 (decided under prior Article 3).
Footnote 39. Copeland v Anderson, 15 Ariz App 60, 485 P2d 1177 (pre-Code case).
c. Notice of Unauthorized Signature or Alteration [294]
294 Generally
View Entire Section

In order to be considered a holder in due course, a person must have taken an instrument
without notice that the instrument contains an unauthorized signature or has been altered.
40
Comment: The requirement that a holder take an instrument without notice of

forgery or alteration is stated separately from the requirement that a holder take
without notice of defenses to the instrument in the revised Article 3 of the Uniform
Commercial Code because forgery and alteration are not technically defenses under
that section of the revised Article 3 enumerating defenses and claims in recoupment. 41
Footnotes
Footnote 40. UCC 3-304(1)(a) [1952]; UCC 3-302(a)(2)(iv) [1990 Rev], stating that a
purchaser has notice of a claim or defense if an instrument is so incomplete, bears such
visible evidence of forgery or alteration, or is otherwise so irregular as to call into
question its validity, terms, or ownership or to create an ambiguity as to the party to pay.
As to instruments bearing apparent evidence of forgery or alteration, see 264 et seq.
As to what constitutes notice, see 284.

courseNo notice of unauthorized signature. 6A Am Jur Pl & Pr Forms (Rev),
AnswerDefensePlaintiff not holder in due courseMaterial alteration constituted

notice. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:118.
AnswerDefensePlaintiff not holder in due courseNotice that signature of maker of

note was obtained by fraud. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Footnote 41. Official Comment 2 to UCC 3-302, referring to UCC 3-305(a) [1990
Rev].
d. Notice of Claim to Instrument [295, 296]
295 Generally
View Entire Section

In order to qualify as a holder in due course, a holder must have taken an instrument
without notice of any claim to the instrument described in the statute relating to claims of
a property or possessory right in an instrument or its proceeds, including a claim to
rescind negotiation and to recover the instrument or its proceeds. 42
Public filing or recording of a document does not of itself constitute notice of a claim to
the instrument. 43

Footnotes
Footnote 42. UCC 3-302(1)(c) [1952]; UCC 3-302(a)(2)(v), referring to UCC 3-306
[1990 Rev].
A holder who takes a note with notice of the maker's absolute right to rescind is properly
chargeable with the ramifications of that knowledge. First International Bank, Ltd. v L.
Blankstein & Son, Inc., 59 NY2d 436, 465 NYS2d 888, 452 NE2d 1216, 36 UCCRS
565; Merchants Mortg. & Trust Corp. v Dawe (Colo App) 754 P2d 418.
Purchasers of an interest in a promissory note were not holders in due course where an
investigation made by one of the purchasers as to various parties' interests in the note had
provided actual notice of claims against the instrument. Brantley v Karas, 220 Va 489,
260 SE2d 189, 27 UCCRS 1332.
Where a check was delivered to a party as part of a proffered settlement and such party
had actual notice of the defense that the check was conditionally delivered subject to
acceptance of it as settlement of the account, the party was not a holder in due course.
Losson v Whitson (Tex Civ App Amarillo) 535 SW2d 406, 19 UCCRS 1169.
Footnote 43. 285.
296 Notice of claim arising out of breach of fiduciary duty
View Entire Section

If an instrument is taken from a fiduciary for payment or collection or for value, the taker
has knowledge of the fiduciary status of the fiduciary, and the represented person makes
a claim to the instrument or its proceeds on the basis that the transaction of the fiduciary
is a breach of fiduciary duty, the following rules apply:
(1) Notice of breach of fiduciary duty by the fiduciary is notice of the claim of the
represented person. 44
(2) In the case of an instrument payable to the represented person or the fiduciary as
such, the taker has notice of the breach of fiduciary duty if the instrument is taken in
payment of or as security for a debt known by the taker to be a personal debt of the
fiduciary; taken in a transaction known by the taker to be for the personal benefit of the
fiduciary; or deposited to an account other than an account of the fiduciary, as such, or an
account of the represented person. 45
(3) If an instrument is issued by the represented person or the fiduciary, as such, and
made payable to the fiduciary personally, the taker does not have notice of the breach of
fiduciary duty unless the taker knows of the breach of fiduciary duty. 46
(4) If an instrument is issued by the represented person or the fiduciary, as such, to the
taker as payee, the taker has notice of the breach of fiduciary duty if the instrument is
taken in payment of or as security for a debt known by the taker to be the personal debt of
the fiduciary; taken in a transaction known by the taker to be for the personal benefit of
the fiduciary; or deposited to an account other than an account of the fiduciary, as such,
or an account of the represented person. 47
Definitions: Article 3 defines "fiduciary" as an agent, trustee, partner, corporate

officer or director, or other representative owing a fiduciary duty with respect to an
instrument, 48 and defines "represented person" as the principal, beneficiary,
partnership, corporation, or other person to whom the duty of a fiduciary is owed. 49
Comment: The statute applies only if the person dealing with the fiduciary "has
knowledge of the fiduciary status of the fiduciary." Notice which does not amount to
actual knowledge is not enough for the statute to apply. In most cases, the taker will be
a bank or other organization and the individual who receives and processes the
instrument will be a clerk who has no knowledge of any fiduciary status of the person
from whom the instrument is received. In such cases, the statute does not apply
because knowledge of the organization is determined by the knowledge of the
individual conducting that transaction, that is, the clerk who receives and processes the
instrument. The requirement that the taker have knowledge rather than notice is meant
to limit the statute to relatively uncommon cases in which the person who deals with
the fiduciary knows all the relevant facts: the fiduciary status and that the proceeds of
the instrument are being used for the personal debt or benefit of the fiduciary or are
being paid to an account that is not an account of the represented person or of the
fiduciary, as such. Mere notice of these facts is not enough to put the taker on notice of
the breach of fiduciary duty and does not give rise to any duty of investigation by the
taker. 50
The prior Article 3 of the Uniform Commercial Code merely states that the purchaser has
notice of a claim against the instrument when he or she has knowledge that a fiduciary
has negotiated the instrument in payment of or as security for his own debt or in any
transaction for his own benefit or otherwise in breach of duty. 51 Similarly, knowledge
that any person negotiating the instrument is or was a fiduciary does not of itself give the
purchaser notice of a defense or claim under the prior Article 3. 52
Footnotes
Observation: An Illinois court has held that this provision of the UCC will ordinarily
prevail over a provision of the Uniform Fiduciaries Act which states that a bank is not
liable for allowing a known fiduciary to dishonestly deposit a check into his personal
account unless the bank has "actual knowledge" of a breach of fiduciary duty. County
of Macon v Edgcomb (4th Dist) 274 Ill App 3d 432, 211 Ill Dec 136, 654 NE2d 598,
27 UCCRS2d 1328.

Definition: A person "knows" or has "knowledge" of a fact when he has actual

knowledge of it. 159.
Footnote 51. UCC 3-304(2) [1952].
Under the prior Code provision, an instrument's purchaser who knows that "a fiduciary
has negotiated" it "for his own benefit" has notice of a claim against an instrument. First
Fed. Sav. & Loan Ass'n v Gump & Ayers Real Estate (Utah App) 771 P2d 1096, 105
Utah Adv Rep 27, 8 UCCRS2d 720, 9 UCCRS2d 139, petition for certiorari filed (Utah)
107 Utah Adv Rep 81 and cert den (Utah) 776 P2d 916, 110 Utah Adv Rep 61.
Allegations that checks were drawn to the order of a bank as payee but were negotiated
by an employee of the drawer for her own benefit, if true, would establish adequate
notice so as to preclude the bank from holder-in-due-course status as to the checks. Sun'n
Sand, Inc. v United California Bank, 21 Cal 3d 671, 148 Cal Rptr 329, 582 P2d 920, 24
UCCRS 667, 21 UCCRS2d 1003 (criticized on other grounds in Roy Supply, Inc. v
Wells Fargo Bank (3rd Dist) 39 Cal App 4th 1051, 46 Cal Rptr 2d 309, 95 CDOS 8401,
95 Daily Journal DAR 14450, 27 UCCRS2d 1363).
Summary judgment was denied because a triable issue of fact existed as to whether a
bank was a holder in due course of a customer's business checks that it allowed the
customer's dishonest accountant to deposit and use to obtain a personal money order;
UCC 3-304(2) says a purchaser takes an instrument with notice of a claim against it
(and therefore is not a holder in due course) if the purchaser knows that a fiduciary has
negotiated an instrument to pay for a personal debt in breach of his fiduciary duty, but on
the evidence, it was unclear whether the bank should be charged with knowledge that the
accountant had deposited the instrument (which was payable to the bank) for a personal
debt in breach of his fiduciary duty. Pecan Shoppe v Bank of Dodge County, 217 Ga
App 295, 457 SE2d 223, 95 Fulton County D R 1504, 26 UCCRS2d 1168,
reconsideration den (Apr 19, 1995) and cert den (Ga) 1995 Ga LEXIS 931.
Footnote 52. UCC 3-304(4)(e) [1952].
Knowledge that the person negotiating an instrument is or was a fiduciary does not in and
of itself give a purchaser notice of a claim or defense, thereby destroying
holder-in-due-course status. Soloff v Dollahite (Tenn App) 779 SW2d 57, 10 UCCRS2d
884.
e. Notice of Defense or Claim in Recoupment [297-302]
297 Generally; notice barring holder-in-due-course status

View Entire Section
To qualify as a holder in due course, a holder must take an instrument without notice that
any party has a defense 53 or claim in recoupment described in the Uniform Commercial
Code. 54 If a holder takes a check with notice of a maker's defense, the holder will be
denied the status of a holder in due course. 55
Comment: Other Code provisions make a distinction between defenses to the

obligation to pay the instrument and claims in recoupment by the maker or drawer that
may be asserted to reduce the amount payable on the instrument. Because of this
distinction, which was not made in former Article 3, the statute setting forth the
requirements to qualify as a holder in due course refers to both a defense and a claim in
recoupment. 56
Footnotes
Footnote 53. UCC 3-302(1)(c) [1952]; UCC 3-302(a)(2)(vi) [1990 Rev], referring to
UCC 3-305(a) [1990 Rev].
Mortgagors created an issue as to whether they were defrauded and whether a bank trust
company was immune to the mortgagors' fraud defense as a holder in due course, where
the mortgagors alleged that the original mortgagee had defrauded them and that the bank
trust company, which purchased their mortgages as a trustee under a pooling
arrangement, was aware of this fraud at the time of its purchase of the notes so that it was
not a holder in due course. James v Nationsbank Trust Co. (FLA.) Nat'l Ass'n (Fla App
D5) 639 So 2d 1031, 19 FLW D1482 (decided under pre-1990 Code).
The assignee of a promissory note qualified as a holder in due course because it lacked
notice that the underlying loan transaction between a bank customer, the maker, and the
bank, the payee, violated state law restricting the circumstances in which a bank may
make a loan for the purpose of enabling a customer to purchase stock in a bank. State St.
Bank & Trust Co. v Strawser (MD Pa) 908 F Supp 249.
Footnote 54. UCC 3-302(a)(2)(vi) [1990 Rev], referring to UCC 3-305(a) [1990
Rev].
Footnote 55. Vail Nat'l Bank v Finkelman (Colo App) 800 P2d 1342.
298 Notice or knowledge of consideration
View Entire Section

A recital of consideration in itself constitutes no notice of a failure of consideration for an

instrument, 57 unless the recital makes the instrument conditional on the performance of
an executory consideration. 58
Mere notice of the existence of an executory promise does not prevent the holder from
taking in due course even though such notice appears in the instrument itself. 59 On the
other hand, knowledge that consideration for an instrument is illegal prevents one from
taking it as a holder in due course, 60 as does full knowledge of the lack and failure of
the consideration between the original parties. 61 One who takes a negotiable
instrument knowing that it was issued without consideration takes with notice of a
defense of a party to the instrument and cannot be a holder in due course. 62
Footnotes
Footnote 57. Jockmus v Claussen & Knight, Inc. (DC Fla) 47 F2d 766 (decided under
former law).
Footnote 58. Siegel v Chicago Trust & Sav. Bank, 131 Ill 569, 23 NE 417; First Nat'l
Bank v School Dist., 173 Minn 383, 217 NW 366, 56 ALR 1369.
Footnote 59. 299.
Footnote 60. Hurley v Union Trust Co., 244 App Div 590, 280 NYS 474; Walker v
Walbridge, 151 Misc 329, 271 NYS 473.
Footnote 61. A. B. G. Invest., Inc. v Selden (Fla App D4) 336 So 2d 444; Arcanum Nat'l
Bank v Hessler, 69 Ohio St 2d 549, 23 Ohio Ops 3d 468, 433 NE2d 204, 33 UCCRS 604.
Footnote 62. Frequency Electronics, Inc. v National Radio Co. (SD NY) 422 F Supp 609,
193 USPQ 635, 20 UCCRS 680, affd (2 NY) 546 F2d 497, 20 UCCRS 684; Fink v
Pennsylvania Builders, Inc. (1954) 6 Pa Chest 214.
299 --Executory promise or failure of consideration
View Entire Section

The prerevision Article 3 of the Uniform Commercial Code provides that knowledge that
an instrument is issued or negotiated in return for an executory promise does not of itself
give the purchaser notice of a claim or defense, unless the purchaser has notice that a
defense or claim has arisen from the terms thereof. 63 The Code does not require a
holder to presume that a party will breach his promise and thereby give rise to a defense
to performance; only after the defense to an executory contract actually arises does the
obligation predicated upon the contract become voidable. 64
Observation: This provision of the 1952 Article 3 was omitted from the 1990
Revision.
Moreover, mere notice of the existence of an executory promise does not prevent the
holder from taking in due course, even though such notice appears in the instrument
itself. 65 While knowledge that the consideration has failed or will fail prevents one
from taking the instrument as a holder in due course, 66 a failure of consideration after a
bona fide transfer to the purchaser does not affect the character of his title. 67
Footnotes
Footnote 63. UCC 3-304(4)(b) [1952].
Knowledge that a note was given in consideration of an executory agreement of the

payee, which has not been performed, will not deprive the holder of the character of bona
fide holder unless he had knowledge as of the time of transfer that the agreement had
been breached. Howard v Biggs (Okla) 378 P2d 306; Marriott v Harris, 235 Va 199, 368
SE2d 225, 6 UCCRS2d 744; Commerce Trust Co. v Denson (Mo App) 437 SW2d 94.
Under pre-Code law, it was a well-settled rule that knowledge by the purchaser of a bill
or note that the consideration therefor was an executory contract did not prevent the
purchaser from becoming a bona fide holder thereof. Bassett v Avery, 15 Ohio St 299;
Robertson v Northern Motor Sec. Co., 105 Fla 644, 142 So 226 (per Davis, J., concurring
in part and dissenting in part; decided under former law); Whitehall Realty Corp. v
Manufacturers Trust Co. (Fla) 100 So 2d 617; Jockmus v Claussen & Knight, Inc. (DC
Fla) 47 F2d 766 (decided under former law).
Footnote 64. Israel Discount Bank, Ltd. v Rosen, 59 NY2d 428, 465 NYS2d 885, 452
NE2d 1213, 36 UCCRS 574.
Footnote 66. 298.
Footnote 67. Jockmus v Claussen & Knight, Inc. (DC Fla) 47 F2d 766 (decided under
former law).
300 Knowledge of separate agreement
View Entire Section

Under the revised Article 3 of the Uniform Commercial Code, the obligation of a party to
an instrument to pay the instrument may be modified, supplemented, or nullified by a
separate agreement of the obligor and the person entitled to enforce the instrument if the

instrument is issued or the obligation is incurred in reliance on the agreement or as part of
the same transaction giving rise to the agreement. 68 To the extent an obligation is
modified, supplemented, or nullified by an agreement under this provision, the agreement
is a defense to the obligation. 69
Comment: The separate agreement might be a security agreement or mortgage, or it

might be an agreement that contradicts the terms of the instrument. The UCC permits
a party obligated to pay an instrument to raise the separate agreement as a defense, but
such defense would not be good against a subsequent holder in due course who took
the instrument without notice of the agreement. 70
Illustration: Suppose X requested credit from Creditor who is willing to give the
credit only if an acceptable accommodation party will sign the note of X as comaker.
Y agrees to sign as comaker on the condition that Creditor also obtain the signature of
Z as comaker. Creditor agrees and Y signs as comaker with X. Creditor fails to obtain
the signature of Z on the note. Under the provisions governing the liability of issuers
of notes and of accommodation parties, Y is obliged to pay the note, but the provision
relating to separate agreements affecting instruments applies. In this case, the
agreement modifies the terms of the note by stating a condition to the obligation of Y
to pay the note. This case is essentially similar to a case in which a maker of a note is
induced to sign the note by fraud of the holder. Although the agreement that Y not be
liable on the note unless Z also signs may not have been fraudulently made, a
subsequent attempt by Creditor to require Y to pay the note in violation of the
agreement is a bad-faith act. Article 3, in treating the agreement as a defense, allows Y
to assert the agreement against Creditor, but the defense would not be good against a
subsequent holder in due course of the note that took it without notice of the
agreement. If there cannot be a holder in due course because the note at the time it is
issued or first comes into possession of a holder contains a statement, required by
applicable statutory or administrative law, to the effect that the rights of a holder or
transferee are subject to claims or defenses that the issuer could assert against the
original payee, a subsequent holder that took the note in good faith, for value and
without knowledge of the agreement would not be able to enforce the liability of Y.
This result is consistent with the risk that a holder not in due course takes with respect
to fraud in inducing issuance of an instrument. 71
Observation: The effect of merger or integration clauses to the effect that a writing
is intended to be the complete and exclusive statement of the terms of the agreement or
that the agreement is not subject to conditions is left to the supplementary law of the
jurisdiction. 72
Under the prior Article 3, as with the revised version, between the obligor and his or her
immediate obligee or any transferee, the terms of an instrument may be modified or
affected by any other written agreement executed as a part of the same transaction, except
that a holder in due course is not affected by any limitation of his or her rights arising out
of the separate written agreement if he or she had no notice of the limitation when he or
she took the instrument. 73 Knowledge that an instrument was accompanied by a
separate agreement does not of itself give the purchaser notice of a defense or claim,
unless the purchaser has notice that a defense or claim has arisen from the terms thereof;
74 so mere notice of the existence of a separate agreement does not prevent the holder
from taking in due course, and such notice may appear on the instrument itself. 75 Also,
the right of a maker of a note to receive indemnification from the payee under certain
circumstances does not make a note voidable and deprive the assignee of
In other words, a purchaser of an instrument may become a holder in due course even
though he or she takes it with knowledge that it was accompanied by a separate
agreement, if he or she has no notice of any defense or claim arising from the terms of the
agreement. 77 But if the purchaser has notice of any default in the agreement which
gives rise to a defense or claim against the instrument, he is on notice to the same extent
as in the case of any other information as to the existence of a defense or claim. 78 Also,
if any limitation in the separate writing in itself amounts to a defense or claim, as in the
case of an agreement that the note is a sham and cannot be enforced, a purchaser with
notice of it cannot be a holder in due course. 79
The provision subjecting a holder in due course to limitations of his rights of which he
had notice at the time of taking also covers limitations which do not in themselves give
notice of a defense or claim, such as a condition providing that under certain conditions
the note will be extended for one year, and a purchaser with notice of such a limitation
may be a holder in due course but the holder takes the instrument subject to the
limitations. 80 This section also provides that a separate agreement does not affect the
negotiability of an instrument. 81
Footnotes
Footnote 73. UCC 3-119(1) [1952].
Article 3 provides that the obligations of the original parties to a transaction may be
modified or affected by any other written agreement executed as part of the transaction.
Dugas v Modular Quarters, Inc. (La App 3d Cir) 561 So 2d 192, 13 UCCRS2d 167.
Footnote 74. UCC 3-304(4)(b) [1952].
While a holder in due course is unaffected by the terms of a separate written agreement
of which he lacks notice, as between the obligor and his immediate obligee or a
transferee, the terms of another agreement executed as part of the same transaction may
modify or affect the terms of the instrument and, thus, the rights of the payee are not
necessarily the same as those of a holder in due course. Freitag v Lakes of Carriage
Hills, Inc. (Fla App D4) 467 So 2d 708, 10 FLW 565, 10 FLW 1166.

Footnote 76. First Fed. Sav. & Loan Ass'n v Gump & Ayers Real Estate (Utah App) 771
P2d 1096, 105 Utah Adv Rep 27, 8 UCCRS2d 720, 9 UCCRS2d 139, petition for
certiorari filed (Utah) 107 Utah Adv Rep 81 and cert den (Utah) 776 P2d 916, 110 Utah
Adv Rep 61.
Section 3-119 provides that a holder in due course is not affected by any limitation of his
rights arising out of a separate agreement between the obligor and his immediate obligee
if the holder had no notice of the limitation when the holder took the instrument. Leasing
Service Corp. v Crane (4 NC) 804 F2d 828, 3 UCCRS2d 329 (among conflicting
authorities on other grounds noted in Hulsey v West (10 Okla) 966 F2d 579).
Footnote 81. UCC 3-119(1) [1952].
301 Notice of accommodation
View Entire Section

Under the prerevised Article 3 of the Uniform Commercial Code, the obligation of an
accommodation party to pay the instrument is not affected by the fact that the person
enforcing the obligation had notice when the instrument was taken by that person that the
accommodation party signed the instrument for accommodation. 82
Observation: The revised Article 3 excludes this provision.

The prior Article 3 codified the pre-Code rule that knowledge of the accommodation
character of a signature does not of itself bar holder-in-due-course status. 83 Even
where accommodation paper necessarily involved an absence of consideration to the
accommodation party, the mere fact that a person took an instrument with knowledge that
it was accommodation paper generally did not preclude the party from being a holder in
good faith and in due course. 84 Moreover, another section of the prior Article 3 dealing
with the contract of an accommodation party provides that when the instrument has been
taken for value before it is due, the accommodation party is liable in the capacity in
which he or she has signed even though the taker knows of the accommodation. 85
One with notice or knowledge that accommodation paper is executed by an agent should
inquire into his authority, as a corporate accommodation party is ordinarily not liable to a
person who takes with notice of the accommodation character of the instrument. 86

Footnotes
Footnote 82. UCC 3-304(4)(c) [1952].
As to accommodation parties, generally, see 472 et seq.
Footnote 83. People's Finance & Thrift Co. v Moon, 44 Cal App 2d 223, 112 P2d 24.
Footnote 84. Rapp v Demmerle (Fla) 61 So 2d 481; Grannis v Stevens, 216 NY 583, 111
NE 263, reh den 217 NY 664, 112 NE 1060; Packard v Windholz, 88 App Div 365, 84
NYS 666, affd 180 NY 549, 73 NE 1129.
Footnote 85. UCC 3-415(2) [1952].
Footnote 86. J. Schnarr & Co. v Virginia-Carolina Chemical Corp., 118 Fla 258, 159 So
39 (decided under former law).
Knowledge by a bank that a note was executed in the name of the corporation by its
treasurer for the accommodation of a partnership of which the treasurer was a member is
sufficient to charge the bank with notice that the issuance of the note was beyond the
powers of the corporation. Citizen's Nat'l Bank v Florida Tie & Lumber Co., 81 Fla 889,
89 So 139 (decided under former law).
302 Notice of discharge of party to instrument
View Entire Section

Notice of discharge of a party, other than discharge in an insolvency proceeding, is not

notice of a defense, but discharge is effective against a person who became a holder in
due course with notice of the discharge. 87
Comment: Discharge is treated separately from the other defenses, notice of which
prevents a holder from qualifying as a holder in due course. Except for discharge in an
insolvency proceeding, which is specifically stated to be a real defense in UCC
3-305(a)(1) in the statute setting forth defenses to which even a holder in due course is
subject, discharge is not expressed in Article 3 as a defense. Discharge is effective
against anybody except a person having rights of a holder in due course who took the
instrument without notice of the discharge. Notice of discharge does not disqualify a
person from becoming a holder in due course. For example, a check certified after it is
negotiated by the payee may subsequently be negotiated to a holder. If the holder had
notice that the certification occurred after negotiation by the payee, the holder
necessarily had notice of the discharge of the payee as indorser. Notice of that
discharge does not prevent the holder from becoming a holder in due course, but the
discharge is effective against the holder. Notice of a defense of a maker, drawer, or
acceptor based on a bankruptcy discharge is different. There is no reason to give
holder-in-due-course status to a person with notice of that defense. 88

The fact that the taker of an instrument has notice that a party to the instrument has been
discharged is thus not notice of a defense under the Uniform Commercial Code that bars
the taker from being a holder in due course. However, if the person became a holder with
notice of the existing discharge, the holder, although he may be a holder in due course, is
subject to the defense of the discharge when recovery against the discharged person is
sought. An exception to this rule is made where the taker of the paper has notice that a
party to the paper has been discharged in insolvency proceedings and the taker is deemed
to have notice of such a defense as bars him from being a holder in due course. 89
Observation: Under the prior Article 3, a purchaser has notice of a claim or defense
if the purchaser has notice that all parties have been discharged. 90
Footnotes
Forms: AnswerDefenseDischarge in bankruptcy. 6A Am Jur Pl & Pr Forms

Footnote 89. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-302:15, 3-302:16.
Footnote 90. UCC 3-304(1)(b) [1952].
C. Lost, Stolen, or Destroyed Instruments [303-312]
Research References
UCC 3-804 [1952]; UCC 3-309 [1990]; UCC 3-309, 3-312, 4-302 [1991
Amendment]
ALR Digest: Lost Instruments 1, 2
ALR Index: Bills and Notes; Holder in Due Course; Lost or Destroyed Instruments;
3:67, 3:68
35 Am Jur POF2d 147, Foundation for Admission of Secondary Evidence
6A Anderson, Uniform Commercial Code 3d [Rev] 3-309:5, 3-309:7 through
3-309:16, 3-312:3, 3-312:8, 3-312:9, 3-312:11, 3-312:15, 3-312:19, 3-312:20
1. Lost or Missing Instruments, Generally [303-307]
303 Enforcement of lost, stolen, or destroyed instruments
View Entire Section

It is a well-recognized principle of law that the accidental or unintentional loss or

destruction of a written instrument does not, as a general rule, change or impair the
obligation of the parties thereto; rights evidenced by an instrument are not ordinarily lost.
91 The general rule that the accidental or unintentional loss or destruction of an
instrument does not impair the underlying rights and obligations of the parties applies to
negotiable instruments. 92 Commercial paper constitutes intangible property and only
represents or evidences legal title to, or the right to possess, property of intrinsic value,
and neither the value or money or funds it represents nor the legal right to receive the
funds or money it represents is "lost" when the paper evidence is lost or destroyed. 93
Both the pre-1990 version and the revised Article 3 of the Uniform Commercial Code
contain provisions permitting the enforcement of lost, destroyed, or stolen instruments
under certain circumstances. 94
Under revised Article 3, a person not in possession of an instrument is entitled to enforce

the instrument if all of the following apply:
The person was in possession of the instrument and entitled to enforce it when the loss
of possession occurred
The loss of possession was not the result of a transfer by the person or a lawful seizure
The person cannot reasonably obtain possession of the instrument because the
instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful
possession of an unknown person or a person who cannot be found or is not amenable to
service of process. 95
Comment: Section 3-309 is a modification of 3-804 of the pre-1990 Article 3. The

rights described in the revised section are those of "a person entitled to enforce the
instrument" at the time of loss, rather than those of an "owner" as stated in 3-804. 96
Under the pre-1990 Article 3, the owner of an instrument which is lost, whether by
destruction, theft, or otherwise, may maintain an action in his or her own name and
recover from any party liable thereon upon providing:
(1) proof of ownership;
(2) proof of the facts which prevent the owner's production of the instrument; and
(3) proof of its terms. 97 This provision of the pre-1990 Code does not define "owner."
98
The casualty to or reason for loss of possession of the instrument must be involuntary as
far as the plaintiff suing is concerned, or be unlawful. 99 Thus, the plaintiff cannot claim
the benefit of the provision governing the enforcement of lost, stolen, or destroyed
instruments as a shortcut procedure for rescinding a negotiation or voluntary transfer that
the plaintiff had made of the instrument. 1 If the loss of possession was the result of the
plaintiff's voluntary transfer of the instrument, the plaintiff cannot ignore the transfer and

seek to enforce the instrument that he or she no longer possesses. 2 The fact that the
plaintiff would be able to rescind a negotiation or set aside a transfer because of fraud or
other reason does not remove the bar imposed by the Code regarding voluntary transfers.
3
Observation: If a claimant is a person entitled to proceed under the section dealing

with lost, destroyed, or stolen instruments generally and is also a person who has the
right to assert a claim under the section dealing with lost, destroyed, or stolen cashier's,
teller's, or certified checks, 4 the claimant has the option to proceed under either
section. 5
Footnotes
Footnote 91. 52 Am Jur 2d, Lost and Destroyed Instruments 2.
Footnote 92. 52 Am Jur 2d, Lost and Destroyed Instruments 3.
As to the definition and characteristics of traveler's checks, see 49.
Footnote 93. Parker v Dudley (Fla App D5) 527 So 2d 240, 13 FLW 1268, 6 UCCRS2d
149, review den (Fla) 536 So 2d 243.
846.
Footnote 94. UCC 3-804 [1952]; UCC 3-309 [1991 Amendment].
The section of the pre-1990 UCC permitting a party to enforce a lost, stolen, or destroyed
instrument was added to the Uniform Commercial Code to provide a plaintiff claiming to
be an owner a method of recovery when it could not be proven that the plaintiff was a
holder of the instrument. Jernigan v Bank One, Texas, N.A. (Tex App Houston (14th
Dist)) 803 SW2d 774, 15 UCCRS2d 516.
Footnote 95. UCC 3-309 [1991 Amendment].
The owner of a lost, destroyed, or stolen negotiable instrument could proceed under
Article 3 by direct action against the makers and endorsers on the instrument without first
re-establishing the instrument in a separate action. Dunn v Willis (Fla App D5) 599 So
2d 271, 17 FLW D1362, 19 UCCRS2d 826 (decided under pre-1990 Code).
Forms: Complaint, petition, or declarationFor recovery on lost or stolen promissory

note. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:67.
Instruction to juryRight to enforce lost or stolen instrument. 6A Am Jur Pl & Pr

Footnote 96. Official Comment to UCC 3-309 [1991 Amendment].
Footnote 97. UCC 3-804 [1952].

Under UCC 3-804, an owner may recover on a lost promissory note by proving that the
note is lost and the terms of the obligation. Bean v Bluebonnet Sav. Bank FSB (Tex App
Dallas) 884 SW2d 520.
The owner of an instrument which is lost may maintain an action and recover on the
instrument upon proof of his ownership, proof of the facts which prevent his production
of the instrument, and proof of the terms of the instrument; evidence of the payee that the
original note had mysteriously disappeared from a desk drawer in a room in her home to
which a number of people, including the obligor, had access, and identification of copies
of the original note, was sufficient to create an issue for the jury. Gutierrez v Bermudez
(Fla App D5) 540 So 2d 888, 14 FLW 760, 9 UCCRS2d 1310.
Law Reviews: Slattery & Martinetti, The rights of "owners" of lost, stolen, or
destroyed instruments under UCC 3-804: Can they be holders in due course? 98
Commercial LJ 328 (Fall 1993).
Footnote 98. Jerstad v Warren, 73 Or App 387, 698 P2d 1033, 41 UCCRS 149 (noting
that when a stranger pays the paper at the request of the payee and the payee surrenders
the paper to the payor, thereby vesting the payor with the rights of the transferor, the
transferee is to be deemed the "owner" for the purpose of bringing suit).
Footnote 5. UCC 3-312(d) [1991 Amendment].
As to the right to assert a claim under a lost, destroyed, or stolen cashier's check, teller's
check, or certified check, see 308.
304 Inability to produce instrument
View Entire Section

The former possessor of an instrument seeking to bring a suit to enforce under Article 3
of the Uniform Commercial Code must establish the fact that the instrument itself cannot
be produced in court. 6 It is sufficient that the plaintiff demonstrate that he or she
"cannot reasonably obtain possession." 7 That is, the Code does not impose the standard
of absolute impossibility to produce the instrument, although in cases of physical
destruction, that severe test will of course be satisfied. 8
The absence of the instrument is excused when it is shown that the instrument has been
destroyed. 9 This destruction of the instrument may be by any means or by any person
with the exception that it must not have been a voluntary destruction by the person who
was then the holder. 10 Such a destruction would warrant the inference that the holder
had discharged the instrument and would make academic any question of right to sue on
the destroyed instrument. 11
The plaintiff also excuses the failure to produce the instrument in court when the plaintiff
shows that the location of the instrument is unknown to the him or her and cannot be
determined. 12
Observation: It appears that the "cannot be determined" language of the Code is to

be interpreted as "cannot reasonably be determined." 13 The use of the qualifying
adverb "reasonably" at the beginning of the section in question should be deemed to
modify all parts. 14
Finally, the plaintiff may sue on the lost instrument if he can show that the instrument
cannot be obtained because it is in the wrongful possession of a person who cannot be
reached either because his or her identity is unknown, or he or she cannot be found, or he
or she is not amenable to the service of process. 15
Footnotes
When the plaintiff does not make any claim that a commercial paper has been lost or
stolen, the section governing lost, destroyed, or stolen instruments does not apply. Lloyd
v Lawrence (5 Tex) 472 F2d 313, 11 UCCRS 1205.
As to the burden of proof of a person seeking enforcement of a lost, destroyed, or stolen

instrument, see 306.
Practice References Proof of unavailability of original documentLoss or destruction.

35 Am Jur POF2d 147, Foundation for Admission of Secondary Evidence 6.

305 Providing security to protect defendant
View Entire Section

The court may not enter judgment in favor of the person seeking to enforce a lost, stolen,
or destroyed instrument unless it finds that the person required to pay the instrument is
adequately protected against a loss that might occur by reason of a claim by another
person to enforce the instrument. 16 Adequate protection may be provided by any
reasonable means. 17
Comment: The revised provision in Article 3 of the Uniform Commercial Code is a

modification of the 1952 section governing lost, stolen, or destroyed instruments.
Under the revised Article 3, judgment to enforce the instrument cannot be given unless
the court finds that the defendant will be adequately protected against a claim to the
instrument by a holder who may appear at some later time. The court is given
discretion in determining how adequate protection is to be assured. Under the revised
provision, adequate security is a flexible concept. For example, there is substantial risk
that a holder in due course may make a demand for payment if the instrument was
payable to bearer when it was lost or stolen. On the other hand, if the instrument was
payable to the person who lost the instrument and that person did not indorse the
instrument, no other person could be a holder of the instrument. In some cases, there is
a risk of loss only if there is doubt about whether the facts alleged by the person who
lost the instrument are true. Thus, the type of adequate protection that is reasonable in
the circumstances may depend on the degree of certainty about the facts in the case. 18
The court, in entering judgment for the plaintiff on a lost or missing instrument, may thus
impose reasonable conditions necessary to protect the defendant from liability should the
missing instrument be presented at a later date by a person having the rights of a holder
in due course. 19 The Code does not specify what should or what may be required of the
plaintiff beyond stating that the protection afforded the defendant must be adequate and
at the same time must be provided by "reasonable means." 20
As with the revised sections, under the 1952 Article 3 when suit is brought upon an
instrument which is missing, whether lost, stolen, or destroyed, the court has the
discretion to require the plaintiff to furnish security to indemnify the defendant against
loss should there be further claims on the instrument in question. 21 The power to
require indemnity under UCC 3-804 is discretionary with the court, although as a
practical matter indemnity will always be required unless it is clear that no danger of
double liability exists. 22
Practice guide: When suit is brought on a lost check the indemnity requirement of
the state having the most significant contacts with the transaction will be applied. 23

The court, in fixing the indemnity to be entered when suit is brought on a stolen
instrument, may take into consideration the improbability that loss would ever be
sustained on the instrument because of the time that had elapsed and the fact that
payment would probably be refused because the paper was long overdue. 24
Footnotes
Footnote 16. UCC 3-309(b) [1991 Amendment].
Footnote 18. Official Comment to UCC 3-309 [1991 Amendment].
Footnote 19. 6A Anderson, Uniform Commercial Code 3d [Rev] 3:309:7.
Footnote 22. First Constr. Co. v Tri-South Mortg. Investors (Minn) 308 NW2d 298.
Footnote 23. National Shawmut Bank v International Yarn Corp. (SD NY) 322 F Supp
116, 8 UCCRS 1278.
Footnote 24. 487 Clinton Ave. Corp. v Chase Manhattan Bank, 63 Misc 2d 715, 313
NYS2d 445, 8 UCCRS 69.
306 Burden and standard of proof
View Entire Section

A person seeking enforcement of a lost, destroyed, or stolen instrument must prove the
terms of the instrument and his or her right to enforce it. 25 Although the provision of
the Uniform Commercial Code permitting the holder of lost, stolen, or destroyed paper to
sue is an exception to the requirement that the suit be brought by a holder and that the
holder be a person with possession of the paper, 26 because the plaintiff in such an
action is not in possession of the instrument and, as such, is technically not a "holder," he
or she must prove affirmatively every element essential to recovery on the instrument. 27
Such a party has a greater burden of proof than a plaintiff suing on an instrument that is
produced in court, and the scope of this burden is partially defined by the revised Code in
its requirements that a person seeking enforcement prove both the terms of the instrument
and that person's right to enforce the instrument. 28
The plaintiff also must carry the burden of showing that the conditions specified in the
Code have been satisfied. 29 This requirement is not expressly stated by the Code, but
may be implied from the phrase "seeking enforcement of an instrument pursuant to
subsection (a) must prove." 30 At any rate, the ordinary rule that allocates the burden of
proof to the party who will benefit by establishing the affirmative of an issue mandates
that the plaintiff carry the burden of proof necessary to bring him within the protection of
the Code and to excuse him from not producing the original instrument in court. 31
Certainly there is nothing in the Code that can be said to displace this pre-Code rule as to
burden of proof which accordingly continues in force. 32
The plaintiff has the burden of proving the terms of the missing instrument. 33
The party seeking to enforce establishes a prima facie case by showing the loss of the
original, showing that the copy offered in evidence was a photocopy and that the
signature thereon was that of the defendant; and such prima facie case is not overcome by
a mere denial that the note had been executed or that no demand had ever been made on
the note. 34
The plaintiff also has the burden of proving his or her right to enforce the instrument. 35
Whether the plaintiff is such a person is determined by the terms of the instrument and
the provisions of Article 3 establishing who is entitled to enforce an instrument. 36
The plaintiff suing on a lost or missing instrument finally has the burden of proving that
the defendant being sued signed the missing instrument or that it was signed on the
defendant's behalf by an authorized agent. 37 The Code does not impose this
requirement, but it necessarily follows from the fact that signing is not a term of the
instrument or an element of being entitled to enforce the instrument. 38 In order to
avoid the absurd result that a defendant could be held liable on a missing instrument that
he or she had not signed, it will be held that proof of the defendant's signature is implicit
in the section governing lost or missing instruments and that the burden of proof of such
signing is on the plaintiff. 39
If the party seeking to enforce a lost, destroyed, or stolen instrument meets the burden of
proving the terms of the instrument and the person's right to enforce it, the statute
governing proof of signatures and status as holder in due course applies to the case as if
the person seeking enforcement had produced the instrument. 40 Therefore, under the
revised Code, the burden regarding the signature is on the plaintiff, who must aver in his
or her complaint that the defendant signed the instrument in a stated capacity so that the
defendant may specifically deny the averment, or, failing to do so, be deemed to have
admitted that he or she had signed the instrument. 41
Under the pre-1990 Code, there is a conflict of authority as to whether the plaintiff suing
on a lost or stolen instrument is only required to produce "satisfactory" proof, 42 or must
present evidence that is "clear and convincing." 43
However, an appeals court found that the evidence substantially supported a trial court's
finding as to the existence and terms of a lost promissory note where the payee testified
that he had surrendered it to an officer of the corporate maker, where the officer testified
as to the note's execution and his presence at the execution, the payee and corporate
officer of the maker testified as to the note's contents and the fact that no one had been
able to find it after its surrender by the payee, and the guarantor of the note did not
dispute its existence, but simply stated that he could not recall it. 44

Footnotes
A holder may bring suit upon the instrument in his own name just as if the instrument
were available for production in court; however, it is necessary for him to prove the terms
of the missing instrument, and this requires that there be sufficient evidence produced of
his ownership of the instrument and of the facts which prevent its production in court.
Kraft v Sommer (4th Dept) 54 App Div 2d 598, 387 NYS2d 318, 20 UCCRS 475
(decided under pre-1990 Article 3).
Footnote 26. Hanalei, BRC, Inc. v Porter, 7 Hawaii App 304, 760 P2d 676, 7 UCCRS2d
1528.
Footnote 27. Investment Service Co. v Martin Bros. Container & Timber Products Corp.,
255 Or 192, 465 P2d 868, 7 UCCRS 373.
Annotation: Statute excluding testimony of one person because of death of another as

applied to testimony in respect of lost or destroyed instrument, 18 ALR3d 606.
Footnote 30. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-309:13, citing UCC
3-309(b).
As to the continued applicability of pre-Code law when not displaced by provisions in the
Code, see 18.
Footnote 34. Steven v Falese Land Co. (2d Dist) 50 Ill App 3d 231, 8 Ill Dec 581, 365
NE2d 967.
Under the former Article 3, the sufficiency of the proof of loss of an instrument is largely
a matter within the discretion of the trial court. Affiliated Capital Corp. v Musemeche
(Tex App Houston (14th Dist)) 804 SW2d 216, writ den (Apr 24, 1991); Barber v Ehrich
(Fla App D5) 394 So 2d 220, 31 UCCRS 1038.
As to the definition of persons entitled to enforce an instrument, see 235.

Footnote 40. UCC 3-309 [1990 Rev], referring to UCC 3-308 [1990 Rev].
As to signatures on an instrument, see 60 et seq.
Footnote 42. Union Sav. Bank v Cassing (Mo App) 691 SW2d 513, 41 UCCRS 135.
Footnote 43. Buster v Gale (Alaska) 866 P2d 837, 24 UCCRS2d 1164; Castellano v
Bitkower, 216 Neb 806, 346 NW2d 249, 38 UCCRS 561.
Footnote 44. Lutz v Gatlin, 22 Wash App 424, 590 P2d 359, 26 UCCRS 129, review den
92 Wash 2d 1007.
307 Evidence
View Entire Section

The absence of the original instrument will permit the admission into evidence of copies
of the instrument, 45 and the admissibility of the copies and of parol evidence generally
to establish the terms of the missing instrument will be covered by pre-Code law as to
evidence. 46 Therefore, secondary evidence of an instrument may be properly admitted
when the loss of the original has been established, 47 or a photocopy of a note may be
admissible in evidence when it is testified that the copy is a photocopy of the original and
that the original has been lost. 48
Footnotes
Footnote 47. Gutierrez v Bermudez (Fla App D5) 540 So 2d 888, 14 FLW 760, 9
UCCRS2d 1310; Aesoph v Golden (Minn App) 367 NW2d 639.
Footnote 48. Lester v Groves, 162 Ga App 590, 291 SE2d 785 (decided under UCC
3-804); Owen v Ostrum, 259 Mont 249, 855 P2d 1015, 23 UCCRS2d 614; Equitable Life
Assurance Soc. v Starr, 241 Neb 609, 489 NW2d 857.
2. Lost, Destroyed, or Stolen Cashier's Check, Teller's Check, or Certified Check

[308-312]
308 Generally
View Entire Section

The revised Article 3 of the Uniform Commercial Code provides special procedures for
asserting a claim to the amount of a lost, destroyed, or stolen cashier's check, teller's
check, or certified check. 49
Observation: Prior to the 1990 revisions 3-804, the general provision regarding the
enforcement of lost, stolen, or destroyed instruments governed enforcement of lost or
destroyed cashier's checks, teller's checks, or certified checks. 50
A typical case to which this provision applies is a case where a customer of a bank closes
an account and takes a cashier's check or teller's check of the bank as payment of the
amount of the account; in such a case the check will normally be payable to the customer.
51 In another typical case a cashier's check or teller's check is bought from a bank for
the purpose of paying some obligation of the buyer of the check; in such a case the check
may be made payable to the customer and then negotiated to the creditor by indorsement,
but often, the payee of the check is the creditor. 52 In the latter case the customer is a
"remitter," and the Code provision covers loss of the check by either the remitter or the
payee. 53 It also covers a loss of a certified check by either the drawer or payee. 54
Unlike the provisions applicable to lost, destroyed, or stolen instruments generally, the
special provisions of the revised Article 3 regarding cashier's checks, teller's checks, or
certified checks establish a nonjudicial method of determining claims relating to a limited
class of checks that are missing and, thereby, eliminate the cost and delay of judicial
proceedings. 55
An obligated bank against which a claim is made for payment of a lost or missing
cashier's check, teller's check, or certified check may not impose requirements beyond
those imposed under the Code; for example, the bank may not require the posting of a
bond or other form of security where such is not required under the Code. 56
Definition: An "obligated bank" means the issuer of a cashier's check or teller's

check or the acceptor of a certified check. 57
Under the revised Article 3 provision, a claimant may assert a claim to the amount of a
cashier's, teller's, or certified check that was lost, destroyed, or stolen, by a
communication to the obligated bank describing the check with reasonable certainty and
requesting payment of the amount of the check if:
(1) the claimant is the drawer or payee of a certified check or the remitter of a cashier's
check or teller's check;

(2) the communication contains or is accompanied by a declaration of loss of the
claimant with respect to the check;
(3) the communication is received at a time and in a manner affording the bank a
reasonable time to act on it before the check is paid; and
(4) the claimant provides reasonable identification if requested by the obligated bank. 58
Comment: An indorsee of a certified, cashier's, or teller's check is not covered,

because the indorsee is not an original party to the check or a remitter. Limitation to
an original party or remitter gives the obligated bank the ability to determine, at the
time it becomes obligated on the check, the identity of the person or persons who can
assert a claim with respect to the check. The bank is not faced with having to
determine the rights of some person who was not a party to the check at that time or
with whom the bank has not dealt. If a cashier's check is issued to the order of the
person who purchased it from the bank and that person indorses it over to a third
person who loses the check, the third person may assert rights to enforce the check
under the section on lost, destroyed, or stolen instruments but has no rights under the
section dealing specifically with cashier's checks. 59
If a claimant has the right to assert a claim under the section dealing with lost, destroyed,
or stolen cashier's, teller's, or certified checks and is also a person entitled to enforce such
a check so as to be entitled to proceed under the section dealing with lost, destroyed, or
stolen instruments generally, the claimant has the option to proceed under either section.
60
Comment: Under the section dealing with lost, destroyed, or stolen instruments
generally, a person seeking to enforce a cashier's check or teller's check may be
required by the court to give adequate protection to the issuing bank against a loss that
might occur by reason of the claim by another person to enforce the check. This might
require the posting of an expensive bond for the amount of the check. Moreover, the
general section regarding enforcement of lost instruments may only be utilized by
those persons entitled to enforce the check. It does not apply to a remitter of a cashier's
check or teller's check or to the drawer of a certified check, whereas the section
governing lost, destroyed, or stolen cashier's, teller's, and certified checks may be used
by other parties. The purpose of the latter section is to offer a person who loses such a
check a means of getting a refund of the amount of the check within a reasonable
period of time without the expense of posting a bond and with full protection of the
obligated bank. 61
Footnotes
A cashier's check, like all commercial paper, only represents or evidences legal title to
some property of intrinsic value, and that right is not lost if the paper evidence is lost or
destroyed; in this way, a cashier's check, like traveler's checks and money orders, is better
than cash, because loss of the paper is not a loss of the funds the paper represents. Parker
v Dudley (Fla App D5) 527 So 2d 240, 13 FLW 1268, 6 UCCRS2d 149, review den (Fla)
536 So 2d 243.
As to the definition of cashier's check, see UCC 3-104 [1990 Rev], discussed in 48.
As to the definition of certified check, see UCC 3-409 [1990 Rev], discussed in 48.
As to the definition of teller's check, see UCC 3-104 [1990 Rev], discussed in 48.
Footnote 50. Santos v First Nat'l State Bank, 186 NJ Super 52, 451 A2d 401, 35 UCCRS
518.
Footnote 56. Official Comment 2 to UCC 3-312 [1991 Amendment].
Footnote 57. UCC 3-312(a)(4) [1991 Amendment].
As to the requirement of a declaration of loss, see 309.
Footnote 60. UCC 3-312(d) [1991 Amendment].
As to the enforcement of lost, destroyed, or stolen instruments, generally, see 303 et

seq.
309 Declaration of loss
View Entire Section

The declaration of loss required by the revised Article 3 is a written statement, made
under penalty of perjury, to the effect that:
(1) the declarer lost possession of the check;
(2) the declarer is the drawer or payee of the check, in the case of a certified check, or the
remitter or payee of the check, in the case of a cashier's check or teller's check;
(3) the loss of possession was not the result of a transfer by the declarer or a lawful
seizure; and
(4) the declarer cannot reasonably obtain possession of the check because the check was
destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an
unknown person or a person that cannot be found or is not amenable to service of
process. 62
Delivery of a declaration of loss is a warranty of the truth of the statements made in the
declaration. 63
Comment: The warranty is made to the obligated bank and anybody who has a right
to enforce the check. If the declaration of loss falsely alleges loss of a cashier's check
that did not in fact occur, a holder of the check who was unable to obtain payment
because the statute caused the bank to dishonor the check would have a cause of action
against the declarer for breach of warranty. 64
The claim must be in writing, as the concept of delivery implies the transmission of a
tangible thing. 65
Footnotes
Footnote 62. UCC 3-312(a)(3) [1991 Amendment].
The general provision regarding the enforcement of lost, missing, or stolen instruments in
the 1952 Article 3 contains no such requirement. UCC 3-804 [1952].
310 Effect of claim; date enforceable
View Entire Section

If a claim for payment of a missing teller's check, cashier's check, or certified check is
asserted in compliance with the Uniform Commercial Code, the claim becomes
enforceable at the later of:
The time the claim is asserted

The 90th day following the date of the check, in the case of a cashier's check or teller's
check
The 90th day following acceptance, in the case of a certified check 66
Until the claim becomes enforceable, it has no legal effect and the obligated bank may
pay the check or, in the case of a teller's check, permit the drawee to pay the check;
payment to a person entitled to enforce the check discharges all liability of the obligated
bank with respect to the check. 67 If the claim becomes enforceable before the check is
presented for payment, the obligated bank is not obliged to pay the check and, when the
claim becomes enforceable, the obligated bank becomes obliged to pay the amount of the
check to the claimant if payment of the check has not been made to a person entitled to
enforce the check. 68
Comment: A claim asserted under the statute does not have any legal effect until the
date it becomes enforceable, which cannot be earlier than 90 days after the date of a
cashier's check or teller's check or 90 days after the date of acceptance of a certified
check. Thus, if a lost check is presented for payment within the 90-day period, the
bank may pay a person entitled to enforce the check without regard to the claim and is
discharged of all liability with respect to the check. This procedure ensures the
continued utility of cashier's checks, teller's checks, and certified checks as cash
equivalents. Virtually all such checks are presented for payment within 90 days. 69 If
the claim becomes enforceable and payment has not been made to a person entitled to
enforce the check, the bank becomes obligated to pay the amount of the check to the
claimant. When the bank becomes obligated to pay the amount of the check to the
claimant, the bank is relieved of its obligation to pay the check. Thus, any person
entitled to enforce the check, including even a holder in due course, loses the right to
enforce the check after a claim under the Code becomes enforceable. 70
After the claim becomes enforceable, the obligation of the bank runs to the claimant
unless it had made an otherwise proper payment of the check before the claim became
enforceable. 71 If payment had not been so made, the bank can only discharge its
liability by making payment to the claimant, and no other person has a right to payment.
72
Footnotes

311 Effect of payment of claim; discharge of bank
View Entire Section

Payment by a bank to a claimant whose claim has become enforceable under Article 3 of
the Uniform Commercial Code discharges all liability of the obligated bank with respect
to the check. 73 Thus, although after the bank has paid an enforceable claim a person
may appear with the missing instrument and demand its payment, the bank that paid the
claim has no further liability with respect to the missing instrument. 74
Comment: The only exception to the rule discharging the bank of all liability is the
unlikely case in which the obligated bank subsequently incurs liability with respect to
the check under the provision in Article 4 relating to a payor bank's responsibility for
the late return of an item. 75 For example, Obligated Bank is the issuer of a cashier's
check and, after a claim becomes enforceable, it pays the claimant under Article 3.
Later the check is presented to Obligated Bank for payment over the counter. Under
Article 3, Obligated Bank is not obliged to pay the check and may dishonor the check
by returning it to the person who presented it for payment. But the normal rules of
check collection are not affected by the section in Article 3 governing missing cashier's
checks. If Obligated Bank retains the check beyond midnight of the day of
presentment without settling for it, it becomes accountable for the amount of the check
under Article 4 even though it had no obligation to pay the check. 76
It follows from the provision stating that payment in accordance with the provisions of
the statute discharges a bank from all liability with respect to a missing cashier's check,
teller's check, or certified check, that it is immaterial that the bank made such payment
without any prior court order or approval, or that at a later date a court should determine
in some other proceeding that the bank had in fact made payment to the wrong person. 77
Comment: An obligated bank that pays the amount of a check to a claimant under
the Code is discharged of all liability on the check so long as the assertion of the claim
meets the requirements of the governing section. This release from liability is
important in cases of fraudulent declarations of loss. For example, if the claimant
falsely alleges a loss that in fact did not occur, the bank, so long as it acts in good faith,
may rely on the declaration of loss. On the other hand, a claim may be asserted only
by a person described in the statute. Thus, the bank is discharged only if it pays such a
person. Although it is highly unlikely, it is possible that more than one person could
assert a claim to the amount of a check. Such a case could occur if one of the
claimants makes a false declaration of loss. The obligated bank is not required to
determine whether a claimant who complies with the statute is acting wrongfully. The
bank may utilize procedures outside Article 3, such as interpleader, under which the
conflicting claims may be adjudicated. 78
Footnotes

As to the time at which a claim becomes enforceable, see 310.
312 Rights of bank and holder following payment to claimant
View Entire Section

If the obligated bank pays the amount of the check to a claimant as required under the
statute and the check is presented by a person having rights of a holder in due course, the
claimant is obliged to refund the payment to the obligated bank if the check is paid, or
pay the amount of the check to the person having rights of a holder in due course if the
check is dishonored. 79 In accordance with the Uniform Commercial Code, if a later
claimant who produces the instrument and seeks payment does not have the rights of a
holder in due course, he is not entitled to payment from either the formerly obligated
bank or the claimant who has received payment. 80 If the later claimant has the rights of
a holder in due course and the check was dishonored by the obligated bank, the later
claimant can compel the earlier claimant to refund to him the payment made by the
obligated bank. 81
Comment: Although it is unlikely that a lost check would be presented for payment
after the claimant was paid by the bank under Article 3, it is possible for it to happen.
Suppose the declaration of loss by the claimant fraudulently alleged a loss that in fact
did not occur. If the claimant negotiated the check, presentment for payment would
occur shortly after negotiation in almost all cases. Thus, a fraudulent declaration of
loss is not likely to occur unless the check is negotiated after the 90-day period has
already expired or shortly before expiration. In such a case the holder of the check,
who may not have noticed the date of the check, is not entitled to payment from the
obligated bank if the check is presented for payment after the claim becomes
enforceable. The remedy of the holder who is denied payment in that case is an action
against the claimant under the Code if the holder is a holder in due course, or for
breach of warranty. The holder would also have common-law remedies against the
claimant under the law of restitution or fraud. 82
When the payment made in accordance with Article 3 is in fact made to the wrong
person, the person who was entitled to payment may thus assert against any party any
non-Code remedy that might be available, such as an action for fraud or unjust
enrichment. 83 It is doubtful whether these remedies will be of much value to the person
who should have received payment, and non-Code limitations may preclude that party
from bringing such actions. 84 The most appropriate remedy may be to sue for breach of
warranty. 85
Footnotes
Footnote 79. UCC 3-312(c) [1991 Amendment].
VIII. PRESENTMENT, DISHONOR, NOTICE OF DISHONOR, AND

PROTEST [313-380]
A. Presentment [313-350]
Research References
UCC 1-201; UCC 3-102, 3-416, 3-501, 3-503 through 3-506, 3-511, 3-601; UCC
4-210 [1952]; UCC 3-111, 3-415, 3-501, 3-502, 3-504; UCC 4-104, 4-106, 4-107,
4-110 [1990 Rev]
ALR Digest: Bills and Notes 187-205, 216-222
ALR Index: Acceptance; Bills and Notes; Checks and Drafts; Collecting Bank;
Presentation or Presentment; Uniform Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms 92, 93; 6A Am Jur Pl & Pr
Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:266-3:287,
3:289, 3:290, 3:296, 3:298, 3:299
3A Am Jur Legal Forms 2d, Bills and Notes 41:58; 19 Am Jur Legal Forms 2d,
Uniform Commercial Code: Article 3Negotiable Instruments 253:2493, 253:2503,
253:2543
3-503:11, 3-503:12, 3-511:20;6A Anderson, Uniform Commercial Code 3d [Rev]
3-501:5 through 3-501:14, 3-502:4, 3-502:7, 3-504:4 through 3-504:7, 3-504:9, 3-511:6
1. In General [313-317]

313 Generally
View Entire Section

Presentment is a demand for acceptance or payment of a negotiable instrument made by

or on behalf of a person entitled to enforce the instrument. 86 For example, an
assertion by a subsequent holder or transferee of an instrument that he or she is the owner
or holder of the instrument and is entitled to acceptance or payment is sufficient to satisfy
the definition of presentment. 87
The purpose of presentment is to determine whether the drawee of a draft or the maker of
a note will accept or pay, as the case may be. 88 In the case of a draft payable on elapse
of a certain period after sight or acceptance, presentment also has the purpose of starting
the running of the period for payment. 89
Footnotes
As to persons by whom presentment may be made, see 331.
As to persons to whom presentment may be made, see 332.
Footnote 89. 314.
314 Necessity of presentment for acceptance
View Entire Section

Under the 1952 version of Article 3 of the Uniform Commercial Code, presentment for
acceptance, unless excused, is necessary in order to charge the drawer and indorsers of a
draft where the draft so provides, where the draft is payable elsewhere than at the
residence or place of business of the drawee, or where its date of payment depends upon
such presentment. 90 As used in this provision, the words "necessary to charge" mean
that the necessary proceeding is a condition precedent to any right of action against the
drawer or indorser; thus, such party is not liable and cannot be sued without the
proceedings, however long delayed, unless the proceeding is entirely excused. 91

Unless excused, therefore, the failure of a holder to make presentment to the maker, 92
or any delay in making presentment beyond the time that the instrument is due, 93
discharges the indorser from liability under Article 3.
Under this provision, the holder may, at his or her option, present for acceptance any
other draft payable at a stated time, 94 and thus is not required to wait until the due date
to know whether the drawee will accept it; however, if presentment is made and
acceptance is refused, the holder must give notice of dishonor. 95 There is no right to
present for acceptance a draft payable on demand, since a demand draft entitles the
holder to immediate payment, but not to acceptance. 96
Under the 1990 revision of Article 3, the presentment contemplated for most types of
drafts is presentment for payment. 97 However, if a draft is payable on elapse of a
period of time after sight or acceptance, presentment for acceptance is necessary in order
to start the running of the time period; if the drawee does not accept the draft upon
presentment, dishonor occurs on such date. 98 A draft payable at a definite time may be
dishonored by nonacceptance or nonpayment; thus, if such a draft is presented for
acceptance before the date payable but it is not accepted, it is dishonored as of the date of
its presentment for acceptance. 99
Observation: The rules under the 1990 Revision pertaining to drafts payable at a
definite time 1 and drafts payable at a stated period of time after sight or acceptance 2
follow the rules contained in the 1952 version 3 of Article 3. 4
Footnotes
Footnote 90. UCC 3-501(1)(a) [1952].
As to when presentment may be excused, generally, see 341 et seq.
23 ALR3d 932 17.
Duties of collecting bank with respect to presenting draft or bill of exchange for
acceptance, 39 ALR2d 1296.
Forms: Complaint, petition, or declarationAllegationBy holder of bill of

exchangePresentment for acceptance, refusal, and protest. 6A Am Jur Pl & Pr Forms
(Rev), Commercial Code : Article 3Negotiable Instruments 3:268-3:270.
Footnote 92. Gaffin v Heymann (RI) 428 A2d 1066, 32 UCCRS 176.
Footnote 93. Nevada State Bank v Fischer, 93 Nev 317, 565 P2d 332, 21 UCCRS 1384.
Footnote 94. UCC 3-501(1)(a) [1952].

Footnote 97. UCC 3-502(b)(1) [1990 Rev], covering unaccepted checks presented to
the payor bank other than for immediate payment over the counter; UCC 3-502(b)(2)
[1990 Rev], covering unaccepted drafts, other than documentary drafts, payable on
demand and to which UCC 3-502(b)(1) [1990 Rev] does not apply; UCC 3-502(c)
[1990 Rev], covering unaccepted documentary drafts payable on demand; UCC
3-502(d) [1990 Rev], covering accepted drafts.
Footnote 98. UCC 3-502(b)(4) [1990 Rev]; Official Comment 4 to UCC 3-502 [1990
Rev].
Footnote 99. UCC 3-502(b)(3) [1990 Rev]; Official Comment 4 to UCC 3-502 [1990
Rev].
Footnote 3. UCC 3-501(1)(a) [1952].
315 Necessity of presentment for payment
View Entire Section

The 1952 version of Article 3 of the Uniform Commercial Code provides that, unless
excused, presentment for payment is necessary to charge any indorser 5 and to prevent
the discharge of the drawer or the acceptor of a draft payable at a bank to the extent set
forth in another provision of Article 3. 6 Presentment for payment is not necessary to
charge primary parties, that is, makers and acceptors of undomiciled paper. 7 As used in
this provision, the words "necessary to charge" mean that the necessary proceeding is a
condition precedent to any right of action against the drawer or indorser; thus, such party
is not liable and cannot be sued without the proceedings, however long delayed, unless
the proceeding is entirely excused. 8 Thus, the mere drawing of a check or similar
instrument creates no liability thereon; rather, until presentment for payment or a demand
on the instrument is made, the drawer's account may not be charged. 9
Except when excused, 10 presentment for payment is required under the 1990 Revision
of Article 3 for the dishonor of certain notes 11 and of all drafts. 12 Either presentment
for acceptance or presentment for payment is necessary for the dishonor of a draft
payable on a date stated in the draft. 13 Presentment is required for time drafts because,
unlike the maker of a note who knows that the note has been issued, the drawee of a draft
may not know that a draft has been drawn on it. 14 Thus, if the draft is presented to the
drawee for payment and payment is not made, the draft is dishonored as of the date of
presentment or the date that the instrument was payable, whichever is later. 15
Footnotes
Footnote 5. UCC 3-501(1)(b) [1952].
As to when presentment may be excused, generally, see 341 et seq.
23 ALR3d 932 17.
Footnote 6. UCC 3-501(1)(c) [1952], referring to UCC 3-502(1)(b) [1952].
Forms: Complaint, petition, or declarationAllegationPresentment of note for

payment. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 92.
Complaint, petition, or declarationAllegationPresentment of note for payment and

protest. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 93.
AnswerDefenseBy maker of note payable at bankNo valid presentmentRefusal of

plaintiff to meet demands of drawee or payor on presentment. 6A Am Jur Pl & Pr
Footnote 9. Kane v Insurance Co. of North America, 38 Pa Cmwlth 42, 392 A2d 325.
Footnote 11. 316.
Footnote 13. 314.
Footnote 15. UCC 3-502(b)(3)(i) [1990 Rev]; Official Comment 4 to UCC 3-502
[1990 Rev].
316 --To charge maker of note
View Entire Section

In the case of the maker of a note payable at a bank, presentment for payment is
necessary under the 1952 version of Article 3 of the Uniform Commercial Code. 16
Pursuant to the 1990 revision of Article 3, a note payable on demand is dishonored if
presentment is duly made and the note is not paid on the day of presentment. 17 Thus,
presentment for payment is required in order for dishonor to occur. 18 With respect to a
note requiring presentment or a note payable at or through a bank, presentment is
necessary in order for dishonor to occur. 19 However, in the case of all other notes
payable at a definite time, presentment is not required in order for dishonor to occur; 20
rather, dishonor occurs when payment is not made on the date that such a note is payable.
21
Observation: In most cases under the 1990 version of Article 3, a formal demand for
payment to the maker of the note is not contemplated; rather, the maker is expected to
send payment to the holder of the note on the date or dates on which payment is due.
22 If payment is not made when due, the holder usually makes a demand for payment,
but in the normal case in which presentment is waived, demand is irrelevant, and the
holder can proceed against indorsers where payment is not received. 23
Comment: Provisions of the 1952 version of Article 3, specifically UCC

3-502(1)(a) and 3-503(1)(c) [1952], which provide in effect that when presentment is
not waived with respect to a note showing the date on which it is payable, the indorser
is discharged from liability unless the holder makes presentment on the exact date the
note is due, have been omitted from the 1990 revision as inconsistent with practice
which seldom involves face-to-face dealings. 24
Footnotes
Footnote 16. UCC 3-501(1)(c) [1952].
Footnote 18. Official Comment 3 to UCC 3-502 [1990 Rev], noting that there is no
change in this regard from the 1952 version of Article 3.
As to the dishonor of such a note, generally, see 352.
Not requiring presentment allows holders to collect notes in ways that make sense
commercially without having to be concerned about a formal presentment on a given day.
Footnote 21. 352.

317 --To charge any indorser
View Entire Section

Unless excused, 25 presentment of a draft is generally necessary for dishonor of the

draft, which gives rise to the obligation of the indorser to pay the draft. 26 Presentment
is likewise required to charge the indorser of a note of a corporation, even though such
party is an officer, director, or stockholder of the corporation. 27 Moreover, since the
taking of an instrument for value before it is due imposes liability on an accommodation
party in the capacity in which he or she has signed, even though the taker knows of the
accommodation, 28 the same rule requiring presentment applies to an accommodation
indorser. 29
Comment: While the 1952 version of Article 3 of the Uniform Commercial Code
provides that presentment is not necessary to charge the indorser who indorses the
instrument after maturity 30 or who uses words of guaranty in the indorsement, 31 no
similar provisions are made in the 1990 Revision. Under the 1990 Revision, an
indorser who adds the words "payment guaranteed," or the like, to an indorsement has
the same liability as an indorser who adds no special words to the indorsement. 32
Footnotes
Footnote 26. 314, 315.
Footnote 27. Shenkin v Grant, 3 Misc 2d 333, 152 NYS2d 996.
An accommodation indorser is not liable on an instrument unless the conditions

precedent to imposing liability on an indorser have been satisfied. Oak Park Currency
Exchange, Inc. v Maropoulos (1st Dist) 48 Ill App 3d 437, 6 Ill Dec 525, 363 NE2d 54,
21 UCCRS 1380.
As to the liability of accommodation parties, generally, see 434 et seq.
Footnote 30. UCC 3-501(4) [1952].
Footnote 31. UCC 3-416(5) [1952].
Footnote 32. PEB Amendment to Official Comment 4 to UCC 3-419 [1990 Rev], dated

February 10, 1994.
2. Time of Presentment [318-323]
318 Generally
View Entire Section

In those jurisdictions which follow the 1952 version of Article 3 of the Uniform
Commercial Code, the time for any presentment is determined in accordance with the
rules set forth in the Code, unless a different time is expressed in the instrument. 33
With the exception of the presentment of checks 34 and of items given to a bank for
collection, 35 the 1990 revision of Article 3 does not contain specific rules governing
the time for presentment. Instead, the provisions specifying when presentment is
necessary in order for dishonor to occur only refer to presentments that are "duly made."
36
The general principles of contract law relating to the method of computing time apply to
computations of time under the Article-3 provisions governing presentment. 37 For
example, the time of payment for an instrument payable at a fixed period of time after a
date or event is determined by excluding the day from which the time is to begin to run
and by including the day of payment. 38
Practice guide: The general statutory construction statutes which exist in many
jurisdictions may regulate the computation of periods of time specified in the Uniform
Commercial Code. 39
Footnotes
Footnote 33. UCC 3-503 [1952].
As to the time for presentment for acceptance, see 319.
As to the time for presentment for payment, see 320.
23 ALR3d 932, 17.
Forms: Complaint, petition, or declarationAllegationPresentment for acceptance or

payment in accordance with terms of instrument. 6A Am Jur Pl & Pr Forms (Rev),
Footnote 34. 332.

Footnote 35. 321.
Footnote 36. UCC 3-502(a)(1), 3-502(a)(2), 3-502(b), 3-502(d).
As to when presentment is required, generally, see 313 et seq.
As to computation of time under contract law, generally, see 17A Am Jur 2d, Contracts
478 et seq.
319 Time for presentment for acceptance
View Entire Section

The time for making a necessary 40 presentment for acceptance under the 1952 version
of Article 3 of the Uniform Commercial Code is as follows:
(1) where an instrument is payable at or during a fixed period after a stated date, any
presentment for acceptance must be made on or before the date it is payable; 41
(2) where an instrument is payable after sight, it must either be presented for acceptance
or negotiated within a reasonable time after date or issue, whichever is later; 42
(3) with respect to the liability of any secondary party, that is, a drawer or indorser, 43
presentment for acceptance as to all other instruments must be made within a reasonable
time after such party becomes liable on the instrument. 44
Footnotes
Footnote 40. 314.
Footnote 41. UCC 3-503(1)(a) [1952].

paymentInstrument payable at, or a fixed time after, a stated date. 6A Am Jur Pl & Pr
Footnote 42. UCC 3-503(1)(b) [1952].

paymentInstrument payable after sight. 6A Am Jur Pl & Pr Forms (Rev),
Footnote 43. UCC 3-102(1)(d) [1952].
Footnote 44. UCC 3-503(1)(e) [1952].
As to what constitutes a reasonable time for purposes of presentment, generally, see

321.
320 Time for presentment for payment
View Entire Section

Under the 1952 version of Article 3 of the Uniform Commercial Code, the time for
presentment for payment is set forth as follows:
(1) where an instrument is payable at a stated date, such instrument must be presented for
payment on the stated date; 45
(2) where an instrument is accelerated, such an instrument must be presented for payment
within a reasonable time after acceleration; 46
(3) with respect to the liability of any secondary party, presentment for payment as to all
other instruments must be made within a reasonable time after such party becomes liable
on the instrument. 47
Footnotes
Footnote 45. UCC 3-503(1)(c) [1952].
Forms: AnswerDefensePresentment violated terms of instrumentNot made on

agreed date. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Footnote 46. UCC 3-503(1)(d) [1952].
As to the acceleration of maturity of an instrument, generally, see 194 et seq.
Forms: Complaint, petition, or declarationAllegationPresentment for

paymentAcceleration instrument. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Footnote 47. UCC 3-503(1)(e) [1952].

321 What constitutes reasonable time
View Entire Section

Where Article 3 of the Uniform Commercial Code states the time for presentment in
terms of a reasonable time, 48 a reasonable time is determined by the nature of the
instrument, any relevant usage of banking or the trade, and the circumstances of the
particular case. 49 In making this determination, there is no distinction between a
drawer and an indorser. 50
As a general rule, what constitutes a reasonable time for presentment is primarily a

question for the fact-finder. 51 However, while the question may involve a mixed
question of law and fact for the jury to determine if the facts are unsettled and the
testimony conflicting, the question becomes a question of law for the court if the facts are
ascertained and not in dispute. 52
Footnotes
Footnote 48. 319, 320.
Footnote 49. UCC 3-503(2) [1952].
As to what constitutes a reasonable time for the presentment of checks, see 322.
23 ALR3d 932, 17.
Forms: AnswerDefensePresentment violated terms of agreementNot made within

reasonable time. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Footnote 51. Hane v Exten, 255 Md 668, 259 A2d 290, 7 UCCRS 35 (refusing to disturb
a trial court's finding that a delay of almost 18 months in presenting a note was
unreasonable).
Timely presentation is not a question of law but rather is a "classic issue" for the trier of
fact. Flagship Cruises, Ltd. v New England Merchants Nat'l Bank (1 Mass) 569 F2d 699,
24 UCCRS 745.
Footnote 52. Commercial Nat'l Bank v Zimmerman, 185 NY 210, 77 NE 1020 (decided
under the former Uniform Negotiable Instruments Law, which contained a similar
provision as to determining what is a reasonable time for presentment).

322 --Checks
View Entire Section

The general principles as to what constitutes a reasonable time for presentment under the
1952 version of Article 3 53 are modified in terms of whether the paper is a check, and
whether the check is postdated, domestic, or certified. 54
In the case of certified checks, international checks, and promissory notes, presentment is
to be made within a "reasonable" time. 55 What constitutes a reasonable time depends
on the nature, purpose, and circumstances of the action in question. 56
In the case of an uncertified domestic check which is drawn and payable within the
United States and which is not a draft drawn by a bank, Article 3 of the Uniform
Commercial Code establishes a presumption as to a reasonable time within which to
present the check for payment or to initiate bank collection. With respect to the liability
of the drawer, 30 days after date or issue, whichever is later, is presumed to be a
reasonable time for presentment. 57 With respect to the liability of an indorser, seven
days after his indorsement is presumed to be a reasonable time for presentment. 58 The
time limit differs as to drawer and indorser since the drawer, who issues the check and
normally expects to have it paid and charged to his account, is reasonably expected to
stand behind it for a longer period, especially in view of the protection provided by
Federal Deposit Insurance. 59 On the other hand, the indorser, who normally merely
receives the check and passes it on, is entitled to know more promptly whether it is to be
dishonored in order that he may have recourse against the person with whom he has
dealt. 60
The time limitations for the presentment of uncertified domestic checks are not to be read
in conjunction with the Code provision 61 setting forth the conditions under which a
party may be discharged from liability on an instrument; therefore, the mere fact that a
check is stale does not discharge the drawer from liability. 62
Since the reasonable time for the presentment of an uncertified domestic check is 30 days
after date or issue for purposes of a drawer's liability, 63 the drawer cannot complain that
the presentment was not made before the date of the check where the check is postdated.
64 With respect to indorsers, on the other hand, there is no provision in the Code for a
variance between the date of issue and the date of the paper; rather, in all cases, seven
days after indorsement is presumably the "reasonable" time within which presentment
must be made in order to charge the particular indorser. 65 While this provision does
not create any problem in connection with the postdated check if the indorsement is made
after the date of the check or less than seven days before the date of the check, if the
indorsement is made more than seven days before the date of the check, a literal
application of the seven-day rule would give rise to the absurd result that presentment
was required to be made before the date of the check and that presentment was required
earlier with respect to an indorser than with respect to the drawer. 66 However, because
the seven-day rule as to the indorser is merely a presumption, the trier of fact could
reasonably find that by the act of indorsing a postdated check the indorser manifests his
assent that the instrument be paid on its date and that the reasonable time within which he
is to be given notice of dishonor runs from a presentment made on the date of the check.
67
Under the 1990 revision of Article 3, there is a 30-day period, rather than the seven-day
period of the 1952 version, 68 within which a check must be presented for payment or
given to a depositary bank for collection in order to prevent the discharge of the
indorser's liability on the check. 69 This period is an absolute rather than a presumptive
period. 70 The drawer of a check is also protected when the check is not presented for
payment or given to a depositary bank for collection within 30 days after its date, the
drawee suspends payments after expiration of the 30-day period without paying the
check, and such suspension deprives the drawer of funds to cover payment of the check.
71
Footnotes
Footnote 53. 321.
Footnote 56. UCC 1-204 [1952], further providing that the parties may by agreement
specify a time for presentment and "any time which is not manifestly unreasonable" will
be given effect.
Footnote 57. UCC 3-503(2)(a) [1952].
Thirty days is presumed to be a reasonable period for initiating the collection of an

uncertified check under UCC 3-503(2). Genua v Kilmer, 37 Colo App 365, 546 P2d
1279.
Footnote 58. UCC 3-503(2)(b) [1952].
Footnote 59. Official Comment 3 to UCC 3-503 [1952], noting further that the 30 days
coincides with the time after which a purchaser has notice that a check has become
overdue for holder-in-due-course purposes.
Footnote 61. UCC 3-601 [1952].
Footnote 62. Wildman Stores, Inc. v Carlisle Distributing Co., 15 Ark App 11, 688 SW2d
748, 40 UCCRS 1766; Kaiser v Northwest Shopping Center, Inc. (Tex Civ App Dallas)
544 SW2d 785, 21 UCCRS 180.
The drawer of a dishonored uncertified check was not discharged by the failure of the
payee to demand payment of the drawee within a reasonable time where it was not shown
that the drawee bank became insolvent during the delay, thereby depriving the drawer of
funds with which to cover the check. Grist v Osgood, 90 Nev 165, 521 P2d 368, 14
UCCRS 1001 (delay over 30 days).

Footnote 63. UCC 3-503(2)(a) [1952].
Footnote 65. UCC 3-503((b) [1952].
Footnote 68. UCC 3-503(2)(b) [1952].
Footnote 69. UCC 3-415(e) [1990].
As to the payment of an instrument under Article 3, generally, see 401 et seq.
323 Presentment during business hours and days
View Entire Section

Where any presentment is due on a day which is not a full business day for either the
person making presentment or the party to pay or accept, presentment under the 1952
version of Article 3 of the Uniform Commercial Code is due on the next following day
which is a full business day for both parties. 72 This requirement is intended to make
allowance for the closing of banks or businesses on Saturday or other days of the week,
and is not intended to mean that any drawee or obligor can avoid dishonor of instruments
by extended closing. 73
In order to be sufficient, presentment must be made at a reasonable hour and, if at a bank,

during its banking day. 74
Provisions regarding the hours and days when presentment should be made have been
omitted from the 1990 revision of Article 3'.
Observation: A number of states have special laws validating certain transactions

when entered into outside of regular banking hours, on holidays or Saturday
afternoons. 75 In jurisdictions in which such statutes were in force before the
adoption of the Uniform Commercial Code, it is likely that they have been expressly
preserved and continued in force. 76

Footnotes
Footnote 72. UCC 3-503(3) [1952].
Where the date for a holder's presentment of a note fell on Saturday, the makers had until
the following Monday to tender payment under UCC 3-503(3), since the statute's
legislative history indicated that the benefit of additional time allowed by the statute
should be extended to both the maker and the holder of the instrument. Reynolds
Aluminum & Masonry Contractors, Inc. v Alexander (Fla App D2) 449 So 2d 357, 38
UCCRS 1315.
Footnote 74. UCC 3-503(4) [1952].
"Banking day" means that part of any day on which a bank is open to the public for
carrying on substantially all of its banking functions. UCC 4-104(1)(c) [1952].
3. Place of Presentment [324-326]
324 Generally
View Entire Section

Under the 1952 version of Article 3 of the Uniform Commercial Code, presentment may
be made at the place of acceptance or payment specified in the instrument or, if there is
none, at the place of business or residence of the party to accept or pay. 77 However, if
neither the party to accept or pay nor anyone authorized to act for him or her is present or
accessible at such place, presentment is excused. 78
Subject to Article 4 dealing with bank deposits and collections, to an agreement of the
parties, and to clearinghouse rules and the like, presentment under the 1990 revision of
Article 3 may be made at the place of payment of the instrument. 79 Ordinarily, a
negotiable instrument is payable at the place of payment stated in the instrument. 80 If
no place of payment is stated in the instrument, the presentment may be made at any
place where the fact of presentment will be communicated to the presentee. 81 Thus, if
the presentee has a place of business, presentment should be made at the place of
business; on the other hand, if there is no place of business within the jurisdiction,
presentment may be made at the residence of the presentee or any other place at which
the presentment demand will come to the attention of the presentee. 82

Footnotes
Footnote 77. UCC 3-504(2)(c) [1952].
23 ALR3d 932. 17.
Footnote 78. UCC 3-504(2)(c) [1952].
As to the place of presentment of instruments payable at banks, see 325.
Footnote 80. UCC 3-111 [1990 Rev], further specifying where it is payable if no place
of payment is stated in the instrument.
As to the place of payment, generally, see 401.

payment in accordance with terms of instrument. 6A Am Jur Pl & Pr Forms (Rev),
325 Instrument made payable at bank
View Entire Section

Subject to Article 4 of the Uniform Commercial Code dealing with bank deposits and
collections, to an agreement of the parties, and to clearinghouse rules and the like,
presentment must be made at the place of payment if the instrument is payable at a bank
in the United States. 83 That is, presentment must be made at the bank. 84 A branch
or separate office of a bank is a separate bank for the purpose of determining the place at
which action may be taken under Article 3. 85 Thus, where a check is drawn on a
particular branch by a customer whose account is carried at that branch, that branch is the
only proper place for the presentment of that check. 86
Footnotes
Forms: AnswerDefenseBy maker of note payable at bankFailure of plaintiff to

present note for payment at designated place. 6A Am Jur Pl & Pr Forms (Rev),

Footnote 84. Official Comment to UCC 3-501(b)(1) [1990 Rev].
A draft accepted or a note made payable at a bank in the United States must be presented
at such bank. UCC 3-504(4) [1952].
A scheme between the maker of forged notes and a bank manager, who was unaware that
such notes were forgeries, that whenever a note was delivered by the plaintiff holder to
the bank manager for collection, the manager would inform the maker, who would then
deliver cash to the manager to cover the face amount of the note, circumvented the usual
bank collection process in clear violation of UCC 3-504(4), which provides that a note
made payable at a bank in the United States must be presented at such bank. Lippes v
Atlantic Bank of New York (1st Dept) 69 App Div 2d 127, 419 NYS2d 505.
326 Presentment by notice of item not payable by, through, or at bank
View Entire Section

Where an item is not payable by, through, or at a bank, the 1952 version of Article 3 of
the Uniform Commercial Code provides that presentment is to be made in the manner
and with the result stated in the pertinent provision 87 of Article 4 of the Uniform
Commercial Code. 88 This provision requires the timely sending by a collecting bank of
a written notice calling upon the drawee to accept or pay, and the failure of such nonbank
drawee to honor the item, or to request exhibition of the instrument, or to take certain
other action, permits the bank to treat the item as dishonored. 89
Observation: This provision 90 of the 1952 version of Article 3 has been omitted
from the 1990 Revision of Article 3.
Footnotes
Footnote 87. UCC 4-210 [1952].
Footnote 88. UCC 3-504(5) [1952].
Footnote 89. UCC 4-210 [1952].
Footnote 90. UCC 3-504(5) [1952].

4. Manner of Presentment [327-336]
327 Generally
View Entire Section

Presentment is a demand for acceptance or payment of a negotiable instrument. 91 No

formal requirements or restrictions of any kind are imposed on the making of a
presentment. 92 A mere demand for acceptance or payment is sufficient presentment in
the first instance, and if the demand is refused nothing more is required. 93
However, since presentment requires a demand for acceptance or payment, 94 the

delivery of a check to the payor bank for collection does not constitute presentment
where the check is to be held for a reasonable period of time until sufficient funds
become available in the account to pay the check. 95 Similarly, a telephone call by the
holder of a check to the drawee bank 96 or by the payee of a check to the maker's bank,
97 inquiring as to the sufficiency of the funds to pay the check does not constitute
presentment under Article 3 of the Uniform Commercial Code.
Pursuant to the 1990 version of Article 3 of the Uniform Commercial Code, presentment
may be made by any commercially reasonable means, including an oral, written, or
electronic communication, unless otherwise provided by Article 4 of the Code, by an
agreement of the parties, by clearinghouse rules, and the like. 98 Presentment is
effective when the demand for payment or acceptance is received by the person to whom
presentment is made. 99 However, the person to whom presentment is made may
demand exhibition of the instrument, its surrender, or certain other acts, the compliance
with which is necessary in order for the presentment to be effective. 1
Observation: What value the phrase "any commercially reasonable means" may
have in restricting the presentment has been questioned by some authorities. 2 Since
the presentment is not effective until received, the view has been expressed that it
appears pointless to allow the person having actual knowledge of the demand to
challenge the manner in which he was informed, particularly in light of the fact that he
has the privilege of making counterdemands to protect himself. 3 In this regard, it has
also been noted as significant that in listing the protective demands that a presentee
may make, it was not stated that he could dispute the means by which the presentment
was made known to him or refuse to pay or accept because the manner of
communicating the demand was not commercially reasonable. 4
Practice guide: Whether a valid presentment was made requires a factual finding
which is a matter that should first be addressed by the trial court, not by the appellate
court on appeal. 5
Footnotes

Footnote 91. 313.
23 ALR3d 932, 17.
Because the collection letters accompanying the drafts directed the payor bank to pay the
drafts or return them within 24 hours, and also stated "do not hold for convenience of
drawee unless otherwise instructed," presentment or demand for payment of the drafts
occurred on the date the payor bank received the drafts. Union Bank of Benton v First
Nat'l Bank (5 Tex) 621 F2d 790, 29 UCCRS 598.
Footnote 94. 313.
Footnote 95. Rose v U.S. Nat'l Bank, 218 Neb 97, 352 NW2d 594, 39 UCCRS 561.
There was no presentment of a check in a situation in which the secretary of the payee
(executor of an estate), in company with the attorney for another party interested in the
estate, took the check to the bank and asked whether it would be honored if it were
presented, but no demand for payment was made, neither the secretary nor the attorney
had been authorized by the executor to demand payment, and the check was not indorsed.
Estate of Kohlhepp v Mason, 25 Utah 2d 155, 478 P2d 339, 8 UCCRS 716.
Footnote 96. Rose v U.S. Nat'l Bank, 218 Neb 97, 352 NW2d 594, 39 UCCRS 561.
Footnote 97. Hart v Sims (5 Tex) 702 F2d 574, 35 UCCRS 1517.
Footnote 1. 333.
Footnote 5. Bufman Org. v FDIC (CA11 Fla) 82 F3d 1020, 29 UCCRS2d 905, 9 FLW
Fed C 1112.
328 Presentment by mail or through clearinghouse
View Entire Section

The 1952 version of Article 3 of the Uniform Commercial Code expressly authorizes
presentment by ordinary mail, in which event the time of presentment is determined by
the time of receipt of the mail. 6 Thus, presentment may be made by mail directly to
the obligor. 7 The presentment is sufficient and the instrument is dishonored by
nonacceptance or nonpayment even though the party making presentment may be liable
for improper collection methods. 8
Presentment may also be made through a clearinghouse under the 1952 version of Article
3. 9 Presentment "through a clearinghouse" means that presentment is not made when
the demand reaches the clearinghouse, but when it reaches the obligor. 10 Where a
clearinghouse is the vehicle for presentment, clearinghouse rules control. 11
Footnotes
Footnote 6. UCC 3-504(2)(a) [1952].
Forms: Presentment by mail. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :

Complaint, petition, or declarationAllegationPresentment of instrument by mail. 6A

3:273.
Presentment by mail. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article
Where a letter of credit contained an expiration date of April 18, which necessitated for
purposes of the bank's liability its receipt of a sight draft and all required documentation
prior to the such expiration date, the bank's receipt of the sight draft, payable on demand,
together with the required documentation, on April 18, was timely, even though the draft
was dated April 19, and therefore the bank was liable for wrongful dishonor. First State
Bank v Shuford Mills, Inc. (Tex App Corpus Christi) 716 SW2d 649, 2 UCCRS2d 1032,
writ ref n r e (Mar 4, 1987) and rehg of writ of error overr (Apr 15, 1987).
Footnote 9. UCC 3-504(2)(b) [1952].
Forms: Complaint, petition, or declarationAllegationPresentment of instrument

through clearinghouse. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
The delivery of a check from a bank clearinghouse to an intermediate collecting bank

which operated a data processing service for the payor bank constituted presentment,
despite the contention that presentment occurred upon delivery to the data processing
service's data processing department rather than upon delivery to the service's proof and
transit department, which sorted, proved, and microfilmed checks, where the proof and
transit department and the data processing department were in a single computer center
and where the data processing contract with the payor bank provided for delivery to the
intermediate collecting bank's banking house, making no distinction between the
computer processing departments. Capital City First Nat'l Bank v Lewis State Bank (Fla
App D1) 341 So 2d 1025, 21 UCCRS 183, cert den (Fla) 357 So 2d 186.
Footnote 11. Pulaski Bank & Trust Co. v Texas American Bank/Fort Worth, N.A. (Tex
App Dallas) 759 SW2d 723, 7 UCCRS2d 335, writ den (Sep 6, 1989).
329 Presentment by electronic communication
View Entire Section

Pursuant to the 1990 version of Article 3 of the Uniform Commercial Code, presentment
may be made by any commercially reasonable means, including electronic
communication. 12
Definition: An "agreement for electronic presentment" means an agreement,

clearinghouse rule, or Federal Reserve regulation or operating circular providing that
presentment of an item may be made by transmission of a presentment notice, that is,
an image of the item or information describing the item, rather than by delivery of the
item itself. 13
Footnotes
Footnote 12. 324, 313, 327.
330 By telephone
View Entire Section

While the 1990 version of Article 3 of the Uniform Commercial Code permits
presentment to be made by an oral, written, or electronic communication, 14 the 1952
version of the pertinent Article 3 provision, 15 which authorizes presentment by mail or
through a clearinghouse, 16 does not contemplate that presentment of a personal check
drawn on a bank may be made by telephone. 17
Footnotes
Footnote 14. 324, 313, 327.
Footnote 15. UCC 3-504(2) [1952].
Footnote 16. 328.
Footnote 17. Prevo v McGinnis (App) 142 Ariz 298, 689 P2d 557, 39 UCCRS 556;
Kirby v Bergfield, 186 Neb 242, 182 NW2d 205, 8 UCCRS 710.
331 Persons by whom presentment may be made
View Entire Section

Presentment may be made by or on behalf of the holder of the instrument, 18 or by or on

behalf of the person entitled to enforce the instrument. 19 Thus, either the payee or a
bona fide agent of the payee may make presentment. 20
Footnotes
Footnote 18. UCC 3-504(1) [1952].
Even though the plaintiffs in an action against indorsers on a promissory note had
assigned the note to a bank as collateral security for a loan, they were holders on the day
suit was commenced, and so were empowered to make a presentment, where the
evidence showed and the trial court found that prior to the commencement of the action
the bank authorized reassignment to the plaintiffs whenever necessary for collection.
Wiener v Van Winkle (2nd Dist) 273 Cal App 2d 774, 78 Cal Rptr 761, 6 UCCRS 819.
The secretary of the payee, who was the executor of an estate, and an attorney for another
party interested in the estate, were neither holders within the meaning of UCC 3-504(1)
[1952] nor authorized by the executor to demand payment; therefore, no presentment
occurred when the secretary and the attorney took a check to the bank to determine if it
would be honored if it were presented. Estate of Kohlhepp v Mason, 25 Utah 2d 155,
478 P2d 339, 8 UCCRS 716.
Footnote 20. Brown v Fifth Third Bank (Hamilton Co) 10 Ohio App 3d 97, 10 Ohio BR
120, 460 NE2d 739, 38 UCCRS 177, motion overr (decided under the 1952 version of
Article 3).

332 Persons to whom presentment may be made
View Entire Section

Under the 1990 version of Article 3 of the Uniform Commercial Code, the identity of the
person to whom presentment is made is determined in terms of the nature of the
presentment demand and the nature of the instrument involved. 21 Thus, presentment to
pay an instrument may be made to the drawee or a party obliged to pay the instrument or,
in the case of a note or accepted draft payable at a bank, to the bank. 22 Presentment for
acceptance of a draft may be made to the drawee. 23
Presentment under the 1952 version of Article 3 may be made to any person who has
authority to make or refuse the acceptance or payment. 24 Presentment may also be
made to any one of two or more makers, acceptors, drawees, or other payors, 25 without
the necessity of showing that one is the partner of the other or that he or she has authority
to act for him. 26 Thus, when there are six comakers, presentment is not defective
because it is made only to three of the comakers. 27
Where presentment is made to an organization as presentee, there is no distinction under

Article 3 in terms of different departments within the organization. 28 Moreover, the
fact that the person designated as the person on whom presentment is to be made does not
have authority to pay or accept is immaterial, as there is no requirement that presentment
can only be made upon a person having information and authority to pay or dishonor. 29
Hence, the proof and transit department of a computerized clearinghouse is not
disqualified from being the presentee, as against the contention that it lacked authority or
information on which to accept or dishonor. 30
Footnotes
Footnote 22. UCC 3-501(a)(i) [1990 Rev].
Under Article 4, when an item states that it is "payable at" a bank designated in the item,
the item may be presented for payment only by or through the bank. UCC 4-106(b).
Footnote 23. UCC 3-501(a)(ii) [1990 Rev].
Footnote 24. UCC 3-504(3)(b) [1952].
Forms: AnswerDefensePresentment made to person lacking authority to make or

refuse acceptance or payment. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Footnote 25. UCC 3-504(3)(a) [1952].

Subject to Article 4, to an agreement of the parties, and to clearinghouse rules and the
like, presentment is effective when made to any one of two or more makers, acceptors,
drawees, or other payors. UCC 3-501(b)(1) [1990 Rev].
Footnote 26. First Arlington Nat'l Bank v Stathis (1st Dist) 90 Ill App 3d 802, 46 Ill Dec
175, 413 NE2d 1288, 32 UCCRS 260; Engine Parts v Citizens Bank, 92 NM 37, 582 P2d
809, 23 UCCRS 1248.
175, 413 NE2d 1288, 32 UCCRS 260.
If there are joint makers, a presentment to any one of them is effective as a presentment
of the instrument. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-501:8.
Footnote 28. Capital City First Nat'l Bank v Lewis State Bank (Fla App D1) 341 So 2d
1025, 21 UCCRS 183, cert den (Fla) 357 So 2d 186.
333 Rights of person to whom presentment is made
View Entire Section

While in the first instance a mere demand for acceptance or payment is a sufficient
presentment, 31 the person to whom presentment is made is permitted to impose
additional requirements in order to protect himself or herself from improper and
fraudulent demands. 32 Thus, subject to Article 4 of the Uniform Commercial Code, to
agreement of the parties, to clearinghouse rules and the like, upon demand of the person
to whom presentment is made, the person making presentment must (1) exhibit the
instrument, (2) give reasonable identification and, if presentment is made on behalf of
another person, reasonable evidence of authority to do so, and (3) sign a receipt on the
instrument for any payment made or surrender the instrument if full payment is made. 33
The fact that Article 3 authorizes a drawee to whom the instrument is presented for
payment to require identification, evidence of the presenter's authority, or a signed
receipt for partial or full payment does not establish any duty on the part of the bank;
rather, the specified precautions are merely made available to the drawee without danger
that dishonor of the instrument will be found to have occurred. 34
Without dishonoring the instrument, the party to whom presentment is made may also (1)
return the instrument for lack of a necessary indorsement, or (2) refuse payment or
acceptance for failure of the presentment to comply with the terms of the instrument, an
agreement of the parties, or other applicable law or rule. 35 For purposes of this
provision, the reference to the "agreement of the parties" is to be construed as limited to
an agreement between the presenter and the presentee, since there is no basis for binding
the presenter by an agreement with some other person unless that agreement can qualify
as a defense that in the particular case may be asserted against the presenter. 36
A presentment is not effective until the presenter has reasonably satisfied all proper
counterdemands of the presentee. 37 However, unless insisted upon by the presentee,
the counterdemands are not required. 38
Footnotes
Footnote 31. 324, 313, 327.
23 ALR3d 932. 17, 17.5.
As to the demand that the instrument be exhibited, see 334.
As to the demand that the presenter give reasonable identification, see 335.
Forms: Counterdemands by party to whom presentment made. 6A Am Jur Pl & Pr

AnswerNo valid presentmentRefusal of plaintiff to meet demands of drawee or

payor on presentment. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Counterdemands by party to whom presentment made. 19 Am Jur Legal Forms 2d,

Observation: UCC 3-501(b)(2) [1990 Rev] is a restatement of UCC 3-505

[1952]. Official Comment to UCC 3-501(b)(2) [1990 Rev].
Footnote 34. Wright v Bank of California (1st Dist) 276 Cal App 2d 485, 81 Cal Rptr 11,
6 UCCRS 1165.
Footnote 35. UCC 3-501((b)(3) [1990 Rev].
The antecedent to the above provision permitting the return of an instrument lacking a
necessary indorsement is UCC 3-507(3) [1952]. Official Comment to UCC 3-501
[1990 Rev].
Forms: AnswerDefenseDenial of dishonorReturn of instrument for lack of proper


334 --Exhibition of instrument; return for improper indorsement
View Entire Section

Unless the parties have otherwise agreed, such as in the case of an electronic presentment
agreement, 39 the person to whom presentment is made may require exhibition of the
instrument. 40 Thus, the maker of two notes payable to a savings and loan company
may, without dishonor, require the exhibition of the notes in order to identify the party
that had the authority to accept payment. 41 Where the presentment is one for
acceptance, the instrument will necessarily be exhibited to the drawee since the
acceptance must be written on the instrument. 42
Observation: Although no provision is made as to the time within which the

presenter must produce and exhibit the instrument, this provision 43 of Article 3 of the
Uniform Commercial Code should be interpreted as requiring the production of the
instrument within a reasonable time; likewise, the presentee should be allowed to
specify a reasonable time rather than leave the matter undetermined. 44 However,
even though the making of a demand for the exhibition of the instrument does not
dishonor the instrument, it is likely that if the presentee requires exhibition within a
time that is unreasonably short, the courts will hold that the action of the presentee is
equivalent to a repudiation of the obligation and, therefore, constitutes a dishonor of
the instrument. 45
Upon exhibition of an instrument, if the presentee detects the lack of an indorsement that
is necessary to the presenter's chain of title, the presentee may either return the
instrument to the presenter, without causing a dishonor, in order to obtain the missing
indorsement, 46 or take the position that the presenter was not the person entitled to
enforce the instrument. 47
Footnotes
Footnote 39. Official Comment to UCC 3-501v [1990 Rev].
As to electronic presentment agreements, see 329.
Footnote 40. 333.
Footnote 41. Wilner v O'Donnell (Mo App) 637 SW2d 757, 35 UCCRS 200 (wherein the
notes had been transferred from the savings and loan company to the purchaser, who paid
for them with funds furnished by a realty company).

23 ALR3d 932. 17, 17.5.
As to acceptance of a draft, generally, see 381 et seq.
Footnote 43. UCC 3-505(1) [1952]; UCC 3-501(b)(2) [1990 Rev].
Footnote 46. 333.
335 --Verification of presenter's identification
View Entire Section

Where reasonable identification is required of the presenting party by the presentee, 48

"reasonable identification" means identification that is reasonable under the
circumstances 49 or that is "commercially reasonable," either in terms of what is
required or the time within which it is required. 50 If the party on whom demand is
made knows the person making presentment, no requirement of identification is
reasonable, whereas if the circumstances are suspicious, a great deal may be required. 51
In this regard, each branch of a bank is a separate place of business and the fact that a
party making presentment is known at one branch does not prevent another branch from
making a reasonable request for identification. 52
The requirement of reasonable identification applies whether the instrument is payable to

order or to bearer. 53
Footnotes
Footnote 48. 333.
23 ALR3d 932, 17, 17.5.

Footnote 52. Buckley v Trenton Sav. Fund Soc., 111 NJ 355, 544 A2d 857, 6 UCCRS2d
1040.
336 --Surrender of instrument
View Entire Section

A presentee who is requested to pay an instrument in full may demand the surrender of
the instrument in return for the payment. 54 If the presentee is making only a partial or
installment payment, he or she may demand a notation of receipt for such payment's
being written on the instrument. 55 In this situation, a receipt for any payment that is
not written on the instrument does not satisfy such a demand; rather, the payment receipt
must appear on the instrument or the fact of payment cannot be asserted against a
subsequent taker of the instrument who has the rights of a holder in due course. 56
Footnotes
Footnote 54. 333.
23 ALR3d 932, 17, 17.5.
As to the status and rights of a holder in due course, see 247 et seq.
5. Time for Acceptance or Payment [337-340]
337 Generally
View Entire Section

The 1952 version of Article 3 of the Uniform Commercial Code provides that acceptance
may be deferred without dishonor until the close of the next business day following

presentment, or for an additional business day if allowed by the holder in a good-faith
effort to obtain acceptance. 57 Except as a longer time is allowed in the case of
documentary drafts drawn under a letter of credit or unless an earlier time is agreed to by
the party to pay, payment of an instrument may likewise be deferred without dishonor,
pending reasonable examination to determine whether it is properly payable, as long as
payment is made before the close of business on the day of presentment. 58
Under the 1990 version of Article 3, a payor must generally decide whether to pay or to
accept an instrument on the day of presentment. 59 For example, when an unaccepted
draft, other than a documentary draft, is presented for acceptance, and the draft is payable
on a date stated in the draft, 60 or on elapse of a period of time after sight or acceptance,
61 the draft must be accepted on the day of presentment. Similarly, a negotiable
instrument presented for payment must be paid on the day of presentment if the
instrument is a note payable on demand; 62 a check presented to the payor bank for
immediate payment over the counter or an unaccepted draft is payable on demand, other
than a documentary draft, 63 or an accepted draft payable on demand. 64 If the
instrument is an accepted draft not payable on demand, 65 is an unaccepted draft other
than a documentary draft and is payable on a date stated in the draft, 66 or is a note not
payable on demand and is payable at or through a bank or requires presentment by its
terms, 67 it must be paid on the day it becomes payable or on the day it is presented for
payment, whichever is later.
Footnotes
Footnote 57. UCC 3-506(1) [1952].
Footnote 58. UCC 3-506(2) [1952].
Even though Saturday is not a "banking day" under the Uniform Commercial Code,
where the payor-depositary-drawee bank was presented with a $75,000 check on
Saturday, it had until the close of business (1:00 p.m.) to pay the check. DeLuca v
BancOhio Nat'l Bank, Inc. (Franklin Co) 74 Ohio App 3d 233, 598 NE2d 781, 19
UCCRS2d 216 (decided under the 1952 version of Article 3).
Forms: Complaint, petition, or declarationAllegation of dishonor of

presentmentFailure to pay demand note on day of presentment. 6A Am Jur Pl & Pr
AnswerDefenseDenial of dishonorPayment deferred to determine if instrument

valid. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:299.
As to the effect of presentment after a cutoff hour established by the party to whom
presentment is made, see 339.
Footnote 60. UCC 3-502(b)(3)(B) [1990 Rev].
As to unaccepted documentary drafts, see 338.

Footnote 64. UCC 3-502(d)(1) [1990 Rev].
Footnote 66. UCC 3-502(b)(3)(A) [1990 Rev].
338 Unaccepted documentary drafts
View Entire Section

Unaccepted documentary drafts must be accepted or paid according to the rules stated
with respect to documentary drafts, 68 except that payment or acceptance may be
delayed without dishonor until no later than the close of the third business day of the
drawee following the day on which payment or acceptance is required by those rules. 69
This extension of time is given because of the time that may be needed to examine the
documents. 70
Footnotes
Footnote 68. UCC 3-502(b)(2) through 3-502(b)(4) [1990 Rev].
339 Effect of cutoff hour established by party to whom presentment is made
View Entire Section

Presentment is ordinarily effective when the demand for payment or acceptance is

received by the person to whom presentment is made. 71 However, because a payor
must ordinarily decide whether to pay or to accept on the day of presentment, Article 3 of

the Uniform Commercial Code allows the payor to set a cutoff hour for receipt of
instruments presented. 72 Subject to Article 4 of the Code, to agreement of the parties,
and to clearinghouse rules and the like, the party to whom presentment is made may treat
presentment as occurring on the next business day after the day of presentment, if the
party to whom presentment is made has established a cutoff hour not earlier than 2 p.m.
for the receipt and processing of instruments presented for payment or acceptance and
presentment is made after the cutoff hour. 73 If the cutoff time of the presentee is earlier
than 2 p.m., it cannot defer action until the next business day but must treat the
presentment as having been received on the day of its actual receipt. 74
Footnotes
Footnote 71. 329.
340 Effect of counterdemands
View Entire Section

Where the person to whom presentment of an instrument is made imposes additional

requirements on the presenter as a prerequisite to acceptance or payment of the
instrument, 75 the time for acceptance or payment runs from the time of compliance. 76
Observation: The above provision of the 1952 version of Article 3 of the Uniform
Commercial Code has been omitted from the 1990 Revision of Article 3.
Footnotes
Footnote 75. 333.
Footnote 76. UCC 3-505(2) [1952].
Forms: AnswerDefenseNo valid presentmentRefusal of plaintiff to meet

requirements of drawee or payor. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code
: Article 3Negotiable Instruments 3:279.
6. Excuse and Waiver [341-350]

a. Excuse [341-346]
341 Generally
View Entire Section

Under Article 3 of the Uniform Commercial Code, presentment for acceptance or

payment of an instrument may be excused if:
(1) the person entitled to present the instrument cannot with reasonable diligence make
presentment; 77
(2) the maker or acceptor has dishonored or repudiated the obligation to pay the
instrument, or otherwise has no reason to expect or right to require that the instrument be
paid or accepted; 78
(3) the maker or acceptor is dead or in insolvency proceedings; 79
(4) by the terms of the instrument, presentment is not necessary to enforce the obligation
of the enforcer or the drawer, or the drawer or indorser whose obligation is being
enforced has waived presentment; 80
(5) the drawer has instructed the drawee not to pay or accept the draft; or 81
(6) the drawee is not obligated to the drawer to pay the draft. 82 Whether presentment
is excused presents a question of fact, not law. 83
Comment: The 1990 provisions 84 governing excused presentment largely restate

the 1952 provisions 85 governing the same matter. 86
Caution: Even though presentment for acceptance or payment may be excused,

dishonor will occur without presentment if the instrument is not duly accepted and
paid. 87
Footnotes
Footnote 77. 342.
Footnote 78. 343.
Footnote 79. 344.
Footnote 80. 347.

Footnote 81. 345.
Footnote 82. UCC 3-504(a)(v) [1990 Rev].
Forms: Complaints alleging facts excusing presentment. 6A Am Jur Pl & Pr Forms

(Rev), Commercial Code : Article 3Negotiable Instruments 3:280 et seq.
Instruction to juryWhen necessity for presentment of instrument excused. 6A Am Jur

Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:290.
Footnote 83. McLaughlin v Sports & Recreation Club, Inc. (Minn App) 356 NW2d 398,
39 UCCRS 1373.
Footnote 85. UCC 3-511 [1952].
Footnote 87. 351.
342 Inability to make presentment by exercise of reasonable diligence
View Entire Section

Presentment for acceptance or payment of an instrument is excused when presentment

cannot be made with reasonable diligence. 88 This excuse is established only by proof
that reasonable diligence has been exercised without success, or that reasonable diligence
would in any case have been unsuccessful. 89 Whether the person required to make
presentment has exercised reasonable diligence is a question of fact to be determined by
the trier of fact in light of all of the surrounding circumstances, including reasonable
commercial standards, practices, and usages. 90
Observation: The 1952 version of Article 3 of the Uniform Commercial Code also
provides, without mention of reasonable diligence, that presentment is excused where
neither the party to accept or pay, nor anyone authorized to act for such party, is
present or accessible at the place for acceptance or payment. 91
Footnotes
Footnote 88. UCC 3-511(2)(c) [1952]; UCC 3-504(a)(i) [1990 Rev].
Forms: Complaint, petition, or declarationBy payee against maker of

notePresentment excusedPresentment could not be made with reasonable
diligenceLost or stolen note. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :

Complaint, petition, or declarationBy payee of bill of exchange against

drawerPresentment excusedPresentment could not be made with reasonable
diligenceDrawee not found. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Footnote 91. 324.
343 No right to acceptance or payment; repudiation of obligation
View Entire Section

Presentment is entirely excused when the party to be charged has dishonored the
instrument, 92 or when such party otherwise has no reason to expect or right to require
that the instrument be accepted or paid. 93 Under this rule, however, the fact that the
drawer is having current financial difficulties does not establish that the holder has no
reason to expect that the paper will be paid. 94 The fact that the drawers of a check
tender the check to the payee before depositing funds to cover it also does not excuse
presentment on the basis that the drawers had no reason to expect that the check would be
paid and no right to require its payment, since there is no rule of law which requires that
the funds be deposited before the check can be tendered. 95
Since the purpose of presentment is to determine whether or not the maker, acceptor, or
drawee will pay or accept, presentment is also excused when that question is clearly
determined, 96 as when such party has refused acceptance or payment, but not for want
of proper presentment, 97 or has repudiated the obligation to pay the instrument. 98
Under these rules, lack of presentment is not a defense to a defendant indorser where it is
clear that it was he who had defaulted. 99 Similarly, where the party to be charged is an
accommodated party who has broken the accommodation agreement, such party has no
reason to expect or right to require that the instrument be accepted or paid. 1 Where an
indorser has such knowledge or so participates in the affairs of the primary party that the
indorser knows that the instrument will not be honored by the primary party, it is likewise
not required that the holder go through the useless gesture of making a presentment and
of notifying the secondary party in order to hold the latter liable. 2
Observation: The repudiation of the obligation to pay an instrument will excuse

presentment regardless of when the repudiation is made; typically, however, the
repudiation will occur prior to the time that presentment would otherwise be made. 3

Footnotes
Footnote 92. UCC 3-511(2)(b) [1952].
The "party to be charged" means the party liable on the instrument, not a party seeking to
recover from the payor bank. Northwestern Nat'l Ins. Co. v Midland Nat'l Bank, 96 Wis
2d 155, 292 NW2d 591, 29 UCCRS 940.
Footnote 93. UCC 3-511(2)(b) [1952]; UCC 3-504(a)(iv) [1990 Rev].
Footnote 94. Available Iron & Metal Co. v First Nat'l Bank (1st Dist) 56 Ill App 3d 516,
13 Ill Dec 940, 371 NE2d 1032, 23 UCCRS 694.
Footnote 95. McLaughlin v Sports & Recreation Club, Inc. (Minn App) 356 NW2d 398,
39 UCCRS 1373.
Footnote 97. UCC 3-511(3)(b) [1952].
Forms: Complaint, petition, or declarationAllegationPresentment

excusedRepudiation of obligation by maker. 6A Am Jur Pl & Pr Forms (Rev),
Footnote 99. Rourke v Angelis (NY Sup) 12 UCCRS 526.
A party cannot object to the absence of an otherwise necessary step if such party has been
the cause of the default. 6A Anderson, Uniform Commercial Code 3d 3-511:6.
Footnote 2. Makel Textiles, Inc. v Dolly Originals, Inc. (NY Sup) 4 UCCRS 95.
Where a note was payable at a specified place and the holder telephoned the maker on the
note's due date and requested payment but was told by the maker that payment could not
be made at that time, the holder's failure to present the note at a specified place for
payment was excused because the maker, on the note's due date, had refused payment for
reasons other than the lack of proper presentment. Smith v Belello (La App 1st Cir) 431
So 2d 80.
Formal presentment of a check tendered in discharge of the defendant's underlying

obligation was entirely excused where payment of the check was refused by the bank
solely for the lack of sufficient funds in the defendant's account and not for the lack of
proper presentment. Rains v Lewis, 20 Wash App 117, 579 P2d 980.

344 Death or insolvency
View Entire Section

Presentment is excused if the acceptor or maker of an instrument is dead or in insolvency

proceedings. 4
Definitions: Insolvency proceedings include any assignment for the benefit of

creditors or other proceedings intended to liquidate or rehabilitate the estate of the
person involved; 5 a person is insolvent who either has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due, or is insolvent
within the meaning of the Federal Bankruptcy Law. 6
The statutory provision excusing presentment if the acceptor or maker is dead or in

insolvency proceedings should be liberally construed so as to include both the "death" of
an artificial person, as by corporate dissolution or forfeiture of a corporate charter, and
the mental incompetency of a natural person. 7 However, an insolvency proceeding is
an excuse for the absence of presentment only when the proceeding is pending at the time
when the presentment is due; consequently, the fact that the person on whom presentment
should have been made subsequently goes into bankruptcy does not operate retroactively
to excuse the absence of presentment at the earlier time. 8
Footnotes
Presentment is entirely excused when the maker, acceptor, or drawee of any instrument
except a documentary draft is dead or in insolvency proceedings instituted after the issue
of the instrument. UCC 3-511(3)(a) [1952].
Forms: Complaint, petition, or declarationAllegationPresentment excusedDeath of

maker. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:284.
Complaint, petition, or declarationAllegationPresentment excusedMaker or

acceptor in bankruptcy proceedings. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Complaint, petition, or declarationAllegationPresentment excusedFailure of holder

to present instrument for payment excused by insolvency of drawee bank. 6A Am Jur

Footnote 8. Custom Craft Tile, Inc. v Bridgecrest, Inc. (Mo App) 662 SW2d 320, 37
UCCRS 1204.
345 Stop-payment of draft
View Entire Section

Presentment for payment or acceptance of an instrument is excused if the drawer

instructed the drawee not to pay or accept the draft. 9 Thus, where the drawer stops
payment on a draft, presentment is entirely excused. 10 A stop-payment order by a
drawer is effective to excuse the need for presentment without regard to whether the
drawer has broken a contract obligation in making such an order and without regard to
the identity of the defendant. 11
Footnotes
Footnote 9. UCC 3-504(a)(v) [1990 Rev].
Presentment is entirely excused when the party to be charged has countermanded

payment. UCC 3-511(2)(b) [1952].
Footnote 10. UAW-CIO Local #31 Credit Union v Royal Ins. Co. (Mo) 594 SW2d 276,
28 UCCRS 1435.
346 Absence of notice; excuse for delay
View Entire Section

Delay in presentment is excused when the party is without notice that it is due or when
the delay is caused by circumstances beyond such party's control and he or she exercises
reasonable diligence after the cause of the delay ceases to operate. 12 Under this
provision, delay is excused when a party has acted with reasonable diligence and the
delay is not the fault of such party, 13 such as where an instrument has been accelerated
without such party's knowledge or a demand has been made by a prior holder
immediately before such party's purchase of the instrument. 14
Caution: The 1990 Revision of Article 3 of the Uniform Commercial Code does not
contain a similar provision excusing a delay in presentment. However, it does contain
a provision excusing delay in giving notice of dishonor. 15
Footnotes
Footnote 12. UCC 3-511(1) [1952].
Forms: Instruction to juryWhen necessity for presentment of instrument excused. 6A

3:290.
Footnote 15. 368.
b. Waiver [347-350]
347 Generally
View Entire Section

Presentment for acceptance or payment of an instrument is excused if the drawer or

indorser whose obligation is being enforced has waived presentment. 16 The waiver
may be express 17 or implied, 18 oral or written. 19
Observation: Under the 1990 Revision of Article 3 of the Uniform Commercial

Code, a waiver of presentment also constitutes a waiver of notice of dishonor, 20
while under the 1952 version, a waiver of protest also constitutes a waiver of
presentment and notice of dishonor. 21
Footnotes
Footnote 16. UCC 3-504(a)(iv) [1990 Rev].
Presentment is entirely excused when the party to be charged has waived it either before
or after it is due. UCC 3-511(2)(a) [1952].
23 ALR3d 932, 19.5.
Forms: Complaint, petition, or declarationAllegationPresentment excusedWaiver

by maker or drawer. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Waiver of presentment. 3A Am Jur Legal Forms 2d, Bills and Notes 41:58.
Waiver of presentment and notice. 19 Am Jur Legal Forms 2d, Uniform Commercial
Footnote 17. 348.
Footnote 18. 350.
As to dishonor and notice of dishonor, generally, see 351 et seq., , see 361 et seq.
Footnote 21. UCC 3-511(5) [1952].
As to protest, generally, see 375 et seq.
348 Express waiver
View Entire Section

A waiver of presentment may be express, 22 as the terms of the instrument may state
that presentment is not necessary in order to enforce the obligation of indorsers or the
drawer. 23 Where a note sued on and incorporated in a complaint contains an express
waiver of presentment and notice, the contention that the complaint be dismissed for
failure to allege presentment and notice is without merit. 24
In order to be effective, however, the waiver must be clear and unequivocal; that is, the
waiver provision must state specifically and separately the rights surrendered. 25 A
statement on a note providing that "presentment for payment and notice of nonpayment
are hereby waived" constitutes an automatic waiver of presentment. 26
Ordinarily, waiver will occur by reason of express words added by the drawer or indorser
to his or her signature; however, a waiver may also be made by a separate written or oral
agreement. 27
Footnotes
Footnote 22. UCC 3-511(2)(a) [1952].

Waiver may be, and often is, a term of the instrument when it is issued. Official
23 ALR3d 932, 19.5.
Forms: ReplyAllegationExpress waiver of presentment. 6A Am Jur Pl & Pr Forms

Footnote 24. Fett Developing Co. v Garvin, 119 Ga App 569, 168 SE2d 212, 6 UCCRS
680.
Footnote 25. Shumway v Horizon Credit Corp. (Tex) 801 SW2d 890, 13 UCCRS2d
1174.
Footnote 26. First New Haven Nat'l Bank v Clarke, 33 Conn Supp 179, 368 A2d 613, 20
UCCRS 1228.
The failure of the holder of promissory notes to present them is an insufficient defense
where the notes clearly provide that presentment is waived. Abby Financial Corp. v
Weydig Auto Supplies Unlimited, Inc. (NY Sup) 4 UCCRS 858.
349 --Persons bound
View Entire Section

A waiver of presentment which is embodied in the instrument itself is binding upon all
parties. 28 However, where the waiver is written above the signature of an indorser, it
binds only that indorser. 29 Thus, where a promissory note states on its face "protest
waived," such waiver is binding upon all parties, and the fact that the note is not
presented for payment does not constitute a defense to an action to recover on the note.
30
Observation: Unlike the 1952 version of Article 3 of the Uniform Commercial

Code, the 1990 version does not contain a provision as to the effect of a waiver where
it is written above the signature of an indorser.
Footnotes
Footnote 28. UCC 3-511(6) [1952].
An instrument which states on its face that presentment is not required is effective to

excuse the absence of presentment with respect to any drawer and all indorsers of the
instrument. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-504:4.
Footnote 29. UCC 3-511(6) [1952].
Footnote 30. Gerrity Co. v Padalino, 51 Misc 2d 928, 273 NYS2d 994, 3 UCCRS 989.
350 Implied waiver
View Entire Section

A waiver of presentment may occur by implication. 31 Thus, any conduct manifesting

the intent to waive the requirement of presentment will constitute a waiver of this
requirement. 32 If the holder relies on statements or conduct manifesting an intention to
waive presentment, principles of estoppel under the common law, which are not
displaced by the Uniform Commercial Code, will bar the defense of lack of presentment.
33
Footnotes
Footnote 31. UCC 3-511(2)(a) [1952].
Presentment of the buyer's check was excused because of the buyer's implied waiver of
presentment. Hart v Sims (5 Tex) 702 F2d 574, 35 UCCRS 1517.
Footnote 32. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-504:5; 6A

Anderson, Uniform Commercial Code 3d 3-511:20.
23 ALR3d 932, 19.5.
Footnote 33. 6A Anderson, Uniform Commercial 3d [Rev] 3-504:5.
B. Dishonor, Notice of Dishonor, and Protest [351-380]
Research References
UCC 1-201; UCC 3-501, 3-507 through 3-511 [1952]; UCC 3-103, 3-409, 3-415,
3-418, 3-502 through 3-505; UCC 4-104 [1990]; UCC 4-102, 4-104, 4-215, 4-502
ALR Index: Bills and Notes; Checks and Drafts; Dishonor; Notice of Dishonor; Protest;
(Rev), Commercial Code : Article 3Negotiable Instruments 3:296, 3:297,
3:302-3:304, 3:306-3:309, 3:311, 3:314-3:316
Instruments 253:2513-253:2517, 253:2543, 253:2553
6A Anderson, Uniform Commercial Code 3d 3-501:11, 3-509:4; 6A Anderson,
Uniform Commercial Code 3d [Rev] 3-415:8, 3-502:4, 3-502:9, 3-502:10, 3-502:12
through 3-502:14, 3-503:5, 3-503:7, 3-504:13 through 3-504:16, 3-505:4, 3-505:9
through 3-505:11, 3-505:13, 3-505:14, 3-510:3
1. Dishonor [351-360]
351 Generally
View Entire Section

Under Article 3 of the Uniform Commercial Code, an instrument is dishonored when a

necessary or optional presentment is duly made and due acceptance or payment is refused
or cannot be obtained within the prescribed time or, in the case of bank collections, the
instrument is seasonably returned in accordance with the rules set forth in Article 4. 34
Dishonor of an instrument also occurs when presentment, while otherwise required for
dishonor, is excused and the instrument is not duly accepted or paid. 35
Footnotes
Footnote 34. UCC 3-507(1)(a) [1952].
Dishonor under the 1990 revision of Article 3 ordinarily occurs when a negotiable
instrument is not accepted or paid upon presentment. 6A Anderson, Uniform
Commercial Code 3d [Rev] 3-502:4.
As to the dishonor of notes, see 352.
As to the dishonor of unaccepted drafts, see 353 et seq.
As to the dishonor of checks presented for payment through the check collection system,
see 355.
As to the dishonor of accepted drafts, see 356.
Footnote 35. UCC 3-507(1)(b) [1952]; UCC 3-502(e) [1990 Rev].
As to when presentment is excused, see 341.
352 Notes

View Entire Section
A note payable on demand is dishonored if presentment is duly made to the maker and
the note is not paid on the day of presentment. 36 This rule applies under both the 1952
and 1990 versions of Article 3. 37 If a note is not payable on demand and is payable at
or through a bank, or if the terms of the note require presentment, the note is dishonored
if presentment is duly made and the note is not paid on the day it becomes payable or the
day of presentment, whichever is later. 38 Any other note which is not payable on
demand is dishonored if it is not paid on the day it becomes payable. 39
Footnotes
As to presentment, generally, see 313.

presentmentFailure to pay demand note on day of presentment. 6A Am Jur Pl & Pr
Forms (Rev), Commercial Code, Article 3Negotiable Instruments 3:296.
Footnote 37. Official Comment 3 to UCC 3-502 [1990 Rev] (noting that the 1952
provision is unchanged in the 1990 version).

presentmentNote not paid on date payable. 6A Am Jur Pl & Pr Forms (Rev),
Commercial Code, Article 3Negotiable Instruments 3:297.
As to dishonor of an instrument under the 1952 version of Article 3, generally, see

351.
353 Unaccepted drafts
View Entire Section

An unaccepted draft payable at a definite time may be dishonored either by nonpayment

or nonacceptance. 40 Thus, if a draft is payable on a date stated in the draft, the draft is
dishonored if either: (1) presentment for payment is duly made to the drawee and
payment is not made on the day the draft becomes payable or the day of presentment,
whichever is later; or (2) presentment for acceptance is duly made before the day the

draft becomes payable and the draft is not accepted on the day of presentment. 41
If a draft is payable on elapse of a period of time after sight or acceptance, the draft is
dishonored if presentment for acceptance is duly made and the draft is not accepted on
the day of presentment. 42
Comment: The rules in the 1990 version of Article 3 relating to the dishonor of time
drafts 43 follow the rules set forth in the pertinent provision 44 of the 1952 version of
Article 3. 45
Dishonor of a draft payable on demand occurs if presentment for payment is duly made
to the drawee and the draft is not paid on the day of presentment. 46 This rule applies to
checks presented for immediate payment over the counter and to demand drafts other
than checks, 47 and is the same as the rule applicable to the dishonor of a note payable
on demand. 48
Observation: Where the terms of a drawee's acceptance vary from the terms of the
draft as presented, the holder may refuse the acceptance and treat the draft as
dishonored. 49
Footnotes
Footnote 43. UCC 3-502(b)(3), 3-502(b)(4) [1990 Rev].
Footnote 44. UCC 3-501(1)(a) [1952].
A bank dishonors a check when it does not pay the face amount to the holder upon
presentment, such as where the bank deducts a service charge from the face amount of
the check because the holder was not a customer of the bank. Your Style Publications,
Inc. v Mid Town Bank & Trust Co. (1st Dist) 150 Ill App 3d 421, 103 Ill Dec 488, 501
NE2d 805, 3 UCCRS2d 675, app den 114 Ill 2d 559, 108 Ill Dec 427, 508 NE2d 738
(decided under the 1952 version of Article 3).
As to the rules applicable to checks presented for payment through the check collection
system, see 355.

As to the dishonor of demand notes, see 352.
Footnote 49. 387.
354 --Documentary drafts
View Entire Section

The dishonor of documentary drafts is generally governed by the same principles as those
applicable to nondocumentary drafts other than checks. 50
Definition: A documentary draft is a draft to be presented for acceptance or payment

if specified documents, certificated securities, or instructions for uncertificated
securities, statements, or the like are to be received by the drawee or other payor before
acceptance or payment of the draft. 51
Dishonor of an unaccepted documentary draft occurs according to the rules applicable to

unaccepted time drafts and demand drafts, 52 except that payment or acceptance may be
delayed for a stated additional period without dishonor. 53
Footnotes
Footnote 51. UCC 4-104(1)(f) [1990 Rev].
Footnote 52. 353.
As to acts not constituting dishonor, see 358.
355 --Checks presented for payment through check collection system
View Entire Section

If a check is presented for payment to the payor bank other than for immediate payment
over the counter, the check is dishonored if, under the applicable sections of Article 4 of
the Uniform Commercial Code, 54 the payor bank makes timely return of the check or
sends timely notice of dishonor or nonpayment, or if the bank becomes accountable for
the amount of the check. 55 When a check is presented for payment through the check
collection system, the drawee bank normally makes settlement for the amount of the
check to the presenting bank. 56 Under Article 4 of the Code, however, the drawee bank
may recover this settlement if it returns the check within its midnight deadline, in which
event the check is not paid and dishonor occurs under the relevant provisions 57 of
Article 3. 58 If the drawee bank does not return the check or give notice of dishonor or
nonpayment within the midnight deadline, the settlement becomes final payment of the
check; 59 thus, no dishonor occurs regardless of whether the check is retained or is
returned after the midnight deadline. 60
In some cases, the drawee bank might not settle for the check upon its receipt. 61
Pursuant to Article 4, 62 for example, if the drawee bank is not also the depositary bank
and retains the check without settling for it beyond midnight of the day it is presented for
payment, the bank becomes accountable for, that is, obliged to pay, the amount of the
check. 63 Similarly, where the drawee bank is the depositary bank, the bank becomes
accountable for the amount of the check if the bank does not pay the check, return it, or
send notice of dishonor within the midnight deadline. 64 In all cases in which the
drawee bank becomes accountable, the check has not been paid and, thus, dishonor
occurs under Article 3. 65
Observation: The fact that the bank is obliged to pay the check does not mean that
the check has been paid; rather, when a check is presented for payment, the person
presenting the check is entitled to payment, not just the obligation of the drawee to pay,
and until that payment is made, the check is dishonored. 66
Footnotes
Footnote 54. UCC 4-301, 4-302.
In the case of bank collections, an instrument is dishonored when a necessary or optional

presentment is duly made and the instrument is seasonably returned by the midnight
deadline. UCC 3-507(1)(a) [1952].
A bank's midnight deadline is midnight on its next banking day following the banking
day on which it receives the relevant item or notice or from which the time for taking
action commences to run, whichever is later. UCC 4-104(10).

356 Accepted drafts
View Entire Section

Dishonor of an accepted draft payable on demand is governed by the same rules that
apply to a note payable on demand. 67 Thus, if the draft is payable on demand, the draft
is dishonored if presentment for payment is duly made to the acceptor and the draft is not
paid on the day of presentment. 68 Where an accepted draft is payable at a definite time,
its dishonor is governed by the same rule as that which applies to a note which is payable
at or through a bank. 69 Under this rule, if the draft is not payable on demand, the draft
is dishonored if presentment for payment is duly made to the acceptor and payment is not
made on the day it becomes payable or the day of presentment, whichever is later. 70
Footnotes
As to the dishonor of a demand note, see 352.
As to the dishonor of a note payable at or through a bank, see 352.
357 Dishonor upon revocation of mistaken payment or acceptance
View Entire Section


Notwithstanding the provisions of Article 4 of the Uniform Commercial Code concerning
the final payment of items by banks, 71 if an instrument is paid or accepted by mistake
and the payor or acceptor recovers payment or revokes acceptance, the instrument is
deemed not to have been paid or accepted and is treated as dishonored, and the person
from whom payment is recovered has rights as a person entitled to enforce the
dishonored instrument. 72
Footnotes
As to persons entitled to enforce negotiable instruments, see 641 et seq.
As to the recovery back of payments made by mistake, see 410, 411.
358 Acts not constituting dishonor
View Entire Section

Certain acts do not constitute dishonor under Article 3 of the Uniform Commercial Code,
such as where the party to whom presentment is made returns an instrument for lack of a
necessary indorsement, or refuses payment or acceptance for failure of the presentment to
comply with the terms of the instrument, an agreement of the parties, or other applicable
law or rule. 73 The return of an instrument for reasons such as "signature missing,"
"signature illegible," "forgery," "payee altered," "date altered," "postdated," and "not on
us," also does not constitute dishonor. 74 The refusal to certify a check is not dishonor.
75
In addition, payment or acceptance of an unaccepted documentary draft may be delayed

without dishonor until no later than the close of the third business day of the drawee
following the day on which payment or acceptance would be required if the draft were
not a documentary draft. 76 If a documentary draft is given to a bank for collection, and
the draft or the relevant instructions require presentment "on arrival," "when the goods
arrive," or the like, the refusal to pay or accept because the goods have not arrived is not
dishonor. 77
Footnotes
Footnote 73. 333.

A bank's action in refusing to issue a counter check to a co-owner of a joint checking
account whose name had been removed from the account without her consent did not
amount to dishonor. Wright v Commercial & Sav. Bank, 297 Md 148, 464 A2d 1080, 36
UCCRS 1687, 39 ALR4th 1099.
Footnote 76. 338.
359 --Effect of consent to late acceptance of dishonored draft
View Entire Section

If a draft is dishonored because timely acceptance of the draft was not made and the
person entitled to demand acceptance consents to a late acceptance, from the time of
acceptance the draft is treated as never having been dishonored. 78 In other words, the
late acceptance cures the dishonor, and if the draft is subsequently presented for payment
and payment is refused, dishonor occurs at that time. 79 While such a provision has
been recognized as applicable only to time items, such as drafts, which have been
dishonored by nonacceptance, and not to demand items, such as checks, which have been
dishonored by nonpayment, 80 it has also been recognized that the reference in the
provision 81 to the dishonor of a "draft" by "nonacceptance" includes the dishonor of a
check by nonpayment. 82
Footnotes
Where a draft has been dishonored by nonacceptance, a later presentment for payment
and any notice of dishonor are excused unless in the meantime the instrument has been
accepted. UCC 3-511(4) [1952].
Footnote 80. Blake v Woodford Bank & Trust Co. (Ky App) 555 SW2d 589, 21 UCCRS
383 (criticized on other grounds by Stewart v William H. Jolly Plumbing Co. (Ky App)
743 SW2d 861).
Footnote 81. UCC 3-511(4) [1952].
Footnote 82. Leaderbrand v Central State Bank, 202 Kan 450, 450 P2d 1, 6 UCCRS 172.
360 Holder's rights upon dishonor; re-presentment

View Entire Section
Under Article 3 of the Uniform Commercial Code, subject to any necessary notice of
dishonor and protest, the holder has upon dishonor an immediate right of recourse against
the drawers and indorsers. 83 Thus, a party who has accepted a third-party check in
payment of the balance of a judgment obtained on a retail-installment credit agreement
has, on the return of the check for insufficient funds, a cause of action against the drawer
of the check. 84
A term in a draft or an indorsement which allows a stated time for re-presentment in the
event of any dishonor of the draft by nonacceptance if a time draft, or by nonpayment if a
sight draft, gives the holder an option to waive the dishonor without affecting the liability
of a secondary party bound by the term, and to present again up to the end of the stated
time. 85
Caution: The above provision has been omitted from the 1990 version of Article 3.
Footnotes
Footnote 83. UCC 3-507(2) [1952].
Since a cause of action against an indorser accrues upon demand following dishonor of
the instrument, the holder need not first recover judgment against the maker before
proceeding against the indorser. D'Andrea v Feinberg, 45 Misc 2d 270, 256 NYS2d 504,
2 UCCRS 410.
As to the rights of holders, generally, see 238 et seq.
As to notice of dishonor, generally, see 361 et seq.
Footnote 84. Holiday Universal, Inc. v Patterson (Sup) 116 Misc 2d 547, 456 NYS2d 34.
As to the rights of a holder, generally, see 238 et seq.
Footnote 85. UCC 3-507(4) [1952].
2. Notice of Dishonor [361-374]
361 When notice required
View Entire Section

Unless excused, notice of dishonor of a negotiable instrument must be given to an

indorser 86 in order to enforce that indorser's obligation on dishonor of the instrument.
87 Notice of dishonor, unless excused, must also be given to the drawer of an
instrument in order to enforce the drawer's obligation to pay a dishonored draft accepted
by an acceptor other than a bank. 88
Observation: With respect to the requirement of notice of dishonor, the 1990 version
of Article 3 is largely consistent with the 1952 version. 89 However, unlike the 1952
version, which provides that notice of dishonor is necessary in the case of any drawer,
the acceptor of a draft payable at a bank, or the maker of a note payable at a bank, 90
notice of dishonor is not relevant to the liability of a drawer under the 1990 version
except for the case of a draft accepted by an acceptor other than a bank. 91
Under Article 3, notice of dishonor operates for the benefit of all parties who have rights
on the instrument against the party notified. 92 If optional presentment of a time draft
for acceptance is made and acceptance is refused, the holder must give notice of
dishonor. 93 However, no notice need be given to the parties primarily liable or the
maker or acceptor of undomiciled paper. 94
Footnotes
23 ALR3d 932, 18.
Forms: AnswerDefenseLack of notice of dishonor. 5 Am Jur Pl & Pr Forms (Rev),

Complaint, petition, or declarationAllegationDue notice of dishonor. 6A Am Jur Pl

& Pr Forms (Rev), Commercial Law Article 3, Negotiable Instruments 3:306.
Footnote 87. 362.
Footnote 90. UCC 3-501(2)(b) [1952].
Footnote 92. UCC 3-508(8) [1952].

362 --To enforce obligation of indorser
View Entire Section

Unless notice was excused 95 or indorsement of the instrument occurred after maturity,
96 Article 3 of the Uniform Commercial Code requires that notice of dishonor of a
negotiable instrument must be given to an indorser 97 in order to enforce the indorser's
obligation on dishonor of the instrument. 98 Notice of dishonor is therefore a condition
precedent that must be satisfied before the indorser's liability may be enforced. 99
Under this rule, an indorser who adds the words "payment guaranteed," or the like, to an
indorsement may likewise be entitled to notice of dishonor since such an indorser has the
same liability as an indorser who adds no special words to the indorsement. 1 The mere
fact that the indorser of corporate paper is a stockholder, officer, or director of a
corporation does not release the holder of an instrument from the obligation of giving
notice of dishonor in order to charge the indorser. 2 However, where an indorser is the
principal officer of the corporate maker and knows personally that payment will not be
made by the corporation, there is no necessity for making a presentment of the note for
payment and giving the indorser notice of the dishonor. 3
Footnotes
Footnote 95. 373.
Footnote 96. 363.
Footnote 97. 361.
If notice of dishonor of an instrument is required by UCC 3-503, and notice of dishonor

complying with that section is not given to an indorser, the liability of the indorser under
UCC 3-415(a) is discharged. UCC 3-415(c) [1990 Rev].
As to an indorser's obligation on dishonor, see 459 et seq.
Footnote 1. PEB Commentary No. 11 to UCC 3-116 [1996].
Footnote 2. Shenkin v Grant, 3 Misc 2d 333, 152 NYS2d 996.
Forms: Affidavit denying receipt of notice of dishonorBy officer of corporate

indorser. 19 Am Jur Legal Forms 2d, Uniform Commercial CodeArticle 3,
Negotiable Instruments 253:2517.
Footnote 3. Makel Textiles, Inc. v Dolly Originals, Inc. (NY Sup) 4 UCCRS 95.
363 --Effect of indorsement after maturity
View Entire Section

Notwithstanding any other provision governing when notice of dishonor isrequired, 4

notice of dishonor is not necessary to charge an indorser who has indorsed an instrument
after maturity, 5 that is, when it is overdue. 6 Like primary parties, therefore, such
indorsers remain liable on the instrument for the period of the applicable statute of
limitations. 7
Practice guide: This provision of Article 3 refers merely to "after maturity" without
making any distinction in terms of whether the maturity is determined by the face of
the paper or by matters extrinsic to the paper, such as the acceleration of the paper that
makes the paper mature prior to its stated due date. 8 However, since the situation of
accelerated paper being negotiated is fairly rare, that situation may be ignored in favor
of applying this provision literally to any maturity without exception. 9
Observation: The 1990 version of Article 3 does not contain a similar provision
dispensing with the requirement of notice of dishonor when the indorsement is made
after maturity.
Footnotes
Footnote 4. 361.
Footnote 5. UCC 3-501(4) [1952].
Footnote 6. Silk v Merrill Lynch, Pierce, Fenner & Smith, Inc. (Ala) 437 So 2d 112, 37
UCCRS 187.
Footnote 9. 6A Anderson, Uniform Commercial Code 3d 3-501:11 (further noting that

such a conclusion is confirmed by recognition of the fact that any postacceleration
negotiation would probably be made for the purpose of collection and the indorsement in
such a case would ordinarily be made "without recourse").
364 Persons by whom notice may be given

View Entire Section
Notice of dishonor under Article 3 of the Uniform Commercial Code may be given by
any person. 10 There is no requirement that such person be a party to the dishonored
instrument, nor that the person be the authorized agent of a party. 11
Observation: The 1952 version of Article 3 further specifies that notice of dishonor
may be given by or on behalf of the holder or any party who has himself received
notice, or any party who can be compelled to pay the instrument, or an agent or bank in
whose hands the instrument is dishonored. 12 While it is recognized that notice is
normally given by the holder or by an indorser who has himself received notice, this
provision of the 1952 version of the Code is intended to encourage and facilitate notice
of dishonor by permitting any party who may be compelled to pay the instrument to
notify any party who may be liable on it. 13
Footnotes
Footnote 12. UCC 3-508(1) [1952].
365 Persons to whom notice may be given
View Entire Section

When notice of dishonor is required, it must be given to the indorser or drawer whose
obligation is being enforced. 14
Where notice dishonor is given to a partnership, notice to one partner is notice to each
even though the firm has been dissolved. 15 When any party is in insolvency
proceedings instituted after the issue of the instrument, notice may be given either to the
party or to the representative of his estate. 16 In the case of a party who has died or is
incompetent, notice may be sent to such party's last known address or given to his
personal representative. 17
Caution: The above provisions relating to notice in the case of partnerships and in
the case of parties who are insolvent, dead, or incompetent have been omitted from the

1990 version of Article 3.
Footnotes
Notice of dishonor may be given to any person who may be liable on the instrument; in
addition, in the case of an agent or a bank in whose hands the instrument is dishonored,
notice may be given to the agent's principal, a customer, or another agent or bank from
which the instrument was received. UCC 3-508(1) [1952].
Footnote 15. UCC 3-508(5) [1952].
Where it was established that the defendants were conducting business as a partnership
and the dishonored check they had given the plaintiffs had been signed on behalf of the
partnership by one of the partners, notice of dishonor given to the signing partner was
notice to his copartner even though not given to her personally. Perry & Greer, Inc. v
Manning, 282 Or 25, 576 P2d 791, 24 UCCRS 654.
Footnote 16. UCC 3-508(6) [1952].
Footnote 17. UCC 3-508(7) [1952].
366 Time for giving notice of dishonor
View Entire Section

Except for notice given by banks, 18 notice of dishonor under the 1990 version of
Article 3 must be given within 30 days following the day on which dishonor occurred. 19
Under the 1952 version, however, such notice must be given before midnight of the third
business day after dishonor or receipt of notice of dishonor. 20 The giving of notice
within the prescribed time is mandatory, 21 unless compliance has been excused. 22
Since it is the dispatch of notice of dishonor and not its receipt which is significant, 23 a
written notice of dishonor is deemed given when it is sent, even though it is not received.
24
Observation: While the 1990 version of Article 3 has omitted the above provision,
the Uniform Commercial Code does contain a general provision 25 stating that notice
is given when steps are taken as may be reasonably required to inform another person
in due course, whether or not the other person actually comes to know of it. 26
Footnotes

Footnote 18. 367.
Footnote 20. UCC 3-508(2) [1952].
Footnote 21. Standard Premium Plan Corp. v Wolf, 56 Misc 2d 522, 288 NYS2d 987, 5
UCCRS 161.
Article 3 is clear that notice of dishonor of an instrument must be given within the
specific time limits of dishonor in order to charge any secondary party with liability
thereon. Clements v Central Bank of Georgia, 155 Ga App 27, 270 SE2d 194, 29
UCCRS 1536.
Footnote 22. 368.
Footnote 24. UCC 3-508(4) [1952].
Footnote 26. 369.
367 --Notice by bank; by other persons with respect to items taken for collection
View Entire Section

Unless excused, notice of dishonor with respect to an instrument taken for collection by a
collecting bank must be given (1) by the bank before midnight of the next banking day
following the banking day on which the bank receives notice of dishonor of the
instrument, or (2) by any other person within 30 days following the day on which the
person receives notice of dishonor. 27 Under this rule, when a check is presented for
payment on Friday and the next banking day is Monday, the bank has until the midnight
deadline of Monday in which to give notice of dishonor. 28 Where a collecting bank
receives telephonic notice of dishonor from the payor bank on Friday afternoon,
December 10, but waits until the midnight deadline of the banking day following the
banking day upon which it first receives written notice of dishonor, December 17, before
notifying its customer of the dishonor, the collecting bank fails to give notice as required
by Article 3 and is therefore precluded from recovering against its customer. 29
Where a collecting bank re-presents a dishonored check, it cannot extend the time in
which it should have given notice to the secondary party that the check had been initially
dishonored. 30
Footnotes
Any necessary notice must be given by a bank before its midnight deadline. UCC
3-508(2) [1952].
Footnote 28. Southwest Nat'l Bank v ATG Constr. Management, Inc., 241 Kan 257, 736
P2d 894.
Footnote 29. Wells Fargo Bank v Hartford Nat'l Bank & Trust Co. (DC Conn) 484 F
Supp 817, 28 UCCRS 446.
As to the manner of giving notice of dishonor, generally, see 369.
Footnote 30. Clements v Central Bank of Georgia, 155 Ga App 27, 270 SE2d 194, 29
UCCRS 1536.
368 --Delayed notice
View Entire Section

Although compliance with the time periods prescribed by Article 3 for giving notice of
dishonor is mandatory, 31 delay in giving notice may be excused if the party was
without notice that notice of dishonor was due, 32 or if the delay was caused by
circumstances beyond the control of the person giving the notice and the person giving
the notice exercised reasonable diligence after the cause of the delay ceased to operate.
33 This provision does not excuse the giving of notice, but merely excuses the fact that
it was a late notice. 34
In order for a party to be excused for giving an untimely notice of dishonor, such party
must show that he or she exercised ordinary care in seeking to give timely notice;
otherwise, it is apparent that if the delay was caused in whole or in part by such party's
failure to have exercised ordinary care, it could not be found that the lateness of the
notice was caused by circumstances beyond the control of the person giving notice. 35
Once the barrier to giving notice is removed, the party required to give notice of dishonor
must give such notice with reasonable diligence; if not so given, the person against whom
the notice of dishonor will operate may successfully defend against liability on the
ground that the notice of dishonor was untimely. 36
Footnotes
Footnote 31. 366.
Footnote 32. UCC 3-511(1) [1952].

Where the collecting bank had notice of the dishonor of a check, it therefore had notice
that notice of dishonor was due the indorser. Clements v Central Bank of Georgia, 155
Ga App 27, 270 SE2d 194, 29 UCCRS 1536.
Where the delay in notice of dishonor was not due to circumstances beyond the bank's
control but was due to the bank's failure to give it once the bank itself had notice of the
dishonor and was under an obligation to take action, the delay in notice was not excused
and did not prevent the indorser's discharge. Clements v Central Bank of Georgia, 155
Ga App 27, 270 SE2d 194, 29 UCCRS 1536.
As to when notice of dishonor is excused, generally, see 373.
Forms: Instruction to juryWhen delay in giving notice of dishonor excused. 6A Am

Jur Pl & Pr Forms (Rev), Commercial Code Article 3, Negotiable Instruments
3:309.
Definition: "Ordinary care," in the case of a person engaged in business, means

observance of reasonable commercial standards, prevailing in the area in which the
person is located, with respect to the business in which the person is engaged; in the
case of a bank that takes an instrument for processing by automated means, reasonable
commercial standards do not require examination of the instrument if the failure to
examine does not violate the bank's prescribed procedures and such procedures do not
vary unreasonably from general banking usage not disapproved under Article 3 or
Article 4. UCC 3-103(a)(7) [1990 Rev].
369 Form and manner of giving notice
View Entire Section

The Uniform Commercial Code generally provides that a person notifies or gives a notice
or notification to another by taking such steps as may reasonably be required to inform
the other in ordinary course, whether or not the other person actually comes to know of it.
37 With respect to notice of dishonor, Article 3 further provides that such notice may be
given in any reasonable manner, oral or written, 38 or by any commercially reasonable
means, including an oral, written, or electronic communication. 39
Caution: While oral notice of dishonor is permissible under Article 3, only written
notice of dishonor may be permissible under pertinent provisions of Article 4 40

requiring that notice be "sent," as such provisions have been held to imply the delivery
of a written instrument. 41 Accordingly, since Article 4 provides that it takes
precedence over Article 3 where a conflict exists between the two Articles, 42 the
courts have generally held that oral notice of dishonor by a bank is insufficient, even
though authorized by Article 3. 43 Some courts, however, have taken the opposite
view 44 and have rejected a rigid requirement of written notice on the basis that is
contrary to the principles underlying the Uniform Commercial Code. 45
Footnotes
Footnote 38. UCC 3-508(3) [1952].
Where the defendant bank had received a telephone call from an out-of-town bank that a
check which a customer had deposited with the defendant and upon which the defendant
had granted provisional credit had been dishonored for insufficient funds, the oral
notification was an effective notice of dishonor under UCC 3-508(3) to produce a cause
of action against the customer. Peoria Sav. & Loan Asso. v Jefferson Trust & Sav. Bank,
81 Ill 2d 461, 43 Ill Dec 712, 410 NE2d 845, 29 UCCRS 1305.
In an action by a bank to recover funds credited to the defendant's checking account plus
cash paid to the defendant following the defendant's deposit of a check which was
subsequently dishonored, unrebutted testimony of the bank manager that he called the
defendant by telephone on the day following the date on which the bank learned of the
dishonor established that effective notice of dishonor was made under UCC 3-508.
Laurel Bank & Trust Co. v Sahadi, 32 Conn Supp 172, 345 A2d 53, 17 UCCRS 1259.
Where an officer of the payor bank talked with an officer of the collecting bank and
informed him of the payor bank's intention to dishonor checks and make an offset against
the customer's account for obligations due to the payor bank, the payor bank gave proper
notice of dishonor under UCC 3-508(3). Security Trust Co. v First Nat'l Bank, 79
Misc 2d 523, 358 NYS2d 943, 16 UCCRS 464.
23 ALR3d 932, 18.
Footnote 40. UCC 4-212, 4-302.
Footnote 41. Los Angeles National Bank v Bank of Canton (2nd Dist) 31 Cal App 4th
726, 37 Cal Rptr 2d 389, 95 CDOS 535, 95 Daily Journal DAR 910, 25 UCCRS2d 873,
review den (Apr 13, 1995); Available Iron & Metal Co. v First Nat'l Bank (1st Dist) 56
Ill App 3d 516, 13 Ill Dec 940, 371 NE2d 1032, 23 UCCRS 694; Mutual Sav. & Loan v
National Bank of Detroit, 185 Mich App 591, 462 NW2d 797, 13 UCCRS2d 463, app
den 437 Mich 1013.

13 Ill Dec 940, 371 NE2d 1032, 23 UCCRS 694; Mutual Sav. & Loan v National Bank
of Detroit, 185 Mich App 591, 462 NW2d 797, 13 UCCRS2d 463, app den 437 Mich
1013; General Motors Acceptance Corp. v Bank of Richmondville (3d Dept) 203 App
Div 2d 851, 611 NYS2d 338.
A collecting bank was not entitled to revoke a settlement on dishonored checks and
charge back the account of the depositary bank where the collecting bank gave the
depositary bank only oral notice of dishonor; although UCC 3-508 provides that notice
of dishonor may be given in any reasonable manner and that it may be oral or written,
and although UCC 4-104(3) provides that 3-508 applies to interbank transactions,
UCC 4-212, under which the collecting bank may revoke a settlement given in the case
of dishonor and charge back the amount to its customer if it "sends" notification of that
fact, required notice of dishonor to be given in writing and UCC 4-102(1), prevailed
over conflicting provisions of UCC 3-508. Valley Bank & Trust Co. v First Sec. Bank,
N.A. (Utah) 538 P2d 298, 17 UCCRS 480.
Since UCC 4-301, 4-302 require written notice of dishonor, a payor bank's oral notice
of dishonor before the midnight deadline did not absolve it of its responsibility under
UCC 4-302. Reynolds-Wilson Lumber Co. v Peoples Nat'l Bank (Okla) 699 P2d 146,
40 UCCRS 1319.
Footnote 44. Clements v Central Bank of Georgia, 155 Ga App 27, 270 SE2d 194, 29
UCCRS 1536 (holding that it was neither logical nor credible that the legislature meant to
defuse UCC 3-508 permitting oral or written notice of dishonor, and to render
meaningless the other Article 3 and Article 4 provisions dealing with the discharge of an
indorser's liability within specific time limits by providing that dishonor does not occur
until written notice of it is "sent").
Notice of dishonor under UCC 4-212 need not be given in writing since UCC 3-508
provides that such notice may be given in any reasonable manner. Bank of Commerce v
De Santis (Civ Ct) 114 Misc 2d 491, 451 NYS2d 974, 34 UCCRS 1270.
Footnote 45. Yoder v Cromwell State Bank (Ind App) 478 NE2d 131, 41 UCCRS 173.
370 Content of notice of dishonor
View Entire Section

No specific words are required for a notice of dishonor. 46 A notice of dishonor is

sufficient if it reasonably identifies the instrument and indicates that the instrument has
been dishonored or has not been paid or accepted. 47 Under this rule, it is not
necessary that the notice disclose the name of the holder of the instrument in order to be
sufficient. 48 The return of an instrument given to a bank for collection is alone
sufficient notice of dishonor. 49 However, a receipt given for checks taken for
collection is not a sufficient notice of dishonor where the receipt does not indicate that
the checks have been dishonored. 50
A misdescription which does not mislead the party notified does not vitiate the notice of
dishonor. 51
Observation: Because the Code states the identification requirement in terms of

"reasonably identifies," it is to be concluded that the efficacy of the notice is not
impaired because the description of the dishonored instrument is not as complete as it
could be or because it has minor errors; it may be concluded, moreover, that as long as
the notice is not seriously misleading it will be held that the notice was sufficient to
permit enforcement of the liability of the person notified. 52
Footnotes
A notice of dishonor may be in any terms which identify the instrument and state that it
has been dishonored; in this regard, sending the instrument bearing a stamp, ticket, or
writing stating that acceptance or payment has been refused, or sending a notice of debit
with respect to the instrument, is sufficient. UCC 3-508(3) [1952].
Forms: Notice of dishonorNonpayment. 6A Am Jur Pl & Pr Forms (Rev),

Commercial Law Article 3, Negotiable Instruments 3:302.
Notice of dishonorNonacceptance. 6A Am Jur Pl & Pr Forms (Rev), Commercial

Law Article 3, Negotiable Instruments 3:303.
AffidavitService of notice of dishonor by mail. 6A Am Jur Pl & Pr Forms (Rev),

Commercial Law Article 3, Negotiable Instruments 3:304.
Notice of dishonorNonpayment. 19 Am Jur Legal Forms 2d, Uniform Commercial

CodeArticle 3, Negotiable Instruments, Form 253:2513.
Notice of dishonorNonacceptance. 19 Am Jur Legal Forms 2d, Uniform Commercial

CodeArticle 3, Negotiable Instruments 253:2514.
Notice of dishonorPromissory note. 19 Am Jur Legal Forms 2d, Uniform

Commercial CodeArticle 3, Negotiable Instruments 253:2515.
Affidavit of having given notice of dishonorBy mail. 19 Am Jur Legal Forms 2d,
Uniform Commercial CodeArticle 3, Negotiable Instruments 253:2516.
Footnote 48. First Stroudsburg Nat'l Bank v Nixon (Pa CP Ct) 14 UCCRS 748.
13 Ill Dec 940, 371 NE2d 1032, 23 UCCRS 694.

Footnote 51. UCC 3-508(3) [1952].
371 Place of giving notice
View Entire Section

Article 3 of the Uniform Commercial Code does not specify where notice of dishonor is
to be sent, but only provides that notice may be given in any reasonable manner or by any
commercially reasonable means. 53 However, under the general provisions of Article 1,
the Code does provide that for any writing or notice to be "sent" in the statutory sense of
the term, the writing or notice must be properly addressed, and, in the case of an
instrument, sent to an address specified on the instrument or otherwise agreed, or if there
is none, to any address reasonable under the circumstances. 54 The failure to address a
notice of dishonor properly is not fatal as the receipt of any writing or notice within the
time at which it would have arrived if properly sent has the effect of a proper sending. 55
Footnotes
Footnote 53. 369.
372 Proof of dishonor and notice of dishonor
View Entire Section

The following are admissible as evidence and create a presumption of dishonor and of
any notice of dishonor as stated:
(1) a document, regular in form, which purports to be a protest; 56
(2) a purported stamp or writing of the drawee, payor bank, or presenting bank on or
accompanying the instrument which states that acceptance or payment has been refused
and which sets forth reasons for the refusal that are not inconsistent with dishonor; 57
(3) a book or record of the drawee, payor bank, or collecting bank, kept in the usual
course of business, which shows dishonor, even though there is no evidence of who made

the entry. 58 No priority or best evidence rule is established as between these three
classes of evidence and each is equally as admissible and as probative as the others. 59
Observation: The evidence declared to be admissible as evidence of dishonor and

notice of dishonor is not the only evidence which is admissible to show dishonor and
notice of dishonor, but the evidence described in the Code creates a presumption of
dishonor and of any notice of dishonor stated therein; however, even though evidence
other than that described does not create a presumption, it will support the drawing of
an inference. 60
Footnotes
A protest is self-authenticating; that is, it is not necessary to establish that the officer
executing the protest was qualified to do so, or to establish that the protest itself is
authentic. 6A Anderson, Uniform Commercial Code 3d 3-510:4.
Under UCC 3-510(b), the notation "account closed" on a check deposited by a

customer of a bank in the customer's account was admissible as primary evidence to
establish the fact stated in such notation. Serve v First Nat'l Bank, 143 Ga App 239, 237
SE2d 719, 22 UCCRS 1001.
A stamp or writing of a drawee bank on a check or accompanying paper, which stated

that acceptance or payment had been refused because there was "no account," was
admissible in evidence and created a presumption of dishonor. State v Young, 203 Kan
296, 454 P2d 724.
Since no limitation is placed on the form of the business record, a computer printout is
admissible subject to the usual rules for establishing a predicate or foundation for such
evidence. 6A Anderson, Uniform Commercial Code 3d [Rev] 5-505:7.
Practice References Prima facie proof of dishonor and testimony to establish

nonacceptance. 9 Am Jur Proof of Facts 573, Promissory Notes and Other Negotiable
Instruments, Proof 1.
Forms: Instruction to juryEvidence of dishonor and notice of dishonor. 6A Am Jur

Pl & Pr Forms (Rev), Commercial Code Article 3, Negotiable Instruments 3:316.

373 Excused notice of dishonor
View Entire Section

Notice of dishonor is excused if, by the terms of the instrument, notice of dishonor is not
necessary to enforce the obligation of a party to pay the instrument, 61 or if notice of
dishonor has been waived. 62 Notice is further excused under the 1952 version of
Article 3 when the party to be charged has dishonored the instrument, has countermanded
payment, or otherwise has no reason to expect or right to require that the instrument be
accepted or paid, 63 or when by reasonable diligence notice cannot be given. 64 The
fact that the cause for the failure to give notice of dishonor is the fault of a third person
does not constitute an excuse. 65
When the person who is otherwise entitled to notice of dishonor has knowledge of the
matter to which the notice relates, such as where such person is an officer or a
stockholder of the primary party, notice of dishonor is unnecessary. 66
Footnotes
Forms: Complaint, petition, or declarationAllegationNotice of dishonor

excusedTerms of instrument. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code
Article 3, Negotiable Instruments 3:307.
Footnote 62. 374.
Footnote 63. UCC 3-511(2)(b) [1952].
A vendor of realty, to whom a vendee gave a check for a monthly installment payment
that was dishonored for insufficient funds, was not required to give notice of dishonor to
the vendee because the vendee, as the party to be charged, had dishonored the instrument
himself. Hacker v Fry (CP Ct) 17 Ohio Misc 2d 6, 17 Ohio BR 193, 477 NE2d 477.
The drawer of a check is not entitled to notice of dishonor after the check has been
dishonored where the drawer had placed a "stop-payment" order on the check and
therefore had no reason to expect that it would be paid. Suit & Wells Equipment Co. v
Citizens Nat'l Bank, 263 Md 133, 282 A2d 109, 9 UCCRS 1230; Harik v Harik (6 Mich)
861 F2d 139, 7 UCCRS2d 807.
Footnote 64. UCC 3-511(2)(c) [1952].
When it is apparent that there is no reason to believe that additional efforts to give notice
will be successful, the holder of negotiable paper may stop trying to give notice of
dishonor to secondary parties. Gaffin v Heymann (RI) 428 A2d 1066, 32 UCCRS 176.
Footnote 65. Nevada State Bank v Fischer, 93 Nev 317, 565 P2d 332, 21 UCCRS 1384.
Footnote 66. A. J. Armstrong Co. v Janburt Embroidery Corp., 97 NJ Super 246, 234
A2d 737, 4 UCCRS 748.
Because the defendant indorser of a promissory note knew that the note was not paid and
that the maker would not pay it, the defendant had full knowledge of everything that
notice of dishonor of the note would have given him; accordingly, notice of dishonor was
unnecessary to charge the respondent as indorser. Federal Deposit Ins. Corp. v Kirkland,
272 SC 310, 251 SE2d 750, 26 UCCRS 110.
As to the persons entitled to notice of dishonor, see 365.
374 --Waiver
View Entire Section

Notice of dishonor is excused if the party whose obligation is being enforced has waived
notice of dishonor. 67 In the great majority of cases, notice of dishonor is waived with
respect to notes. 68
A waiver may be included as a provision in the instrument itself; for example, the
instrument may state in general terms that notice of dishonor is not required with respect
to all parties to the instrument or to all indorsers. 69 A person who signs an instrument
containing such a waiver manifests by the act of signing that he or she intends to be
bound by the waiver. 70 A waiver may also be added by an individual upon signing the
instrument as an indorser. 71
Caution: Under the 1952 version of Article 3, a waiver of notice is binding upon all
parties when it is embodied in the instrument itself; however, it is only binding upon
the indorser when it is written above the indorser's signature. 72 This provision has
been omitted from the 1990 version of Article 3.
In order to be effective, the waiver of notice of dishonor need not be written; if written,
the waiver need not be included on the instrument itself. 73 Rather, any words, written
or oral, or any conduct, manifesting an intent waiving the requirement of notice is
sufficient to waive the lack of notice of dishonor. 74
Observation: The problems involved in determining whether there has been a waiver
of notice of dishonor are the same as those involved in determining whether there has
been a waiver of presentment. 75
A waiver of presentment constitutes a waiver of notice of dishonor under the 1990

version of Article 3, 76 while a waiver of protest constitutes a waiver of notice of
dishonor under the 1952 version. 77

Footnotes
Notice of dishonor is entirely excused when the party to be charged has waived it
expressly or by implication either before or after it is due. UCC 3-511(2)(a) [1952].
23 ALR3d 932, 19.5.
Forms: Complaint, petition, or declarationAllegationNotice of dishonor

excusedWaiver. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code Article 3,
Waiver of presentment and notice. 19 Am Jur Legal Forms 2d, Uniform Commercial
Code, Article 3Negotiable Instruments 253:2543.
Footnote 72. UCC 3-511(6) [1952].
When the terms of a waiver contained in an instrument limit it to a particular party, other
persons indorsing the paper are not affected by the waiver. First Nat'l Bank v Linn, 168
W Va 76, 282 SE2d 52, 32 UCCRS 218.
As to the waiver of the requirement of presentment, generally, see 347 et seq.
Footnote 77. 380.
3. Protest [375-380]
375 Generally
View Entire Section

A protest is a certificate of dishonor made by a United States consul or vice consul, a

notary public, or other person authorized to administer oaths by the law of the place
where the dishonor occurs. 78 A protest creates a presumption of dishonor and of any
notice of dishonor stated. 79
Protest is necessary under the 1952 version of Article 3 in order to charge the drawer and
indorsers of any draft drawn or payable outside of the states, territories, dependencies,
and possessions of the United States, the District of Columbia, and Puerto Rico. 80
When protest is not necessary, the holder may at his or her option make protest of any
dishonor of any other instrument and, in the case of a foreign draft, may on insolvency of
the acceptor before maturity make protest for better security. 81
Unlike the 1952 version of Article 3, protest is not mandatory under the 1990 version and
must be requested by the holder. 82 Even if requested, moreover, protest under the 1990
version is not a condition to the liability of indorsers or drawers; rather, it is a service
provided by the banking system to establish that dishonor has occurred and, like other
services provided by the banking system, it is available if market incentives, interbank
agreements, or governmental regulations require it. 83 However, protest may be a
requirement for liability on international drafts governed by foreign law which Article 3
cannot affect. 84
Practice guide: Even when not required, protest may have definite convenience
where process does not run to another state and the taking of depositions is a slow and
expensive matter; even as to an instrument drawn and payable entirely within one state,
there may be convenience in saving the trip of a witness from one city to another to
testify to dishonor, where the substitute evidence of dishonor and notice of dishonor
cannot be relied upon. 85
Footnotes
A protest is a certificate of dishonor made under the hand and seal of a United States
consul or vice consul, a notary public, or other person authorized to certify dishonor
under the law of the place where the dishonor occurs. UCC 3-509(1) [1952].
Forms: Certificate of protest of instrument. 6A Am Jur Pl & Pr Forms (Rev),

Commercial Code Article 3, Negotiable Instruments 3:311.
Complaint alleging due protest of dishonor. 6A Am Jur Pl & Pr Forms (Rev),

Commercial Code Article 3, Negotiable Instruments 3:314.
AnswerDefenseProtest certified by unauthorized person. 6A Am Jur Pl & Pr Forms

(Rev), Commercial Code Article 3, Negotiable Instruments 3:315.
Certificate of protest of commercial paper. 19 Am Jur Legal Forms 2d, Uniform

Commercial CodeArticle 3, Negotiable Instruments 253:2553.

As to proof of dishonor and notice of dishonor, generally, see 372.
Footnote 80. UCC 3-501(3) [1952].
23 ALR3d 932, 19.5.
Footnote 81. UCC 3-501(3) [1952].
376 Who may make protest
View Entire Section

A protest may be made by a United States consul or vice consul, a notary public, or any
person authorized to administer oaths 86 or to certify dishonor 87 by the law of the
place where the dishonor occurs. No other person may execute a protest. 88
Although Article 3 does not define the place where dishonor occurs, it is deemed to be
the place where presentment is or can be made. 89
Footnotes
Footnote 87. UCC 3-509(1) [1952].
Forms: AnswerDefenseProtest certified by unauthorized person. 6A Am Jur Pl &

Pr Forms (Rev), Commercial Code Article 3, Negotiable Instruments 3:315.

377 Basis for protest
View Entire Section

A protest may be made on information satisfactory to the person making the protest. 90
Such person has the discretion to determine whether the information is satisfactory and it
is not necessary that he or she act on his or her own knowledge. 91 Thus, protest may be
made on the basis of anything that the person making protest believes is a satisfactory
basis for issuing the protest, 92 including hearsay which the officer regards as reliable,
the admission of the person who has dishonored, or the fact of re-presentment which
constitutes indirect proof of the original dishonor. 93 There is no requirement, therefore,
that such person be presented with information that would satisfy the rules of evidence of
any particular jurisdiction. 94
Footnotes
378 Form and contents
View Entire Section

A protest need not be in any particular form. 95 However, the protest must identify the
instrument and certify either that presentment has been made or, if not made, the reason
why it was not made 96 or was excused, 97 and that the instrument has been dishonored
by nonacceptance or nonpayment. 98 The protest may also certify that notice of
dishonor has been given to some or all of the parties. 99
There is no requirement that the protest go beyond stating conclusions and recite the facts
on which the conclusions are based. 1 For example, there is nothing in Article 3
requiring a certification of the time, place, and any other relevant details of the
presentment or of the excuse for not presenting the instrument; rather, it is sufficient that
the person making the protest "certify" to the conclusion that presentment was made or in
general terms describe the reason why it was not made. 2 Similarly, there is no

statement as to whether more than a recital of dishonor is required; thus, a protest is
properly admitted in evidence even though it merely states the fact of dishonor without
reciting the factual details. 3
Practice guide: It would be preferable to include a recital as to the time, place, and
other details that are relevant, since ordinarily the protest will have greater weight
when there are such details to show that the conclusions stated are correct. 4
A protest need not be annexed to the instrument, and may be forwarded separately;
however, annexation may identify the instrument. 5 If the instrument is lost, destroyed,
or wrongfully withheld, protest is still sufficient if it identifies the instrument, but the
owner must prove his or her rights as in any action on a lost, destroyed, or stolen
instrument. 6
Footnotes
Footnote 97. UCC 3-509(2) [1952].
379 Place and time for making protest
View Entire Section

There is no requirement under Article 3 that protest itself be made at the place of
dishonor. 7

Any necessary protest under the 1952 version of Article 3 8 is due by the time that
notice of dishonor is due, 9 unless, before protest is due, an instrument has been noted
for protest by the officer to make protest, in which event the protest may be made at any
time thereafter as of the date of the noting. 10 Any optional protest may be made at any
time before it is used as evidence. 11
Observation: The 1990 version of Article 3, under which protest is not a mandatory
requirement, 12 contains no provision as to the time for making a protest.
Footnotes
Footnote 8. 375.
Footnote 9. UCC 3-509(4) [1952].
Footnote 10. UCC 3-509(5) [1952].
Footnote 11. Official Comment 7 to UCC 3-509 [1952.].
Footnote 12. 375.
380 Excused protest or delay in making protest; waiver
View Entire Section

Where protest is mandatory, 13 it is entirely excused when (1) the party to be charged
has dishonored the instrument, countermanded payment, or has no reason to expect or
right to require acceptance or payment of the instrument; or (2) the protest cannot be
made by reasonable diligence. 14 Protest is also excused where a draft is later
presented for payment after being dishonored by nonacceptance, unless in the meantime
the instrument has been accepted. 15
A necessary protest may also be waived, expressly or by implication, either before or

after it is due. 16 A waiver of protest constitutes a waiver of presentment and of notice
of dishonor even though protest is not required. 17 However, a person's waiver of notice
and protest does not operate to excuse a bank for failing to exercise reasonable care in
giving notice of dishonor. 18
Footnotes
Footnote 13. 375.

Footnote 14. UCC 3-511(2) [1952].
Where the defendant indorser of a note directed his bank not to honor the note, neither he
nor his corporation was entitled to notice of protest. Franklin Nat'l Bank v Eurez Constr.
Corp., 60 Misc 2d 499, 301 NYS2d 845, 6 UCCRS 634.
For further discussion of excuse with respect to the requirements of presentment and
notice of dishonor, see 313 et seq.
23 ALR3d 932, 19.5.
Footnote 15. UCC 3-511(4) [1952].
As to the effect of a consent to the late acceptance of a dishonored draft, generally, see
359.
Footnote 16. UCC 3-511(2)(a) [1952].
For further discussion of waiver with respect to the requirements of presentment and
notice of dishonor, see 313, 374.
Footnote 17. UCC 3-511(5) [1952].
Footnote 18. Manufacturers Hanover Trust Co. v Akpan, 91 Misc 2d 622, 398 NYS2d
477, 22 UCCRS 1009.
IX. ACCEPTANCE OF DRAFT [381-390]
Research References
UCC 3-115, 3-410 through 3-413, 3-417, 3-418 [1952]; UCC 3-408 through 3-410,
3-414, 3-417, 3-418 [1990 Rev]; UCC 4-403
ALR Digest: Bills and Notes 165 et seq., 174, 175; Signature 1 et seq.
ALR Index: Acceptance; Bills and Notes; Certificates and Certification; Certified
Checks; Checks and Drafts; Dishonor; Signatures; Uniform Commercial Code
(Rev), Commercial Code : Article 3Negotiable Instruments 3:202-3:206, 3:209,
3:211, 3:212, 3:224-3:226, 3:228
Instruments 253:2451, 253:2452
Commercial Code 3d [Rev] 3-408:4, 3-409:5, 3-409:6, 3-409:8 through 3-409:11,
3-410:3 through 3-410:7, 3-418:9, 3-801:5
381 Generally
View Entire Section

An "acceptance" is the drawee's signed agreement to honor or pay a draft as presented; 19

it must be written on the draft, and may consist of the drawee's signature alone. 20
Observation: As a matter of definition, only a check or a draft can be accepted,

because only a drawee can accept; promissory notes are not accepted. 21
Certification of a check is an acceptance, 22 and an acceptanc, therefore, may be made

by a writing on a check which indicates that the check is certified. 23 However, the
drawee has no obligation to certify a check 24 and a refusal to certify is not dishonor of
the instrument. 25
A draft may be accepted, even though it has not been signed by the drawer, or is
otherwise incomplete, 26 and despite the fact that it is overdue or has been dishonored.
27 The fact that the drawer's signature is missing does not prevent the acceptance of a
draft, because, by accepting it, the acceptor has agreed to pay the face amount of the
instrument, and not merely to pay if the drawer fails to do so. 28
Footnotes
By accepting in writing on an instrument, a drawee may agree to honor it as presented;

on the other hand, a drawee may reject the instrument, as by stamping a notation of
insufficient funds on the check. Tepper by & Through Michelson v Citizens Federal Sav.
& Loan Asso. (Fla App D3) 448 So 2d 1138, 38 UCCRS 528.
Forms: Complaint, petition, or declarationAllegationAcceptance of draft. 6A Am

3:203.
AnswerDefenseActs did not constitute acceptance. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefenseUnauthorized acceptance of bill. 6A Am Jur Pl & Pr Forms (Rev),

Instruction to juryAcceptance defined. 6A Am Jur Pl & Pr Forms (Rev),

Footnote 20. 384.
Footnote 22. UCC 3-411(1) [1952].
The certification of a bank that a check is good is the equivalent to acceptance, in that, a
certified check is available to the holder for all the purposes of money. Cuesta, Rey &

Co. v Newsom, 102 Fla 853, 136 So 551, 2 USTC 792, 10 AFTR 809.
Forms: Certification of check. 19 Am Jur Legal Forms 2d, Uniform Commercial

Code: Article 3Negotiable Instruments 253:2451, 253:2452.
AnswerDefenseCertification of check as acceptance of payment under terms

specified. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:209.
Footnote 27. 385.
As to the discharge of the drawer's liability upon acceptance, see 382.
382 Necessity and effect of acceptance
View Entire Section

The drawee of a check or other draft, normally, is not liable on the instrument until the
drawee accepts it. 29 However, where a drawer draws a draft on itself, the instrument
has the effect of a promissory note; 30 acceptance, therefore, is not necessary to impose
liability on the drawer/drawee. 31
Observation: While the failure of the drawee to accept will bar any liability from
arising under Article 3 of the Uniform Commercial Code (UCC), the drawee may be
found liable for breach of a contract to accept based upon non-UCC principles. 32
The pre-1990 version of the UCC provides that the acceptor of a draft engages to pay the
instrument according to its tenor at the time of the engagement, or as completed pursuant
to the section of the UCC 33 on incomplete instruments. 34 Under the 1990
Revision of the UCC, the acceptor of a draft is obliged to pay the draft:
According to its terms at the time it was accepted, even though the acceptance states
that the draft is payable "as originally drawn" or equivalent terms
If the acceptance varies the terms of the draft, according to the terms of the draft as
varied

If the acceptance is of a draft that is an incomplete instrument, according to its terms as
completed to the extent stated in the provisions of the UCC governing incomplete
instruments and the alteration of instruments 35
Under the pre-1990 version of the UCC, the liability of the drawer and all prior indorsers
is discharged when the holder obtains the acceptance of the drawee in the form of
certification of the check. 36 The 1990 Revision provides that the drawer is discharged
when a draft is accepted by a bank, regardless of when or by whom the acceptance is
obtained. 37
Comment: The 1990 Revision changed the rule of the pre-1990 version of the UCC
that the drawer is discharged only if the holder obtains acceptance. 38
Footnotes
Footnote 30. Canal Ins. Co. v First Nat'l Bank (App) 266 Ark 1044, 596 SW2d 710, affd
268 Ark 356, 596 SW2d 709, 28 UCCRS 1063; First Nat'l Bank v South Carolina Ins.
Co. (La App 1st Cir) 432 So 2d 417, 36 UCCRS 876; Friendly Nat'l Bank v Farmers Ins.
Group (Okla) 630 P2d 318, 31 UCCRS 1634.
A cashier's check is a draft drawn on a bank and is deemed to have been accepted in
advance by the mere fact of its issuance. Taboada v Bank of Babylon, 95 Misc 2d 1000,
408 NYS2d 734, 25 UCCRS 196.
Footnote 31. Canal Ins. Co. v First Nat'l Bank (App) 266 Ark 1044, 596 SW2d 710, affd
268 Ark 356, 596 SW2d 709, 28 UCCRS 1063.
As to the liability of an acceptor, generally, see 447 et seq.
Forms: Complaint, petition, or declarationAllegationBy holderAgainst

acceptorBreach of contract to accept bill of exchange. 6A Am Jur Pl & Pr Forms
Footnote 33. UCC 3-115 [1952].
Footnote 34. UCC 3-413(1) [1952].
As to the warranty of a person obtaining acceptance that the instrument has not been
materially altered, see 389.
Forms: Complaint, petition, or declarationAllegationNonpayment of accepted draft.

Complaint, petition, or declarationRefusal of payment after acceptance and

certification of check. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Complaint in federal courtDiversity of citizenshipBy holderAgainst acceptor of bill

of exchangeTo recover amount due on bill. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationAllegationBy indorseeAgainst

acceptorNonpayment of accepted draft. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationAllegationBy assigneeAgainst acceptor of

draftRefusal to pay balance due on assigned draft. 6A Am Jur Pl & Pr Forms (Rev),
Footnote 35. UCC 3-413(a) [1990 Rev], referring to UCC 3-115 [1990 Rev]
(incomplete instruments) and UCC 3-407 [1990 Rev] (alteration of instruments).
As to an acceptance varying the terms of a draft, see 387 et seq.
Footnote 36. UCC 3-411(1) [1952].
383 --Acceptance of bills in sets
View Entire Section

Under a provision of the pre-1990 version of the Uniform Commercial Code (UCC)
which is not contained in the 1990 Revision of the UCC, any person who accepts a single
part of a draft drawn in a set thereby becomes liable to any holder in due course of that
part as if it were the whole set. 39
Observation: Although the parts of a draft drawn in a set specify that the order is
operative only if no other part has been honored, each part may be negotiated
separately and the taker of any part who otherwise qualifies as such may be a holder in
due course of the draft. 40
With respect to the drawee, the first part of the draft which is presented is entitled to
payment or, if a time draft, to acceptance and payment; moreover, acceptance of any
subsequently presented part renders the drawee liable thereon. 41
Comment: Payment of the part of a draft subsequently presented is improper, and

the drawee therefore may not charge it against the account of the drawer. 42

Footnotes
Footnote 39. UCC 3-801(2) [1952].
Footnote 41. UCC 3-801(3) [1952].
384 Form of acceptance; necessity of writing on draft
View Entire Section

The drawee's agreement to pay the draft as presented must be written on the draft and
signed. 43 An acceptance may consist of the drawee's signature alone. 44 In addition to
signing the draft, the drawee may add the word "accepted" or "certified" above its
signature, or any other words manifesting or consistent with an intent to accept the draft;
by definition, however, the additional words must not manifest an intent contrary to or
inconsistent with an acceptance. 45
Comment: Customarily, the signature of an acceptor is written vertically across the

face of the instrument, but, since the drawee has no reason to sign, for any other
purpose, a signature in any other place, even on the back of the instrument, is
sufficient; it need not be accompanied by such words as "Accepted," "Certified," or
"Good," but may not bear any words indicating an intent to refuse to honor the draft.
46
The statutory requirement that an acceptance be written bars the possibility of an oral,
electronic, or telephonic acceptance; likewise, the requirement that the acceptance be
written on the instrument bars an acceptance in a collateral writing or letter. 47
Observation: While purported acceptances that are not written on the instrument
have no effect under Article 3 of the Uniform Commercial Code (UCC), there is still
the possibility that they may be binding agreements under general contract law
principles that have not been displaced by the UCC. 48
With respect to acceptance by certification of checks, ordinarily the drawee bank will
write or stamp the word "certified" on the check followed by the signature of an officer
signing in a representative capacity; the drawee bank may also use the word "accepted."
49
Footnotes

The evidence was sufficient to show that a bank had accepted a check, where an officer
of the bank orally assured the payee that the drawer's account contained sufficient funds
and signed the check below the drawer's signature. Greyhound Lines, Inc. v First State
Bank (Minn App) 366 NW2d 354, 40 UCCRS 1757.
A drawee bank which orally informs the payee that there are sufficient funds in the
drawer's account to pay a check does not thereby accept the instrument; even though the
drawee later refuses to accept the check due to insufficient funds, the bank is not liable to
the payee. Groos Nat'l Bank v Shaw's of San Antonio, Inc. (Tex Civ App San Antonio)
555 SW2d 492, 22 UCCRS 996, writ ref n r e (Jan 18, 1978) and rehg of writ of error
overr (Mar 1, 1978).
As to the continued applicability of common law which is not displaced by the UCC, see
18.
385 Time of acceptance; effective date
View Entire Section

Acceptance may be made at any time. 50 A draft may be accepted even though it is
already overdue or has been dishonored. 51
The pre-1990 version of the Uniform Commercial Code (UCC) simply provides that
acceptance becomes operative when completed by delivery or notification. 52 Under the
1990 Revision of the UCC, an acceptance becomes effective when notification pursuant
to instructions is given or the accepted draft is delivered for the purpose of giving rights
on the acceptance to any person. 53 An acceptance, therefore, becomes effective when
the drawee, as the acceptor, takes either of two specified definitive steps: (1) acting in
accordance with instructions already given, notifies the person designated by those
instructions that the draft has been accepted; or (2) delivers the instrument to someone
with the intent that the acceptance be effective. 54

Comment: The Uniform Commercial Code states the generally recognized rule that
an acceptance written on the draft takes effect when the drawee notifies the holder or
gives notice according to instructions. 55
Footnotes
Footnote 52. UCC 3-410(1) [1952].
Footnote 54. 6A Anderson, Uniform Commercial Code [Rev] 3-409:8.
386 --Right of holder to supply date of acceptance
View Entire Section

If a draft is payable at a fixed period after sight and the acceptor fails to date the
acceptance, the holder may complete the acceptance by supplying a date in good faith. 56
The holder may complete the acceptance by writing a date as an addition to the
acceptance that already appears on the instrument. 57 For example, where the drawee of
a draft payable 160 days after sight fails to note the date of written acceptance, and the
draft is sent to the "collect-through" bank specified on the draft which acknowledges
receipt on October 4, 1977, the payee of the draft is entitled to complete the drawee's
acceptance by supplying October 4, 1977 as the date of presentment. 58
Comment: Unless the acceptor writes in a different date, the holder is authorized to
complete the instrument according to the terms of the draft by supplying a date of
presentment; any date supplied by the holder is effective, if made in good faith. 59
Footnotes
Footnote 58. Clawson v Berklund, 188 Mont 48, 610 P2d 1168, 28 UCCRS 1407, 66
OGR 231.

3-409 [1990 Rev].
387 Acceptance varying draft
View Entire Section

Instead of refusing to accept a draft, the drawee may be willing to accept the draft if the
terms are changed; in such a case, the drawee may offer to make an acceptance that
varies the terms of the draft. 60 A draft-varying acceptance, in effect is a counteroffer
by the drawee; the drawee implicitly refuses to accept the draft as tendered, but manifests
the willingness to accept the draft if the terms of liability are not identical to those of the
draft. 61
The terms of a draft are not varied by an acceptance to pay at a particular bank or place in
the United States, unless the acceptance states that the draft is to be paid only at that bank
or place. 62 However, if the terms of a drawee's acceptance do vary from the terms of
the draft as presented, the holder may refuse the acceptance and treat the draft as
dishonored, in which case the drawee may cancel the acceptance. 63
Comment: The section governing acceptances varying drafts applies to conditional

acceptances, acceptances for part of the amount, acceptances to pay at a different time
from that required by the draft, or to the acceptance of less than all of the drawees; it
also applies to any other engagement changing the essential terms of the draft. 64
The fact that a holder to whom a draft-varying acceptance is tendered by the drawee may
refuse it of necessity, requires an express statement by the holder to the drawee; likewise,
if the holder is willing to take the draft-varying acceptance in place of an ordinary
unqualified acceptance, this assent will sometimes be communicated by a definite,
express statement. 65
Observation: Nothing is stated in the Uniform Commercial Code as to the effect of

the holder's failing to expressly refuse or assent to a tendered acceptance which varies
the terms of a draft; however, if the holder receives the draft with the varying
acceptance written thereon and makes no express protest and refusal, the holder's
silence can be viewed as an assent to the draft-varying acceptance. 66
If the acceptance varies the terms of the draft, the acceptor is obliged to pay the draft
according to the terms of the draft as varied. 67
Footnotes

As to the holder's right of recourse upon dishonor of an instrument, see 360.
Forms: Complaint, petition, or declarationAgainst drawer on bill with qualified

acceptance. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Footnote 67. 382.
388 --Effect upon liability of drawer and indorsers
View Entire Section

If the holder assents to an acceptance varying the terms of a draft, the obligation of each
drawer and indorser who does not expressly assent to the acceptance is discharged. 68
Thus, the silence of parties to the instrument other than the holder cannot constitute an
assent to a draft-varying acceptance. 69
Comment: The assent of the drawer or indorser must be affirmatively expressed; a

mere failure to object within a reasonable time is not assent which will prevent
discharge. 70
Footnotes
Forms: AnswerDefenseAcceptance varying draftIndorser discharged. 6A Am Jur

3-410 [1990 Rev].

389 Finality of acceptance; exceptions justifying revocation
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) provides that payment or
acceptance of any instrument is final in favor of a holder in due course, or in favor of a
person who has, in good faith, changed his or her position in reliance on the payment,
except for: (1) recovery of bank payments as provided in Article 4 of the UCC; and (2)
liability for breach of warranty of presentment. 71
Comments: The foregoing provision follows the rule that a drawee which accepts or
pays an instrument on which the signature of the drawer is forged is bound by the
acceptance and cannot recover the payment. 72 This provision concerning the
finality of acceptance or payment is to be read together with the section of the UCC 73
concerning the warranties given by a person who obtains acceptance or payment. 74
Observation: A person who obtains payment or acceptance of an instrument

warrants, with stated exceptions, that: (1) he or she has good title to the instrument or
is authorized to obtain payment or acceptance on behalf of one who has good title; (2)
he or she has no knowledge that the signature of the maker or drawer is unauthorized;
and (3) the instrument has not been materially altered. 75
Under the 1990 Revision of the UCC, if the drawee of a draft accepts the draft in the
mistaken belief (1) that payment of the draft had not been stopped, as allowed by statute,
76 or (2) that the signature of the drawer of the draft was authorized, the drawee may
revoke the acceptance; the right of a drawee to revoke its acceptance for such reasons is
not affected by the failure of the drawee to exercise ordinary care in accepting the draft.
77 If an instrument has been accepted by mistake and the case does not come within
either of the two situations referred to above, the person accepting, generally may, to the
extent permitted by the law governing mistake and restitution, revoke the acceptance. 78
However, the remedies available in the case of an acceptance by mistake may not be
asserted against a person who took the instrument in good faith and for value or who, in
good faith, changed position in reliance on the acceptance. 79
Observation: The foregoing subsections, 80 also contain provisions concerning the

finality of payment of an instrument and the drawee's recovery of mistaken payments.
Comment: Under the pre-1990 version of the UCC, the remedy of a drawee that paid
or accepted a draft by mistake was also based on the law of mistake and restitution, but
that remedy was not specifically stated; by contrast, the 1990 Revision specifically
allows restitution in the two most common cases in which the problem is presented:
payment or acceptance of forged checks and checks on which the drawer has stopped
payment. 81 However, the drawee loses the remedy if the person receiving acceptance
was a person who took the check in good faith and for value or who, in good faith,
changed position in reliance on the acceptance; the result in the two cases expressly
covered by the statute is that the drawee, in most cases will not have a remedy against
the person presenting the check because there is usually a person who took the check in
good faith and for value or who, in good faith, changed position in reliance on the
acceptance. 82
Footnotes
Footnote 71. UCC 3-418 [1952].
As to recovery of payments made on instruments, generally, see 410 et seq.
UCC 3-418 was intended to codify the common-law rule under which a drawee who
accepts or pays an instrument on which the drawer's signature is forged cannot recover
from an innocent payee. Morgan Guar. Trust Co. v American Sav. & Loan Ass'n (9 Cal)
804 F2d 1487, 2 UCCRS2d 785, cert den 482 US 929, 96 L Ed 2d 701, 107 S Ct 3214.
As to rules concerning forged or unauthorized signatures, generally, see 414 et seq.
Footnote 73. UCC 3-417 [1952].
Footnote 74. 412.
As to warranties of transferors of instruments, see 527.
Annotation: Right of bank certifying check or note by mistake to cancel, or avoid

effect of, certification, 25 ALR3d 1367.
Footnote 80. UCC 3-418(a)-(c) [1990 Rev].
390 --Effect of revocation
View Entire Section

If an instrument is accepted by mistake and the acceptor revokes the acceptance, the
instrument is deemed not to have been accepted and is treated as dishonored. 83 In that
event, the adversely affected person may enforce the instrument, as in the case of any
other dishonor. 84
Footnotes
As to notice of dishonor of instruments, see 361 et seq.
X. DISCHARGE OF OBLIGATION [391-433]
Research References
ALR Digest: Bills and Notes 225
ALR Index: Bills and Notes; Checks and Drafts; Discharge or Release; Uniform
Commercial Code
Forms 3:317-3:346
Instruments 253:2551-253:2584
391 Generally
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) states that the extent of
the discharge of any party from liability on an instrument is governed by the sections of
the UCC on:
Payment or satisfaction 85
Tender of payment 86
Cancellation or renunciation 87

Impairment of right of recourse or of collateral 88
Reacquisition of the instrument by a prior party 89
Fraudulent and material alteration 90
Certification of a check 91
Acceptance varying a draft 92
Unexcused delay in presentment or notice of dishonor or protest 93
Comment: The foregoing list is exclusive, so far as any provisions of Article 3 are
concerned, but it is not intended to prevent or affect any discharge arising apart from
the UCC such as a discharge in bankruptcy. 94
The 1990 Revision of the UCC provides, without specifying the specific sections which
control, that the obligation of a party to pay an instrument is discharged as stated in
Article 3 of the UCC. 95 Under both the pre-1990 version of the UCC and the 1990
Revision, any party is also discharged from liability on an instrument by any act or
agreement with such party which would discharge an obligation to pay money under a
simple contract. 96
Footnotes
Footnote 85. UCC 3-601(1)(a) [1952], referring to UCC 3-603 [1952].
As to discharge where an instrument is taken for an underlying obligation, see 139.
As to discharge by payment of an instrument, see 401 et seq.
Footnote 86. UCC 3-601(1)(b) [1952], referring to UCC 3-604 [1952].
Footnote 87. UCC 3-601(1)(c) [1952], referring to UCC 3-605 [1952].
As to discharge by cancellation or renunciation, generally, see 394.
Footnote 88. UCC 3-601(1)(d) [1952], referring to UCC 3-606 [1952].
As to discharge by impairment of recourse or collateral, see 427 et seq.
Footnote 89. UCC 3-601(1)(e) [1952], referring to UCC 3-208 [1952].
As to reacquisition and negotiation of an instrument by a prior party, see 217.
As to discharge upon reacquisition by a party with no right of action or recourse on the

Footnote 90. UCC 3-601(1)(f) [1952], referring to UCC 3-407 [1952].

Footnote 91. UCC 3-601(1)(g) [1952], referring to UCC 3-411 [1952].
As to discharge by virtue of an acceptance in the form of the certification of a check, see

382.
Footnote 92. UCC 3-601(1)(h) [1952], referring to UCC 3-412 [1952].
As to the effect of an acceptance varying the terms of a draft upon the liability of
nonconsenting parties, see 388.
Footnote 93. UCC 3-601(1)(i), referring to UCC 3-502 [1952].
Forms: Forms pertaining to discharge. 6A Am Jur Pl & Pr Forms (Rev), Commercial

Code : Article 3Negotiable Instruments, Forms 3:317-3:346.
Forms pertaining to discharge. 19 Am Jur Legal Forms 2d, Uniform Commercial

Code: Article 3Negotiable Instruments 253:2551-253:2584.
Footnote 96. UCC 3-601(2) [1952]; UCC 3-601(a) [1990].
As to acts which discharge a simple contract for the payment of money, see 397.
Forms: AnswerDefenseDischarge of obligor by agreement. 6A Am Jur Pl & Pr

Forms (Rev), Commercial Code : Article 3Negotiable Instruments, Forms 3:320.
392 Who may discharge
View Entire Section

The holder of an instrument, generally, is the person who may discharge it, whether or
not the holder is the owner, except as otherwise provided by statute. 97
Observation: The 1990 Revision of the Uniform Commercial Code (UCC) contains
no specific section which is equivalent to the foregoing provision of the pre-1990
version of the UCC. 98
Under the pre-1990 version of the UCC, if an instrument is made payable to a named
person with the addition of words describing him or her as agent or officer of a specified
person, the agent or officer may act as if he or she were the holder. 99 Where additional
words describe the payee of an instrument as any other fiduciary for a specified person or
purpose, the instrument may likewise be discharged by the named payee. 1 If the payee
is described in any other manner, the additional words are without effect on subsequent
parties. 2
Comment: In the last of the above cases, the person named may discharge the
instrument if he or she is otherwise identified, even though he or she does not meet the
description; any subsequent party may disregard the description and treat the paper as
payable, unconditionally, to the individual identified as the payee. 3
Observation: The 1990 Revision of the UCC contains no specific provisions as to

the persons who are entitled to discharge instruments made payable with words of
description, but the subsection of the 1990 Revision 4 which corresponds to the
foregoing provisions of the pre-1990 version of the UCC determines who can deal with
an instrument as a holder. 5
If an instrument is payable to two or more persons alternatively, it may be discharged by

any or all of them in possession of the instrument. 6 If an instrument is payable to two
or more persons not alternatively, it may be discharged only by all of them. 7
Footnotes
Footnote 97. UCC 3-301 [1952], referring to UCC 3-603 [1952].
Footnote 99. UCC 3-117(a) [1952].
As to transfer and negotiation of instruments payable with words of description, see

204.
Footnote 1. UCC 3-117(b) [1952].
Footnote 2. UCC 3-117(c) [1952].
Footnote 4. UCC 3-110(c)(2).
Footnote 6. UCC 3-116(a) [1952]; UCC 3-110(d) [1990 Rev].
The possession required for an alternative payee to discharge an instrument is not limited
to physical possession, but extends to items under the payee's dominion and control.
Walker v Cross (Iowa) 473 NW2d 45, 15 UCCRS2d 512.
Footnote 7. UCC 3-116(b) [1952]; UCC 3-110(d) [1990 Rev].
As to negotiation of an instrument by multiple payees, see 205.

393 Effect of discharge on holder in due course
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), no discharge of
any party is effective against a subsequent holder in due course, unless that person has
notice thereof when he or she takes the instrument. 8
Comment: The foregoing provision rests on the principle that any discharge of a
party under Article 3 of the UCC is a personal defense of that party, which is cut off
when a subsequent holder in due course takes the instrument without notice of the
defense; it has no application to discharges arising apart from the UCC, such as a
discharge in bankruptcy. 9
The 1990 Revision of the UCC similarly provides that discharge of the obligation of a
party is not effective against a person acquiring rights of a holder in due course of the
instrument without notice of discharge. 10
Observation: Implicit in the foregoing provision is the fact that a person who is
merely a transferee of the instrument, or a person who is a holder but who does not
have the rights of a holder in due course, is subject to the defense that the obligor in
question has been discharged from liability on the instrument. 11
Comment: Discharge is effective against a holder in due course only if the holder
had notice of the discharge when holder in due course status was acquired, as where an
instrument bearing a cancelled indorsement is taken by a holder. 12
The fact that a person taking an instrument has notice of the discharge of an obligor on
the instrument does not bar such a taker from being a holder in due course, but only
subjects him or her to the defense of that discharge. 13 Thus, while a person may take
an instrument on which one or more signatures have been cancelled and still be a holder
in due course, such a holder is barred from enforcing the instrument against any party
whose signature was cancelled. 14
Footnotes
Footnote 8. UCC 3-602 [1952].
Forms: ReplyPrior discharge not effective against subsequent holder in due course
without notice. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Instruction to juryEffect of discharge against holder in due course. 6A Am Jur Pl &


As to discharge as a defense, see 616 et seq.
B. Discharge of Obligation to Pay [394-416]
Research References
Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes 121, 122; 6A Am Jur Pl & Pr Forms
(Rev), Commercial Code : Article 3Negotiable Instruments 3:191, 3:193, 3:194,
3:323, 3:324, 3:330-3:332, 3:334, 3:336, 3:340, 3:341
Instruments 253:2561, 253:2562, 253:2573
1 Am Jur POF 479, Alteration of Instruments; 11 Am Jur POF2d 23, Promissory Note
Executed Under Economic Duress or Business Compulsion 14-27
6 Anderson, Uniform Commercial Code 3d 3-601:9, 3-603:42; 6A Anderson, Uniform
Commercial Code 3d [Rev] 3-311:10, 3-311:11, 3-418:5, 3-418:9, 3-602:8, 3-602:10,
3-604:7, 3-604:10, 3-605:20
Bailey & Hagedorn, Brady On Bank Checks (7th ed) paras 28.12, 28.15
1. Discharge Other than by Payment [394-400]
394 Cancellation or renunciation
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the holder of an
instrument may, even without consideration, discharge any party:
(1) in any manner apparent on the face of the instrument or the indorsement, as by
intentionally cancelling the instrument or the party's signature by destruction or
mutilation, or by striking out the party's signature; 15 or

(2) by renouncing his or her rights by a writing signed and delivered, or by surrender of
the instrument to the party to be discharged. 16 However, neither a cancellation nor a
renunciation has any effect, when made without authority from the holder of the
instrument. 17 Furthermore, a cancellation or renunciation without surrender of the
instrument does not affect title thereto. 18
Observation: A general provision of the UCC states that any right arising out of an
alleged breach can be discharged in whole or in part without consideration by a written
waiver or renunciation signed and delivered by the aggrieved party. 19
The 1990 Revision of the UCC similarly provides that a person entitled to enforce an
instrument may discharge the obligation of a party to pay the instrument, with or without
consideration, by any voluntary act such as: 20
Surrender of the instrument to the party
Destruction, mutilation, or cancellation of the instrument
Cancellation or striking out of the party's signature
Addition of words to the instrument indicating discharge
Agreeing not to sue or otherwise renouncing rights against the party by a signed writing
Observation: A discharge of the obligation of a party to pay an instrument under the

foregoing provisions does not discharge the obligation of an indorser or
accommodation party having a right of recourse against the discharged party. 21
Cancellation or striking out of an indorsement does not affect the status and rights of a
party derived from the indorsement. 22 Thus, while the cancellation of an indorsement
will renounce all rights against the indorser, it does not break the chain of title through
which the person entitled to enforce the instrument owns or holds it. 23 Furthermore, if
the person whose indorsement is cancelled or a prior holder was a holder in due course,
the person entitled to enforce the instrument is a holder through a holder in due course,
despite the cancellation. 24
Footnotes
Footnote 15. UCC 3-605(1)(a) [1952].
A common method of intentional cancellation of a negotiable instrument is by the tearing

of the instrument into pieces. Klein v Witte (Fla App D2) 142 So 2d 789.
As to discharge of an obligation by payment, see 401 et seq.
Forms: AnswerDefenseDischarge by intentional destruction of instrument. 6A Am

3:341.
AnswerDefenseDischarge by striking out signature of maker. 6A Am Jur Pl & Pr

Footnote 16. UCC 3-605(1)(b) [1952].
The maker of a note had the burden of showing, as an affirmative defense, that the
creditor's intention in surrendering an instrument was to discharge the maker's obligation
thereunder. Hubbard Realty Co. v First Nat'l Bank (CA4 W Va) 704 F2d 733, 35
UCCRS 1589.
There is no requirement that the delivery of the writing renouncing a holder's rights in an
instrument must occur contemporaneously with the written renunciation itself.
Cantonwine v Fehling (Wyo) 582 P2d 592, 24 UCCRS 904 (criticized on other grounds
by Stanbury v Larsen (Wyo) 803 P2d 349).
Annotation: What constitutes renunciation by surrender of negotiable instrument

under UCC 3-605, 96 ALR3d 1144.
Forms: AnswerDefenseRelease and discharge of maker by collateral agreement. 5

Am Jur Pl & Pr Forms (Rev), Bills and Notes 122.
AnswerDefenseRelease and discharge of maker by collateral agreement. 6A Am Jur

Notice of renunciation from holderTo party liable on instrument. 19 Am Jur Legal

Footnote 17. Ohio Casualty Ins. Co. v Yaklich (Colo App) 768 P2d 1274, 9 UCCRS2d
994.
A note payable to two persons could not be cancelled by one of those persons without
authority given by the other. May v Triangle Oil Co., 96 Idaho 289, 527 P2d 781.
Footnote 18. UCC 3-605(2) [1952].
As to the discharge of indorsers and accommodation parties, see 417 et seq.
395 --Requirement of intentional act

View Entire Section
For a party to be discharged from liability on an instrument by cancellation or

renunciation, the holder must intentionally cancel the instrument or renounce it; liability
is not extinguished by the act of unintentionally stamping the instrument "paid." 25
Destruction or mutilation of an instrument by tearing it up or cutting off the part of it
containing the signature of a particular obligor must be done intentionally and voluntarily
for the purpose of discharging the obligor; an accidental destruction of an instrument will
not change the liabilities of the parties on the instrument. 26 Likewise, a mistaken
communication or other indication that a note has been paid which results from a clerical
error will not discharge an obligor from liability, since the requisite intent to cancel is
lacking in such a case. 27
Footnotes
Footnote 25. Peoples Bank of South Carolina, Inc. v Robinson, 272 SC 155, 249 SE2d
784, 25 UCCRS 799; Carter County Bank v Craft Industries, Inc. (Tenn App) 639 SW2d
661, 34 UCCRS 1632; Gibraltar Sav. Asso. v Watson (Tex App Houston (14th Dist)) 624
SW2d 650, 32 UCCRS 1520.
Cancellation or renunciation is ineffective if it is unintentional or procured by mistake.

Gover v Home & City Sav. Bank (Fla App D1) 574 So 2d 306, 13 UCCRS2d 1183.
Annotation: Unintentional cancellation of negotiable instrument under UCC Article 3,

59 ALR4th 617.
Footnote 27. Richardson v First Nat'l Bank (Ky App) 660 SW2d 678, 37 UCCRS 1207;
FirsTier Bank, N.A. v Triplett, 242 Neb 614, 497 NW2d 339, 20 UCCRS2d 549.
A borrower's obligation on a note was not extinguished where the note was stamped
"paid" due to a clerical error. First Galesburg Nat'l Bank & Trust Co. v Martin (3d Dist)
58 Ill App 3d 113, 15 Ill Dec 603, 373 NE2d 1075, 23 UCCRS 1328.
396 Fraudulent and material alteration
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) provides that, as against
any person other than a subsequent holder in due course, any alteration of an instrument
by the holder which is both fraudulent and material discharges any party whose contract
is thereby changed, unless that party assents or is precluded from asserting the defense.

28 The 1990 Revision of the UCC similarly states that, except as provided by
statute in the case of payor banks, or drawees paying a fraudulently altered instrument, or
persons taking such an instrument for value, in good faith, and without notice of the
alteration, 29 an alteration fraudulently made discharges a party whose obligation is
affected by the alteration, unless that party assents or is precluded from asserting the
alteration. 30
Comment: If an alteration discharges a party, there is also a discharge of any party

having a right of recourse against the discharged party because the obligation of the
party with the right of recourse is affected by the alteration. 31
Footnotes
Footnote 28. UCC 3-407(2)(a) [1952].
As to the completion of an instrument in an unauthorized manner as a material alteration

sufficient to cause a discharge, see 120.
As to preclusion of a defense based on alteration, see 121.

Practice References 1 Am Jur POF 479, Alteration of Instruments.
Forms: AnswerDefenseAdditional language inserted. 6A Am Jur Pl & Pr Forms

ReplyDenial of making alteration. 6A Am Jur Pl & Pr Forms (Rev), Commercial

ReplyDefense of alteration precluded by consent to alteration. 6A Am Jur Pl & Pr

397 Acts which would discharge simple contract for payment of money
View Entire Section

If the person entitled to enforce an instrument does an act which would discharge the

obligation of an obligor on a simple contract, the obligor on the instrument is discharged.
32 An obligation therefore may be discharged on grounds such as failure of
consideration, 33 estoppel, 34 duress, 35 accord and satisfaction, 36 or novation. 37
As is true for monetary obligations governed by general contract law, the release of one
or more, but less than all of the obligors on a negotiable instrument releases the other
codebtors who are jointly and severally bound. 38
Footnotes
Footnote 32. 391.
Footnote 33. Berta v Rocchio, 149 Colo 325, 369 P2d 51; Hunter v McLelland, 143 Ga
App 746, 240 SE2d 153, 24 UCCRS 172; Tallahassee Bank & Trust Co. v Raines, 125
Ga App 263, 187 SE2d 320, 10 UCCRS 665.
As to failure of consideration, generally, see 17A Am Jur 2d, Contracts 670 et seq.
Footnote 34. Commonwealth Bank & Trust Co. v Plotkin, 371 Mass 218, 355 NE2d 917,
20 UCCRS 692 (holding that a debtor's detrimental reliance on a misrepresentation made
by the creditor may give rise to a defense in the nature of an estoppel sufficient to
discharge the obligor).
Footnote 35. Mancino v Friedman (Cuyahoga Co) 69 Ohio App 2d 30, 23 Ohio Ops 3d
27, 429 NE2d 1181, motion overr.
As to the invalidity of contracts obtained by duress, coercion, or undue influence, see

17A Am Jur 2d, Contracts 234 et seq.
Footnote 36. Bickart v Greater Ariz. Sav. & Loan Ass'n, 6 Ariz App 174, 430 P2d 928,
vacated on other grounds 103 Ariz 166, 438 P2d 403.
As to accord and satisfaction by use of an instrument as payment, see 139.
Footnote 37. 398.
Footnote 38. Wood v Eminger, 44 NM 636, 107 P2d 557 (stating that the reason for the
rule is that the releasing creditor should not be allowed to enforce the obligation against
one whose right of contribution has been destroyed by the release); Economy Sav. &
Loan Co. v Weir (Marion Co) 105 Ohio App 531, 6 Ohio Ops 2d 254, 153 NE2d 155;
Bebe v Tondre, 86 RI 92, 134 A2d 122, related proceeding 86 RI 95, 134 A2d 123.
As to the discharge of accommodation parties by release of the principal debtor, see

427.
398 --Renewal or novation
View Entire Section

As a general rule, the mere execution of a renewal note evidences the same debt by a new
promise; it, therefore, does not constitute a payment or discharge of the original note, but
operates only as an extension of time for payment. 39 In order to constitute a
discharge of an obligation by novation, the transaction must meet the requirements of an
ordinary novation under contract law; that is, there must be a mutual agreement by the
creditor and debtor to extinguish the old obligation and substitute the new. 40 On the
other hand, where it appears from the circumstances of a particular case that the parties
intended that the renewal of a note was not to discharge it, that intent will be given effect.
41
Footnotes
Footnote 39. Farmers Union Oil Co. v Fladeland, 287 Minn 315, 178 NW2d 254, 43
ALR3d 240.
As to the discharge of indorsers and accommodation parties resulting from extensions or

renewals, see 424 et seq.
As to the effect of a renewal note on the maturity of the obligation evidenced by an


Footnote 40. Steele v Vanderslice, 90 Ariz 277, 367 P2d 636; Landmark KCI Bank v
Marshall (Mo App) 786 SW2d 132.
As to an implied agreement to terminate a contract arising from the making or

performance of a new contract, see 17A Am Jur 2d, Contracts 557.
Practice References 9 Am Jur POF2d 159, Novation of Contract by Substitution of

Debtors.
Forms: AnswerDefenseDischarge of original debt by substitution of new debtor and

new obligationAgreement to accept new note and mortgage from comaker of note
sued on. 18A Am Jur Pl & Pr Forms (Rev), Novation, Form 12.
Footnote 41. Granite Nat'l Bank v Fitch, 145 Mass 567, 14 NE 650; Oil Field Gas Co. v
International Supply Co., 187 Okla 262, 103 P2d 91.
399 Acquisition by, or discharge of, party with no recourse
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the liability of all
parties is discharged when any party who has no right of action or recourse on the
instrument:
Reacquires the instrument in his or her own right 42
Is discharged under any provision of Article 3 of the UCC, except as otherwise

provided with respect to discharge for impairment of recourse or collateral 43
Comment: The above provision embodies the principle that all parties to an
instrument are discharged when no party is left with rights against any other party on
the paper; in such a case, the instrument itself is not necessarily extinct, since it may be
reissued or renegotiated. 44
Observation: The 1990 Revision of the UCC contains no provision which is

equivalent to the foregoing subsection of the pre-1990 version. 45
Footnotes
Footnote 42. UCC 3-601(3)(a) [1952].
As to reacquisition of an instrument by a prior party, see 217.
Footnote 43. UCC 3-601(3)(b), referring to UCC 3-606 [1952].
Footnote 45. Table of Disposition of Sections in Former Article (stating that UCC
3-601(3) of the pre-1990 version of the UCC has been omitted from the 1990 Revision).
400 Discharge of comakers by impairment of collateral
View Entire Section

If the obligation of a party is secured by an interest in collateral not provided by an

accommodation party and a person entitled to enforce the instrument impairs the value of
the interest in collateral, the obligation of any party who is jointly and severally liable
with respect to the secured obligation is discharged to the extent the impairment causes
the party asserting the discharge to pay more than that party would have been obliged to
pay, taking into account the rights of contribution, if impairment had not occurred; the

burden of proving impairment is on the party asserting the discharge. 46
Comment: Under the foregoing provision of the Uniform Commercial Code (UCC),
if a person who would otherwise be an accommodation party entitled to be discharged
by reason of impairment of collateral, but that person is not discharged for some
reason, such as that the payee has no knowledge or notice of the accommodation, the
person seeking a discharge is treated as a comaker with a right of contribution rather
than as an accommodation party with a right of reimbursement. 47
Observation: Strict construction of the above subsection of the UCC should make it
applicable to any person who furnishes the collateral, whether or not a party to the
instrument secured by the collateral, provided that such a person is not an
accommodation party. 48
Accommodation comakers of a negotiable corporate bond and warrant executed on the

making of a loan to the corporation, that is, the bond's primary obligor, which comakers
allege a right of recourse against the corporate obligor, are entitled to an evidentiary
hearing to determine whether they are sureties with a right of recourse who can assert, as
against the holder of the bond, the suretyship defense of impairment of collateral. 49
Footnotes
As to the discharge of indorsers and accommodation parties by reason of impairment of

collateral, see 428 et seq.
Observation: An accommodation party is not discharged by reason of a material

modification, extension of time, or impairment of collateral, unless the person entitled
to enforce the instrument knows of the accommodation or has notice that the
instrument was signed for accommodation. 418.
Footnote 49. Federal Deposit Ins. Corp. v Blue Rock Shopping Center, Inc. (3 Del) 766
F2d 744, 41 UCCRS 1 (referring to UCC 3-606(1)(b)).
2. Discharge by Payment [401-416]
401 Generally

View Entire Section
Under the pre-1990 version of the Uniform Commercial Code (UCC), the liability of any
party, generally, is discharged to the extent of his or her payment or satisfaction to the
holder of the instrument evidencing the obligation. 50
Comment: A partial payment discharges the payor pro tanto from his or her liability
The 1990 Revision of the UCC states that, except as otherwise provided by statute, 52 an
instrument is paid to the extent payment is made by, or on behalf of a party obliged to
pay the instrument to a person entitled to enforce the instrument. 53 Under the pre-1990
version of the UCC, payment or satisfaction may be made, with the consent of the holder,
by any person including a stranger to the instrument; surrender of the instrument to such
a person gives him or her the rights of a transferee. 54 However, a presumption that a
note or other instrument has been purchased, rather than paid, pertains where the note is
transferred to a stranger to the instrument; a presumption of payment, with a resulting
discharge of the obligation, arises only when the note is paid by the maker. 55
Footnotes
Footnote 50. UCC 3-603(1) [1952].
As to the place of payment, see 125.
As to exceptions to discharge by payment, see 404.
Forms: AnswerDefensePayment of note. 5 Am Jur Pl & Pr Forms (Rev), Bills and

Notes, Form 121.
AnswerDefensePayment of note. 6A Am Jur Pl & Pr Forms (Rev), Commercial

Discharge; Payment or satisfaction. 19 Am Jur Legal Forms 2d, Uniform Commercial

Code: Article 3Negotiable Instruments 253:2561, 253:2562.
Forms: AnswerDefenseTender of balance on partially paid note. 6A Am Jur Pl &

Footnote 54. UCC 3-603(2) [1952].

As to the transfer of instruments, generally, see 202 et seq.
In an action by the payee of a note against the maker, the trial court properly admitted
evidence of payment of the note by a third party, since UCC 3-603 allows payment to
be made by a stranger with the consent of the holder. Nawas v Holmes (Tex Civ App
Waco) 541 SW2d 283, 20 UCCRS 133.
Footnote 55. Heintz v Woodson (Mo App) 714 SW2d 782, 2 UCCRS2d 548, later
proceeding (Mo App) 1988 Mo App LEXIS 286, later proceeding, en banc (Mo) 758
SW2d 452.
Payment operates to discharge an instrument, but purchase continues it in circulation.

Proctor v Pyle, 33 Cal App 2d 121, 91 P2d 187.
In an action on a note against two comakers, unrebutted allegations of payment by one of

the comakers inured to the benefit of the other. Barnes v York (Mo App) 526 SW2d 404.
402 To whom payment may be made
View Entire Section

As a general rule, the payor of a note exposes himself or herself to double liability if he
or she makes payment to someone other than the holder of the instrument, unless the
other person to whom payment is made is an agent of the owner of the note. 56 By
making payments to one who is not in possession of a note and to whom the instrument
has not been indorsed, the payor also may be exposed to a charge of negligence should
the owner of the note fail to receive payment from the collector, unless the payor can
show that the collector was an agent of the owner. 57
An instrument payable to the order of two or more persons, in the alternative, is payable
to any one of them; if an instrument is payable to two or more persons other than in the
alternative, it is payable to all of them. 58
Footnotes
Footnote 56. Yahn & McDonnell, Inc. v Farmers Bank of Delaware (CA3 Del) 708 F2d
104, 35 UCCRS 1533 (noting that a holder is a person in possession of an instrument
issued or indorsed to him or his order); Sooter v Magic Lantern, Inc. (Mo App) 771
SW2d 359; Lambert v Barker, 232 Va 21, 348 SE2d 214, 2 UCCRS2d 527.
As to an agent's authority to receive payment, see 3 Am Jur 2d, Agency 136 et seq.
Footnote 57. Tedesco v Bekker (Mo App) 741 SW2d 896.
Footnote 58. 205.

403 Medium of payment
View Entire Section

As a general rule, payment of promissory notes must be made in money. 59 Since a

check is not included in the Uniform Commercial Code definition of "money," a creditor
has a right to refuse a debtor's check given in part payment of a note, at least where the
check is not guaranteed by the bank on which it is drawn. 60
Caution: Unless otherwise agreed, an obligation may be discharged by the taking of

a note or check to the same extent that a discharge would result if money equal to the
amount of the instrument were taken in payment of the obligation; however, in the case
of an uncertified check, the acceptance of the instrument merely suspends the
underlying obligation until the instrument is either paid, which discharges the
obligation, or until it is dishonored, which reimposes the obligation. 61
Notwithstanding the general rule that payment must be made in money, the parties may
agree on a mode of satisfying an obligation other than by the payment of money, such as
by the cancellation of mutual indebtedness, 62 or by the furnishing of services or
commodities. 63 However, where the payee of a promissory note agrees to accept
payment in the form of an equity interest in a restaurant, but does not receive evidence of
an ownership interest within a reasonable time, there is no payment to the payee and no
discharge of liability on the note. 64
Footnotes
Footnote 59. Green Acres Enters. v Freeman (Mo App) 876 SW2d 636.
The holder of a note cannot be required to accept a deed to real estate securing a note as
full satisfaction of the note. American Mini-Storage, Marietta Blvd., Ltd. v Investguard,
Ltd., 196 Ga App 862, 397 SE2d 199.
Footnote 60. Midwest Fed. Sav. & Loan Ass'n v Kouba (ND) 335 NW2d 780, 40
ALR4th 338.
A check, like a promissory note, legally imports a promise to pay in money and nothing
more, unless its language provides otherwise. Anderson v Gill, 79 Md 312, 29 A 527.
The fact that a creditor accepted a check for part of a debt and a note signed by a third
party for the balance did not discharge the liability of the debtor in the absence of any
agreement that the debtor was to be discharged. Griffiths v Phenix Supply Co., 192 Ga
App 651, 385 SE2d 789.
The payee's acceptance of checks for 46 monthly payments evidenced a course of dealing
which showed that payment by personal check was an approved manner of making

payments. Neuman v Ferris (Fla App D4) 432 So 2d 641.
As to the definition of "money," see 98.
Footnote 61. 139.
Footnote 62. Gibson v Harl (Mo App) 857 SW2d 260 (holding that the makers of a note
were discharged from liability by their exercise of the right to set off the obligation
against an obligation the payees of the note owed to them under a lease).
As to cancellation of mutual debts, generally, see 60 Am Jur 2d, Payment 30.
Footnote 63. Beaumont Implement Co. v Clubb (Tex Civ App) 140 SW2d 212.
Forms: AnswerDefenseNote discharged by rendition of services. 6A Am Jur Pl &

Footnote 64. Lutz v Gatlin, 22 Wash App 424, 590 P2d 359, 26 UCCRS 129, review den
92 Wash 2d 1007.
404 Exceptions to discharge by payment
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), payment or
satisfaction does not result in the discharge of:
(1) a party who, in bad faith, pays or satisfies a holder who acquired the instrument by
theft or one, other than a holder in due course, who holds through a holder who so
acquired it; or
(2) a party, other than an intermediary bank or a payor bank which is not a depositary
bank, who pays or satisfies the holder of an instrument which has been restrictively
indorsed in a manner not consistent with the terms of the restrictive indorsement. 65
Observation: A depositary bank is not discharged from liability where payment is

made in conflict with the terms of a restrictive indorsement, even though the restrictive
indorser was not the bank's immediate transferor. 66
The 1990 Revision of the UCC provides that the obligation of a party to pay the
instrument is not discharged by payment if the person making payment knows that the
instrument is stolen and pays a person known to the payor to be in wrongful possession
of the instrument. 67 To call this exception into operation, it is necessary that the person
making payment have actual knowledge of the facts designated by statute; reason to
know, suspicion, or notice is not sufficient. 68

Footnotes
Footnote 65. UCC 3-603(1) [1952].
As to the effect of payments made by banks in disregard of restrictive indorsements, see

231.
Footnote 66. Salsman v National Community Bank, 102 NJ Super 482, 246 A2d 162, 5
UCCRS 779, affd 105 NJ Super 164, 251 A2d 460, 6 UCCRS 168.
405 --Payment with knowledge of adverse claim
View Entire Section

Under both the pre-1990 and the 1990 Revision version of the Uniform Commercial
Code (UCC), a discharge by reason of payment to the holder, generally occurs, even
though the payment is made with knowledge of a claim of another person to the
instrument. 69 However, under the pre-1990 version, a party is not discharged from
liability where the payment or satisfaction is made to the holder of an instrument with
knowledge of a claim of another person to the instrument if, prior to the making of a
payment or satisfaction, the person making the claim either:
(1) supplies indemnity deemed adequate by the party seeking the discharge; or
(2) enjoins payment or satisfaction by order of a court of competent jurisdiction in an

action in which the adverse claimant and the holder are parties. 70 If the adverse
claimant takes either of the foregoing steps, the payor cannot thereafter make payment or
give a satisfaction which will affect the claimant; if the payor does make payment or give
satisfaction in such a case, the adverse claimant may ignore the discharge obtained by the
payor from the holder and hold the payor liable, if appropriate, as though no such
payment or satisfaction had been made. 71
The 1990 Revision of the UCC similarly provides that the obligation of a party to pay an
instrument is not discharged if a claim to the instrument, as defined by statute, 72 is
enforceable against the party receiving payment and either:
(1) payment is made with knowledge by the payor that payment is prohibited by
injunction or similar process of a court of competent jurisdiction; or
(2) in the case of an instrument other than a cashier's check, teller's check, or certified
check, the party making payment has accepted indemnity from the person having a claim
to the instrument against loss resulting from refusal to pay the person entitled to enforce
the instrument. 73
Observation: It is not necessary, under the foregoing statutory provision, that the
court order prohibiting payment be called an injunction; any payment-prohibiting order
or decree issued by a court of competent jurisdiction satisfies the requirements of the
statute. 74
Footnotes
Comment: The phrase "claim to the instrument" means a claim of ownership or

possession and not a claim in recoupment. Official Comment to UCC 3-602 [1990
Rev].
Footnote 70. UCC 3-603(1) [1952].
Forms: Complaint, petition, or declarationTo enjoin payment of note to party

wrongfully in possession. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
OrderGranting preliminary injunction against payment or transfer of note. 6A Am Jur

Observation: The payor must, of course, act in good faith in deciding whether the
indemnity offered by an adverse claimant is adequate. 6A Anderson, Uniform
Commercial Code 3d 3-603:42.
406 Effect of tender of payment
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), any party making
tender of full payment to a holder when or after payment is due is discharged to the
extent of all subsequent liability for interest, costs, and attorney's fees. 75 Where the
maker or acceptor of an instrument payable other than on demand is able and ready to
pay at every place of payment specified in the instrument when it is due, it is the
equivalent of tender. 76 However, the foregoing statutory provisions apply only to a
tender of full payment which is made when or after an instrument is due; where a note
does not contain a right of prepayment, a creditor is entitled to refuse any and all
payments tendered before the due date. 77
The 1990 Revision of the UCC provides that if tender of payment of an obligation is
made to a person entitled to enforce an instrument, the effect of the tender is governed by
the principles of law applicable to tender of payment under a simple contract. 78
Furthermore, if such a tender is made, the obligation of the obligor to pay interest after
the due date on the amount tendered is discharged. 79 If presentment is required with
respect to an instrument, and the obligor is able and ready to pay on the due date at every
place of payment stated in the instrument, the obligor is deemed to have made tender of
payment on the due date to the person entitled to enforce the instrument. 80
Observation: Under the pre-1990 version of the UCC, the holder's refusal of a tender
of payment wholly discharges any party who has a right of recourse against the party
making the tender; under the 1990 Revision of the UCC, if a tender of payment is made
and refused, the obligation of an indorser or accommodation party having a right of
recourse with respect to the obligation to which the tender relates is discharged to the
extent of the amount of the tender. 81
Footnotes
Footnote 75. UCC 3-604(1) [1952].
While a tender of payment relieves a maker of further liability for interest, costs, and
attorney's fees, the maker remains liable for the principal outstanding debt. Guaranty
Bank v Thompson (Tex) 632 SW2d 338, 33 UCCRS 629.
The fact that the makers of a promissory note who presented a cashier's check to the
trustee under a deed of trust for the full amount of the debt conditioned their tender of
payment upon the contemporaneous delivery of a deed of reconveyance did not vitiate
the tender's effectiveness to terminate the accrual of interest. Brinton v Haight (App) 125
Idaho 324, 870 P2d 677, 25 UCCRS2d 485.
Forms: AnswerDefensePayment of note. 6A Am Jur Pl & Pr Forms [Rev],

Footnote 76. UCC 3-604(3) [1952].
The fact that a purchaser who executed a promissory note as partial payment for land had
sufficient funds set aside in escrow to pay off the note, as the seller was advised, showed
that the purchaser was able and ready to pay the seller and was tantamount to a tender of
payment sufficient to discharge the purchaser from liability for interest, costs, and
attorney's fees incurred thereafter. Hohn v Morrison (Colo App) 870 P2d 513, 23
UCCRS2d 817, cert den (Colo) 1994 Colo LEXIS 267.
A document offered by a mortgagor to the mortgagee as a tender of payment in full was

at most another promise to pay and, thus, did not relieve the mortgagor from liability for
interest, costs, and attorney's fees. Fleet Real Estate Funding Corp. v Frampton (Okla
App) 812 P2d 416, 15 UCCRS2d 987.

Footnote 77. FDIC v Rusconi (DC Me) 796 F Supp 581, vacated on other grounds,
partial summary judgment gr, in part, on reconsideration, remanded (DC Me) 808 F Supp
30.
The accrual of interest on the amount due under a promissory note was not stopped by a
tender of less than the full amount owed before the amount tendered was due to be paid.
Kohlenberg v American Plumbing Supply Co., 82 Wis 2d 384, 263 NW2d 496, 23
UCCRS 1231.
Footnote 81. 422.
407 Accord and satisfaction by use of instrument
View Entire Section

Under the 1990 Revision of the Uniform Commercial Code (UCC), if a person against
whom a claim is asserted proves that (1) he or she, in good faith, tendered an instrument
to the claimant as full satisfaction of the claim, (2) the amount of the claim was
unliquidated or subject to a bona fide dispute, and (3) the claimant obtained payment of
the instrument, various rules determine whether or not an accord and satisfaction by use
of an instrument has occurred. 82 First, unless another specified subsection 83 applies,
the claim is discharged if the person against whom the claim is asserted proves that the
instrument or an accompanying written communication contained a conspicuous
statement to the effect that the instrument was tendered as full satisfaction of the claim.
84 However, except as otherwise provided by statute, 85 a claim is not discharged if
either of the following applies:
(1) the claimant, if an organization, proves that within a reasonable time before the tender
it sent a conspicuous statement to the person against whom the claim is asserted that
communications concerning disputed debts, including any instrument tendered as full
satisfaction of a debt, were to be sent to a designated person, office, or place, and further
proves that the instrument or accompanying communication in question were not
received by the designated person, office, or place; 86 or
(2) the claimant, including any organization which has not sent a statement of the type
allowed by the preceding paragraph, proves that within 90 days after payment of the
instrument, the claimant tendered repayment of the amount of the instrument to the
person against whom the claim is asserted. 87
Comment: As part of the revision of the UCC in 1990, the section which governs
performance or acceptance under reservation of rights 88 was amended to add a
subsection stating that it does not apply to an accord and satisfaction; because of that
amendment and the inclusion of 3-311 in the 1990 Revision of Article 3 of the UCC,
the provisions of that section concerning accord and satisfaction by use of an
instrument govern full satisfaction checks. 89
A claim is discharged if the person against whom the claim is asserted proves that, within
a reasonable time before collection of the instrument was initiated, the claimant or an
agent of the claimant with direct responsibility with respect to the disputed obligation
knew that the instrument was tendered in full satisfaction of the claim. 90 Where a
debtor seeks to establish an accord and satisfaction by virtue of the foregoing provision,
on the basis of the knowledge of the creditor or its agent, the debtor has the burden of
proving that all of the statutory requirements are met. 91
Footnotes
As to the use of an instrument as payment, generally, see 139.
Forms: AnswerDefenseAcceptance of payment as accord and satisfactionPayment

by check. 1 Am Jur Pl & Pr Forms (Rev), Accord and Satisfaction 38.
Comment: UCC 3-311 does not apply to cases in which the debt is a liquidated
amount and not subject to a bona fide dispute. Official Comment 4 to UCC 3-311
[1990 Rev].
Forms: AnswerDefenseAcceptance of smaller sum as accord and satisfactionBona

fide dispute as to amount of liabilityCheck tendered as payment in fullLetter
accompanying check. 1 Am Jur Pl & Pr Forms (Rev), Accord and Satisfaction 85.
Comment: The foregoing provision is intended to protect an organizational claimant

against an inadvertent accord and satisfaction, which could otherwise occur if
payments are received and processed by employees of the organization other than those
concerned with disputed claims. Official Comment 5 to UCC 3-311 [1990 Rev].
Observation: The accord and satisfaction that has resulted from the acceptance by
the creditor of a part-payment check may be avoided by virtue of the foregoing
provision. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-311:10.

As to acceptance of performance or payment under reservation of rights, see 15A Am Jur

2d, Commercial Code 34.
Annotation: Modern status of rule that acceptance of check purporting to be final

settlement of disputed amount constitutes accord and satisfaction, 42 ALR4th 12.
A check issued by a buyer of goods to a seller for less than the full amount due, which
contained a "settlement in full" notation made by the buyer, created a binding accord
and satisfaction when the seller indorsed and deposited the check, despite the seller's
express "reservation of rights" notation on the check. Stultz Electric Works v Marine
Hydraulic Engineering Co. (Me) 484 A2d 1008, 39 UCCRS 1186.
408 --Effect of acceptance of payment under reservation of rights
View Entire Section

A party who assents, with an explicit reservation of rights, to performance in a manner

demanded or offered by the other party does not thereby prejudice the rights reserved;
words such as "without prejudice," "under protest," or the like are sufficient to reserve all
rights. 92 The Uniform Commercial Code (UCC), thus, permits the acceptance of a part
performance or payment tendered in full settlement without requiring the acceptor to
gamble with his or her legal right to demand the balance of the performance or payment.
93 However, the foregoing provision allowing a reservation of rights does not alter the
law of accord and satisfaction, and the section of the UCC concerning accord and
satisfaction by use of an instrument 94 governs full satisfaction checks. 95 For
example, where a contractor offers payment conditioned upon a subcontractor's assent to
that payment being in full satisfaction of the contractor's obligation, the subcontractor
cannot reject the condition by unilaterally noting on the check a reservation of rights to
collect the remaining balance prior to negotiating the instrument; by cashing the check,
the subcontractor assents to the stated condition and accepts the proceeds of the check by
virtue of the accord and satisfaction which thus results. 96
Footnotes
As to performance or acceptance under reservation of rights, see 15A Am Jur 2d,

Commercial Code 34.
Footnote 95. 407.
Footnote 96. McKee Constr. Co. v Stanley Plumbing & Heating Co. (Mo App) 828
SW2d 700, 18 UCCRS2d 16.
If UCC 1-207 were applicable to full-payment check transactions, a debtor's attempt to

make a good-faith offer of compromise by tendering such a check would be futile, since
the creditor could simply accept the check while reserving the right to demand full
payment. Hearst Corp. v Lauerer, Markin & Gibbs, Inc. (Lucas Co) 37 Ohio App 3d 87,
524 NE2d 193, 6 UCCRS2d 358.
409 Effect of judgment
View Entire Section

The rule that a judgment merges the cause of action on which the suit resulting in the
judgment was brought applies generally to judgments on negotiable instruments. 97 As
a result, there is a discharge of the paper when a judgment is entered on it, 98 and
subsequent suits on the instrument are barred. 99 However, the doctrine of merger by
judgment, as applied to promissory notes, relates only to such parties as are jointly liable
thereon or to cases where a judgment is rendered against both the maker and any
secondarily liable parties; thus, the fact that the creditor obtains a judgment against the
maker of a note alone does not discharge an indorser if the judgment is not satisfied. 1
Footnotes
Footnote 97. In re Miller's Estate, 189 Or 246, 218 P2d 966.
Footnote 99. Fish Meal Co. v Brondum, 242 Miss 573, 135 So 2d 825; Hawkins v Wiest,
167 Mo App 439, 151 SW 789.
Footnote 1. Cline v Receiver of Commercial Nat'l Bank (CA7 Ill) 90 F2d 968; Petri v
Manny, 99 Wash 601, 170 P 127, 1 ALR 1595.
b. Recovery of Payments [410-416]
(1). In General [410-413]

410 Finality of payment; mistake as basis for recovery
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) provides that payment of
any instrument is final in favor of a holder in due course, or in favor of a person who has,
in good faith, changed his or her position in reliance on the payment, except for: (1)
recovery of bank payments as provided in Article 4 of the UCC; and (2) liability for
breach of warranty of presentment. 2
Observation: A section of Article 4 of the UCC, 3 which is applicable to the

collection of items through the banking system, contains provisions which parallel the
section of Article 3 4 governing warranties of presentment. 5
Conversely, payment is not final when it is made in favor of one who is not a holder in
due course and who has not, in good faith, changed his or her position in reliance on the
payment; 6 in that event, the bank is entitled to the return of the mistaken payment no
matter how carelessly the payment was made. 7
Comment: Under the pre-1990 version of the UCC, the remedy of a drawee that
pays a draft by mistake is based on the law of mistake and restitution, but that remedy
is not specifically stated; by contrast, the 1990 Revision expressly allows restitution in
the two most common cases in which the problem is presented: payment or acceptance
of forged checks and checks on which the drawer has stopped payment. 8
Under the 1990 Revision of the UCC, if the drawee of a draft pays the draft in the
mistaken belief (1) that payment of the draft had not been stopped, as allowed by statute,
9 or (2) that the signature of the drawer of the draft was authorized, the drawee may
recover the amount of the draft from the person to whom or for whose benefit payment
was made. 10 The right of a drawee to recover improper payments for such reasons is
not affected by the failure of the drawee to exercise ordinary care in accepting the draft.
11 However, the remedies available in the case of a payment by mistake may not be
asserted against a person who took the instrument in good faith and for value or who, in
good faith, changed position in reliance on the payment. 12
If an instrument has been paid by mistake and the case does not come within either of the
two situations specified by statute, 13 the person paying,generally may, to the extent
permitted by the law governing mistake and restitution, recover the payment. 14
Comment: Perhaps the most important class of cases that falls under the foregoing
provision is that of payment by the drawee bank of a check with respect to which the
bank has no duty to the drawer to pay, either because the drawer has no account with
the bank or because available funds in the drawer's account are insufficient to cover the
amount of the check. 15

Observation: The foregoing provision contemplates that the rights of payor to
recover a payment, other than in the two situations for which remedies are specified by
statute, will be determined by pre-UCC law. 16 Under the common law, while money
paid under a mistake of fact may be recovered, money paid due to a mistake of law,
generally, is not recoverable. 17
Footnotes
Footnote 2. UCC 3-418 [1952].
Where a bank, through inadvertence, makes final payment of a check made out to the
payee by debiting an improper account of the drawer, and where there was no indication
that the payee had acted in bad faith or in breach of warranty, the trial court properly
entered summary judgment in favor of the payee in an action brought by the bank for
unjust enrichment, thereby upholding the finality of the payment under UCC 3-418.
Exchange Bank v Strout Realty, 94 Nev 86, 575 P2d 589.
As to the recovery of payments by a drawee due to breach of a warranty of presentment,

see 412.
Annotation: What constitutes change of position by payee so as to preclude recovery

of payment made under mistake, 40 ALR2d 997.
Footnote 5. Sun'n Sand, Inc. v United California Bank, 21 Cal 3d 671, 148 Cal Rptr 329,
582 P2d 920, 24 UCCRS 667, 21 UCCRS2d 1003 (criticized on other grounds in Roy
Supply, Inc. v Wells Fargo Bank (3rd Dist) 39 Cal App 4th 1051, 46 Cal Rptr 2d 309, 95
CDOS 8401, 95 Daily Journal DAR 14450, 27 UCCRS2d 1363).
Footnote 6. 415.
Footnote 7. Morgan Guar. Trust Co. v American Sav. & Loan Ass'n (CA9 Cal) 804 F2d
1487, 2 UCCRS2d 785, cert den 482 US 929, 96 L Ed 2d 701, 107 S Ct 3214.
UCC 3-418 governs restitution when a bank pays a negotiable instrument by mistake;
the right of a bank to recover a mistaken payment is not affected by the fact that the
drawee retains the check in question beyond its midnight deadline. First Nat'l Bank v
Colonial Bank (ND Ill) 898 F Supp 1220, 28 UCCRS2d 290.

Footnote 12. UCC 3-418(c) [1990 Rev], further providing that the does not limit
remedies provided by UCC 3-417 or 4-407.
Footnote 17. Home Ins. Co. v Honaker (Del) 480 A2d 652; Kerr S.S. Co. v Chicago Title
& Trust Co. (1st Dist) 120 Ill App 3d 998, 76 Ill Dec 355, 458 NE2d 1009.
411 --Effect of recovery for mistake
View Entire Section

The 1990 Revision of the Uniform Commercial Code provides that if an instrument is
paid by mistake and the payor recovers the payment, the instrument is deemed not to
have been paid and is treated as dishonored. 18 In that event, the adversely affected
person may enforce the instrument as in the case of any other dishonor. 19
Footnotes
As to notice of dishonor of instruments, see 361 et seq.
As to the holder's right of recourse against the drawer and indorsers of an instrument
upon dishonor, see 351 et seq.
412 Recovery by drawee for breach of warranty of presentment
View Entire Section

The provision of the pre-1990 version of the Uniform Commercial Code (UCC)
concerning the finality of payments made by drawee banks 20 creates an exception
where the payee has breached any of the warranties of presentment. 21 The final

payment rule, thus, is not applicable in a case involving a breach of warranty by the
payee. 22
Comment: The provision concerning finality of payment must be read together with
the section of the UCC 23 which sets forth the warranties given by a person who
obtains acceptance or payment. 24
Observation: The warranties of presentment include warranties that: (1) such a

person has good title to the instrument or is authorized by one who has title to obtain
payment; (2) a draft presented for payment has been not altered; and (3) the payee has
no knowledge that the signature of the maker or drawer is unauthorized. 25
As a result of the interaction of the foregoing provisions of the UCC concerning the
finality of payment and warranties of presentment, even though a drawee bank has made
a payment which would otherwise be final, it is entitled to recover a payment made to
one who has breached a warranty of presentment. 26 Thus, for example, the completion
of a check by the donee of the instrument after the death of the donor is an unauthorized
completion which constitutes an alteration of the check justifying recovery by the drawee
for breach of warranty. 27
Footnotes
Footnote 20. UCC 3-418 [1952].
Footnote 21. 410.
Footnote 22. Northern Trust Co. v Chase Manhattan Bank, N.A. (SD NY) 582 F Supp
1380, 38 UCCRS 200, affd (2 NY) 748 F2d 803, 39 UCCRS 1335.
Footnote 23. UCC 3-417 [1952].
Footnote 25. 389.
As to recovery of payments where signature is forged or unauthorized, see 414 et seq.
As to warranties of transferors of instruments, see 527.
Footnote 26. DeLuca v BancOhio Nat'l Bank, Inc. (Franklin Co) 74 Ohio App 3d 233,
598 NE2d 781, 19 UCCRS2d 216.
Footnote 27. DeLuca v BancOhio Nat'l Bank, Inc. (Franklin Co) 74 Ohio App 3d 233,
598 NE2d 781, 19 UCCRS2d 216.
As to the effect of an unauthorized completion of an instrument, generally, see 120.
Even a holder in due course may be found to have breached a warranty of presentment, as
where the holder does not have good title to the instrument. ABC Money Exchange v
Public Employees Retirement System (Cuyahoga Co) 70 Ohio App 3d 732, 591 NE2d
1359, 18 UCCRS2d 202 (holding that a money exchange which accepted a check
indorsed by an attorney-in-fact after the principal's death did not have good title by
reason of the fact the death ended the indorsement authority and, thus, could not recover
from the drawer).
413 Recovery for duress, fraud, or failure of consideration
View Entire Section

Payments made as a result of duress, fraud, or failure of consideration, as well as those

made by mistake, generally, may be recovered. 28 This rule pertains, as well in
situations in which money has wrongfully been paid on a negotiable instrument. 29
Observation: Recovery of money wrongfully paid may be sought in an action for

restitution 30 or in an action for money had and received. 31
The rule permitting recovery of money obtained through fraud, imposition, extortion, or
undue advantage does not permit a recovery of the amount paid by a bank upon its
customer's checks under a mistaken belief that the customer's account contained
sufficient funds to cover the checks, where no fraud is charged and no misrepresentation
or overreaching is shown. 32
Footnotes
Footnote 28. 66 Am Jur 2d, Restitution and Implied Contracts 91.
As to recovery of payments made by mistake, see 410.
Footnote 29. Maddox v First Westroads Bank, 199 Neb 81, 256 NW2d 647, 22 UCCRS
743.
Annotation: Economic duress or business compulsion in execution of promissory

note, 79 ALR3d 598.
Practice Refefences Proof that promissory note was executed under economic duress
or business compulsion. 11 Am Jur POF2d 23, Promissory Note Executed Under
Economic Duress or Business Compulsion 14-27.
Footnote 30. In re Men's Sportswear, Inc. (2 NY) 834 F2d 1134, CCH Bankr L Rptr
72126 (criticized on other grounds in Shea & Gould v Red Apple Cos. (In re Shea &
Gould) (BC SD NY) 198 BR 861).
Footnote 31. Penalosa Coop. Exchange v A.S. Polonyi Co. (WD Mo) 745 F Supp 580;
Central Bank & Trust Co. v General Finance Corp. (5 Fla) 297 F2d 126.

Footnote 32. Central Bank & Trust Co. v General Finance Corp. (5 Fla) 297 F2d 126.
(2). Where Signature is Forged or Unauthorized [413-416]
414 Drawer's signature; doctrine of Price v Neal
View Entire Section

As a general rule, a drawee or payor bank which has paid a check bearing a forgery of the
drawer's signature may not recover the proceeds from a bank or other person who has
received payment of the same in good faith. 33 This result is reached under the pre-1990
version of the Uniform Commercial Code (UCC) by virtue of the express provision that,
with certain exceptions which are not pertinent here, payment or acceptance of any
instrument is final in favor of a holder in due course or a person who has, in good faith,
changed his or her position in reliance on the payment. 34
Comment: The rule of Price v Neal, 35 which is followed by the foregoing

provision, mandates that a drawee who accepts or pays an instrument on which the
signature of the drawer is forged is bound on the acceptance and cannot recover the
payment; the justifications for this result are (1) that the drawee is in a superior
position to detect a forgery because it has the drawer's signature and is expected to
know and compare it, and (2) that it is desirable to end the transaction on an instrument
when it is paid, rather than reopen and upset a series of commercial transactions at a
later date when the forgery is discovered. 36
Caution: A person whose negligence substantially contributes to the making of an

unauthorized signature is precluded from asserting the alteration or lack of authority
against a drawee or other payor who pays the instrument in good faith and in
accordance with the reasonable commercial standards of the drawee's or payor's
business. 37
The 1990 Revision of the UCC also adopts the rule of Price v Neal by two provisions of
its finality of payment rule. 38 The first of those provisions 39 permits recovery of a
payment where the drawee is under a belief that the drawer's signature is authorized, but
the second relevant provision 40 limits recovery by providing that it is not permitted
against one who took the instrument in good faith and for value or who, in good faith,
changed position in reliance on the payment or acceptance. 41
Comment: In contrast, in a case in which a check payable to an impostor, fictitious

payee, or a payee not intended to have an interest in the check is paid, the risk with
respect to the forgery is placed on the drawer, unless the provision concerning
negligence contributing to a forged signature applies, 42 rather than on the drawee or
depositary bank that took the instrument for collection. 43

Footnotes
Footnote 33. Bailey & Hagedorn, Brady On Bank Checks (7th ed) para 28.12.
Footnote 34. 410.
Footnote 35. 3 Burr 1354 (1762).
Footnote 37. 605.
Footnote 38. Bailey & Hagedorn, Brady On Bank Checks (7th ed) para. 28.12.
Footnote 41. 410.
As to indorsements by impostors and fictitious payees, see 222 et seq.
415 --Effect of breach of warranty, notice, or bad faith
View Entire Section

One who presents an instrument for payment or acceptance warrants, among other things,
that he or she has no knowledge that the signature of the maker or drawer is
unauthorized. 44
Comment: The basic warranty that the person obtaining payment or acceptance
warrants that he or she has no knowledge that the signature of the maker or drawer is
unauthorized stems from the general principle that one who presents an instrument
knowing that the signature is forged or unauthorized commits an obvious fraud upon
the party to whom presentment is made; since a holder in due course, by definition
takes an instrument without notice of any defense, the above warranty pertains to such
a holder only in the relatively few cases in which he or she acquires knowledge of a
forged or unauthorized signature after taking the instrument, but before presenting it.
45
Since the finality of payment rule does not apply in favor of one who has breached such a
warranty of presentment, the drawee of a check can recover a payment made to one who

had knowledge of an unauthorized signature. 46 Moreover, under both the pre-1990
version of the Uniform Commercial Code (UCC) and the 1990 Revision of the UCC, a
person who learns of a forgery, even after he or she has acquired a forged check, would
be acting in bad faith by attempting to procure payment. 47 In such a case, payment also
is not final because it is made to a person who is not a holder in due course and who has
not in good faith changed his or her position in reliance on the payment. 48
Comment: Since the drawee loses the right to recover a payment if the person
receiving payment was a person who took the check in good faith and for value or who
in good faith changed position in reliance on the payment, the result in most cases
involving the forgery of the drawer's signature is that the drawee will not have a
remedy against the person paid. 49
Footnotes
Footnote 44. 410.
Footnote 46. 412.
Footnote 48. API Supply Co. v Premier Bank (La App 1st Cir) 593 So 2d 660, 17
UCCRS2d 1185, cert den (La) 594 So 2d 896.
As to the contrasting principles that pertain in forged indorsement cases, see 416.
416 Indorsements
View Entire Section

Whereas in cases where the signature of the drawer of a check is forged, the drawee bank
may not recover a payment made to a holder in due course or to one who has, in good
faith, changed position in reliance on the payment, 50 in forged indorsement cases, the
drawee can sue back up the collection stream and recover against the party who took the
check from the forger. 51 Such a recovery by the drawee bank is possible because the
transfer warranties given by indorsers include a warranty that the instrument is free from
forgery and that all prior indorsements and signatures are genuine. 52
Observation: The right of payor bank to recover from a collecting bank or other
prior party who handled a check is sharply different in forged indorsement cases,
where recovery is often permitted, from forged check cases, in which recovery often

cannot be had. 53 This difference results from the fact that, unlike the presentment
warranty regarding unauthorized signatures contained in provisions of Articles 3 54
and 4 55 of the Uniform Commercial Code (UCC), under the transfer warranty
provisions of the UCC, 56 a transferor absolutely warrants that all signatures are
genuine and authorized; that is, a breach of the transfer warranty does not require a
showing that the transferor had knowledge of the forgery. 57
Footnotes
Footnote 50. 410.
Footnote 51. Payroll Check Cashing v New Palestine Bank (Ind App) 401 NE2d 752, 28
UCCRS 1421.
Footnote 52. 516.
As to recovery in forged check cases, see 414 et seq.
Footnote 55. UCC 4-207(1)(b).
Footnote 56. UCC 3-417(2)(b) [1952]; UCC 3-416(a)(2) [1990 Rev]; UCC
4-207(2)(b).
Footnote 57. Dozier v First Ala. Bank, N.A. (Ala Civ App) 363 So 2d 781, 25 UCCRS
802; Payroll Check Cashing v New Palestine Bank (Ind App) 401 NE2d 752, 28 UCCRS
1421.
C. Discharge of Indorsers and Accommodation Parties [417-433]
Research References
Commercial Code
3:337, 3:345, 3:346
Instruments 253:2357, 253:2584
3-606:37, 3-606:40, 3-606:52, 3-802:18; 6A Anderson, Uniform Commercial Code 3d
[Rev] 3-603:6, 3-605:5, 3-605:8, 3-605:11-3-605:14, 3-605:17
1. In General [417-426]

417 Generally
View Entire Section

The pre-1990 version of the Uniform Commercial Code provides that the holder
discharges any party to an instrument to the extent that, without that party's consent and
without an express reservation of rights, the holder (1) releases or agrees not to sue any
person against whom the party has, to the knowledge of the holder, a right of recourse,
(2) agrees to suspend the right to enforce against such a person the instrument or
collateral, or (3) otherwise discharges such a person. 58 However, a failure or delay in
effecting any required presentment, protest, or notice of dishonor with respect to any
such person does not discharge any party as to whom presentment, protest, or notice of
dishonor is either effective or unnecessary. 59 The holder of an instrument also
discharges any party to an instrument to the extent that, without that party's consent, the
holder unjustifiably impairs any collateral for the instrument given by or on behalf of any
person against whom the party has a right of recourse. 60
Comment: The phrase "any party to the instrument" includes not only parties who
are secondarily liable, but any party who is in the position of a surety with a right of
recourse either on the instrument or outside it, including an accommodation maker or
acceptor. 61
Observation: Despite the foregoing Comment, there has been some disagreement
among the courts as to whether the above statutory provisions apply to all parties to an
instrument, or only to those who occupy the position of sureties; some jurisdictions
take the position that even nonaccommodating parties, such as makers and comakers
can avail themselves of the defense of discharge. 62
The pertinent section of the 1990 Revision of the UCC 63 contains separate provisions
concerning the discharge of indorsers and accommodation parties by reason of (1)
extensions of time, and (2) other modifications, 64 as well as a provision concerning
the effect of impairment of collateral on the obligations of such persons. 65
Footnotes
Footnote 58. 427.
Footnote 59. UCC 3-606(1)(a) [1952].
As to presentment, protest, and notice of dishonor, see 313 et seq.
Footnote 60. 428.
The intention of the parties is significant in determining whether a party signing a note is

an accommodation maker or comaker, and the fact that a comaker of a note receives no
proceeds is some evidence that he or she is an accommodation maker. Dalton v George
B. Hatley Co. (Tex App Austin) 634 SW2d 374, 34 UCCRS 213.
The maker of a promissory note executed in connection with the purchase of an

apartment building became, in effect, a surety who was entitled to be discharged when
the seller and subsequent buyers of the building subordinated the maker's second deed of
trust to a fourth deed of trust furnished by the subsequent buyers. Haberl v Bigelow
(Colo) 855 P2d 1368, 23 UCCRS2d 820 (holding that impairment of collateral resulted
from the increased risk to the maker of being held liable which resulted from the
subordination of his deed of trust to that of a third party without his consent).
As to the liability of accommodation parties, generally, see 472 et seq.
Footnote 62. Branch Banking & Trust Co. v Thompson, 107 NC App 53, 418 SE2d 694,
18 UCCRS2d 506, review den 332 NC 482, 421 SE2d 350 (holding that the defense is
available only to accommodation parties and not to nonaccommodating makers or
comakers).
A comaker of a note could not avail himself of the suretyship defense that the assignee of
the note had impaired the collateral securing it, since such a defense is available only to a
surety. Catania v Catania, 26 Conn App 359, 601 A2d 543, 18 UCCRS2d 826.
Where all three members of a law partnership signed the original note, acceptance by the
lender of a renewal note signed only by one partner discharged the nonsigning partners,
even if the note was executed on behalf of the partnership. United Counties Trust Co. v
Podvey, 160 NJ Super 244, 389 A2d 515, 25 UCCRS 537 (holding that UCC 3-606
applies to a party who is primarily liable as well as to one who is secondarily liable).
As to discharges by reason of extensions of time, see 424 et seq.
As to discharges by reason of material modifications, see 423.
Footnote 65. 428.
418 What does not cause discharge
View Entire Section

The 1990 Revision of the Uniform Commercial Code (UCC) specifies that the discharge
of a party pursuant to the section of the UCC concerning discharges by reason of
cancellation or renunciation of an obligation 66 does not discharge the obligation of an
indorser or accommodation party having a right of recourse against the discharged
person. 67
Comment: The foregoing provision allows the principal debtor to be discharged

without the formal reservation of rights against the accommodation party required, in
the absence of consent, under the pre-1990 version of the UCC; the 1990 Revision thus
eliminates the necessity that a creditor reserve rights against an accommodation party
in order to retain rights of recourse against such a party. 68
An accommodation party is not discharged by reason of a material modification,

extension of time, or impairment of collateral unless the person entitled to enforce the
instrument knows of the accommodation or has notice that the instrument was signed for
accommodation. 69
Footnotes
As to discharges by reason of cancellation or renunciation, generally, see 394 et seq.
Footnote 68. Official Comment 3 to UCC 3-605 [1990 Rev], as amended.
Footnote 69. UCC 3-605(h) [1990 Rev], referring to UCC 3-605(c)-(e) [1990 Rev].
As to discharges by reason of material modifications, see 423.
As to discharges by reason of extensions of time, see 424
As to discharges by reason of impairment of collateral, see 428 et seq.
419 --Consent
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), a party is not
discharged to the extent that he or she has consented to the actions taken by the creditor.
70 For example, a guarantor may consent to impairment of the debtor's collateral, and
such a consent operates as a waiver of the guarantor's right to claim a discharge from
liability under the impairment-of-collateral provision of the UCC. 71
A consent to an extension contained in an instrument, unless otherwise specified,

authorizes a single extension for a period not longer than the original period of the
obligation, and such an extension is binding upon secondary parties and accommodation
makers. 72 Such parties, therefore, cannot claim to be released on the ground that the

extension was given without their agreement, 73 unless the extension is given without
their consent for more than one time or for a period longer than that of the original note.
74
Where the instrument specifies that no extension or renewal thereof will affect the
liability of comakers or guarantors, renewals or extensions of any duration which are
agreed to, are authorized; since the instrument otherwise specifies, the statutory provision
limiting a consent to a single extension not longer than the original period of the note is
inapplicable. 75
Comment: Consent may be given in advance, commonly by incorporation into an

instrument, or after execution of the instrument; in either event, no consideration is
required for a consent to be valid, and the consent operates as a waiver of the
consenting party's right to claim his or her discharge. 76
The 1990 Revision of the UCC explicitly provides that an accommodation party or
indorser is not discharged if the party asserting the discharge has consented to the event
or conduct that is the basis of the discharge. 77
Observation: The foregoing provision does not specify whether the consent to the
event or conduct in question must be express, as opposed to being manifested by
conduct, or whether the consent must be in writing; however, it is likely that the
consent necessary to prevent a discharge may be express or by conduct and that it may
be oral or written. 78
Footnotes
Footnote 71. Executive Bank of Ft. Lauderdale v Tighe, 54 NY2d 330, 445 NYS2d 425,
429 NE2d 1054, 32 UCCRS 894.
Footnote 72. UCC 3-118(f) [1952].
Forms: Provision in negotiable instrumentPayment subject to extension. 19 Am Jur

253:2357.
Footnote 73. Bay Nat'l Bank & Trust Co. v Mason (Fla App D1) 349 So 2d 810, 22
UCCRS 1004; Federal Land Bank v Taggart, 31 Ohio St 3d 8, 31 Ohio BR 6, 508 NE2d
152, 3 UCCRS2d 1836.
Footnote 74. Rogers v Merchants & Planters Bank, 302 Ark 353, 789 SW2d 463, 11
UCCRS2d 1198.
Two extensions of a note, each for the same period as the note itself, were binding on the
estate of a deceased accommodation indorser, where the note provided that it could be
extended from time to time after maturity without notice to any indorsers or sureties; in
such a case, the accommodation indorser is deemed to have consented in advance to
extensions without notice. Bay Nat'l Bank & Trust Co. v Mason (Fla App D1) 349 So 2d
810, 22 UCCRS 1004.
An accommodation party who signs as a maker is not bound by a provision in an

indorsement by which the indorser agrees to an extension. Holcomb State Bank v
Adamson (2d Dist) 107 Ill App 3d 908, 63 Ill Dec 704, 438 NE2d 635, 34 UCCRS 940.
Footnote 75. Stewart v Jones (Ala) 614 So 2d 1023, 22 UCCRS2d 1056; Brazosport
Bank of Texas v Travis (Tex Civ App Houston (14th Dist)) 617 SW2d 729, 32 UCCRS
163, writ ref n r e (Oct 21, 1981) and rehg of writ of error overr (Feb 10, 1982).
Where a coguarantor had authorized the creditor to increase, decrease, or release

collateral, unilaterally and without notice to her, there could be no injury to or
impairment of her obligation that she had not authorized, absent a showing of fraud,
accident, or mistake. Bullard v Carreras, 183 Ga App 539, 359 SE2d 429.
In an action by a lender against a surety on promissory notes which were secured by a

security interest on the debtor's equipment, the lender's release of its security interest with
respect to collateral sold by the debtor did not discharge the surety, where the notes were
cosigned by the surety and contained an express consent to partial release of the
collateral. Holmes v Rushville Production Credit Asso., 170 Ind App 509, 353 NE2d
509, 20 UCCRS 471, op withdrawn on other grounds 170 Ind App 517, 355 NE2d 417
and reinstated 170 Ind App 518, 357 NE2d 734, transfer den 267 Ind 454, 371 NE2d 379.
The consent of an accommodation party to an extension of the maker's obligation need

not be in writing and may be established by conduct. McGhee v First State Bank & Trust
Co. (Ky App) 793 SW2d 133, 13 UCCRS2d 194.
420 --Waiver
View Entire Section

The 1990 Revision of the Uniform Commercial Code (UCC) specifies that a party is not
discharged if the instrument or a separate agreement of that party provides, either
specifically or by general language, for a waiver of discharge by reason of defenses based
on suretyship or impairment of collateral. 79 Under the pre-1990 version of the UCC, a
waiver also will bar a defense based upon the defense of impairment of collateral. 80
Thus, where a guaranty agreement states that the guarantor unconditionally guarantees
full and proper payment of the debt and waives any and all defenses, and further provides
that the creditor is not required to proceed to collect on or realize any other security, there
is an unequivocal waiver of any right to be discharged by reason of impairment of
collateral. 81 Likewise, a comaker of an installment note is not discharged from
liability, on the ground that, the creditor has wrongfully impaired the note's collateral,
where the instrument contains a provision authorizing the release of the collateral without
the consent of, or notice to, the comaker; in such case, consent is deemed to have been
given in advance and the right to claim a discharge from liability is waived. 82
Where a note states that the bank has no duty as to the collection or protection of
collateral and gives the lender the right to release, surrender, or exchange any of the
collateral without notice, a guarantor waives any right he or she might have had to a
discharge from liability for impairment of collateral by guaranteeing the note. 83
Similarly, while a guarantor's obligation may be discharged where a creditor gives a
debtor an extension of time to pay a note without the guarantor's consent, 84 the
guarantor is not discharged if the guaranty agreement expressly waives any defense based
upon unauthorized extensions of the note. 85
Comment: No particular language or form of agreement is required to waive

discharge, whether in the instrument itself or in a separate agreement; however, such a
waiver of rights has no effect on the rights with respect to the disposition of collateral
which are conferred by various provisions of Article 9 of the UCC upon an
accommodation party who is also a debtor. 86
Observation: The requirement of good faith imposed by the UCC 87 is not

undermined by allowing a secured creditor to insert an all-embracing waiver clause in
a guaranty agreement, since the court can limit oppressive application of such a clause
and avoid any unconscionable result caused by misconduct by the creditor with respect
to the collateral. 88
Footnotes
Footnote 80. Federal Deposit Ins. Corp. v Hill, 13 Mass App 514, 434 NE2d 1029, 33
UCCRS 1510, app den 386 Mass 1104, 440 NE2d 1177.
Provisions in instruments barred guarantors from asserting defenses based on release of

collateral or extension of credits in excess of the valuation of the collateral, because those
provisions operated as a waiver of the guarantors' impairment of collateral defenses under
UCC 3-606(1)(b). Carrollton Car Center, Inc. v Citizens & Southern Nat'l Bank, 202
Ga App 429, 414 SE2d 674, 103-6 Fulton County D R 20.
Footnote 81. Pemstein v Stimpson, 36 Mass App 283, 630 NE2d 608, 23 UCCRS2d 877,
summary op at (Mass App) 22 MLW 1531 and review den 418 Mass 1103, 636 NE2d
279, 22 MLW 1996.
Footnote 82. McBurnett v National City Bank, 142 Ga App 505, 236 SE2d 179, 22
UCCRS 123.
As to the discharge of comakers by the impairment of collateral, see 428.
Footnote 83. Federal Deposit Ins. Corp. v Hill, 13 Mass App 514, 434 NE2d 1029, 33
UCCRS 1510, app den 386 Mass 1104, 440 NE2d 1177.
As to a failure to preserve or improper disposition of collateral as an impairment of

collateral justifying the discharge of indorsers and accommodation parties, see 431.
Footnote 84. 424.
Footnote 85. Republic Nat'l Bank v Sabet (SD NY) 512 F Supp 416, affd without op (2
NY) 681 F2d 802, cert den 456 US 976, 72 L Ed 2d 850, 102 S Ct 2241.
Footnote 86. Official Comment 8 to UCC 3-605 [1990 Rev], as amended, referring to
UCC 9-105(1)(d), 9-501(3)(b), 9-504(3) and 9-505(1).
Footnote 88. First Sec. Bank, N.A. v Mountain View Equip. Co. (App) 112 Idaho 158,
730 P2d 1078, 3 UCCRS2d 180, affd 112 Idaho 1078, 739 P2d 377, 4 UCCRS2d 1133.
421 --Creditor's exercise of enforcement options
View Entire Section

When a creditor has several options for the enforcement of its claim, it may exercise
those options in the manner it sees fit; the fact that an obligor's liability would have been
lessened had the creditor pursued a different option does not give rise to an impairment
of collateral such as would discharge an indorser or accommodation party. 89 Thus, the
creditor has the option of enforcing the liability of the parties to the commercial paper,
and is not required to proceed first against collateral. 90 A party who is liable on a
secured note, therefore, is not discharged when the creditor fails to take steps to recover
collateral sold by the debtor, because the creditor has the option of enforcing the note
rather than proceeding first against the collateral. 91 The failure of the creditor to
repossess collateral in order to protect the guarantor, likewise, is not an impairment of
collateral that releases the guarantor, 92 even where the debtor later becomes bankrupt.
93
A secured creditor with an interest in both real and personal property has the option of
proceeding against either in separate actions, unless there is an agreement or promise by
the creditor to look to certain property first. 94 Moreover, the fact that a bank does not
set off a deposit against a note does not bar it from asserting the liability of a party to the
paper. 95

Footnotes
Footnote 90. State Bank of Fisk v Omega Electronics, Inc. (Mo App) 634 SW2d 234, 34
UCCRS 934.
Footnote 91. Hassell v First Nat'l Bank, 218 Ga App 231, 461 SE2d 245, 95 Fulton
County D R 2387, reconsideration den (Jul 28, 1995) and cert den (Ga) 1995 Ga LEXIS
1199.
As to a failure to preserve or improper disposition of collateral as impairment warranting

discharge, see 431.
Footnote 92. Moore v Luxor (North America) Corp., 294 Ark 326, 742 SW2d 916, 5
UCCRS2d 1427.
The holder of a secured note is not required to repossess the collateral upon default
because one comaker calls upon the creditor to do so, but instead can repossess when the
holder desires to do so. Salter v AmSouth Bank, N.A. (Ala Civ App) 487 So 2d 927, 1
UCCRS2d 839 (involving a note which expressly gave the creditor the right to pursue
cumulative remedies and not to repossess the collateral).
Footnote 93. First Guaranty Bank v Szekeres, 139 Ga App 124, 227 SE2d 908, 20
UCCRS 462.
Footnote 94. West Branch State Bank v Gates (Iowa) 477 NW2d 848.
Footnote 95. Glover v National Bank of Commerce, 258 Ark 771, 529 SW2d 333, 18
UCCRS 459.
422 Discharge by tender of payment
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) provides that the holder's
refusal of a tender of payment wholly discharges any party who has a right of recourse
against the party making the tender. 96
Comment: The person discharged by virtue of the foregoing provision is the person
who has a right of recourse against the party making tender, whether the latter is a prior
party or a subsequent one who has been accommodated. 97
Under the 1990 Revision of the UCC, if a tender of payment made to a person entitled to

enforce an instrument is refused, the obligation of an indorser or accommodation party
having a right of recourse with respect to the obligation to which the tender relates is
discharged to the extent of the amount of the tender. 98
Comment: The foregoing provision discharges any indorser or accommodation party

having a right of recourse against the party making the tender in the event that a tender
of payment is refused. 99
A tender is an unconditional offer to pay the exact amount that is due, and a statement by
the debtor that he or she is ready and willing to make payment is not sufficient as a tender
where there is no actual production of the money due or its equivalent. 1 However,
under both the pre-1990 version of the UCC and the 1990 Revision, where the maker or
acceptor of an instrument payable other than on demand is able and ready to pay at every
place of payment specified in the instrument when it is due, it is the equivalent of tender.
2
Observation: Since the UCC does not specify who has the burden of proving a
constructive tender by reason of ability and readiness to pay the instrument on the due
date, the general rule that whoever will benefit from the affirmative of the issue has the
burden of proof pertains. 3
Footnotes
Footnote 96. UCC 3-604(2) [1952].
As to the discharge of obligations by payment, see 401 et seq.
Forms: AnswerDefenseDischarge of accommodation party. 6A Am Jur Pl & Pr

Footnote 2. 406.
423 Discharge by material modification of obligation
View Entire Section

Where the person entitled to enforce an instrument agrees to a material modification of

the obligation of a party other than an extension of the due date, the modification
discharges the obligation of an indorser or accommodation party having a right of
recourse against the person whose obligation is modified to the extent the modification
causes loss to the indorser or accommodation party with respect to the right of recourse. 4
Illustration: The following is an illustration of the kind of case to which the

foregoing provision would apply: Corporation borrows money from Lender and issues
a note payable to Lender. X signs the note as an accommodation party for
Corporation. The loan agreement under which the note was issued states various
events of default which allow Lender to accelerate the due date of the note. Among the
events of default are breach of covenants not to incur debt beyond specified limits and
not to engage in any line of business substantially different from that currently carried
on by Corporation. Without the consent of X, Lender agrees to modify the covenants
to allow Corporation to enter into a new line of business that X considers to be risky,
and to incur debt beyond the limits specified in the loan agreement to finance the new
venture. This modification releases X, unless Lender proves that the modification did
not cause loss to X or that the loss caused by the modification was less than X's right of
recourse. 5
The loss suffered by the indorser or accommodation party as a result of the modification
is deemed equal to the amount of the right of recourse, unless the person enforcing the
instrument proves that no loss was caused by the modification or that the loss caused by
the modification was an amount less than the amount of the right of recourse. 6
Comment: The foregoing provision puts the burden on the person seeking
enforcement of the instrument to prove the extent to which loss was not caused by the
modification; in the absence of proof by the person seeking enforcement that no loss
occurred, or that the loss was less than the full amount of the right of recourse, the
surety is completely discharged. 7
Footnotes
424 Extension of due date of obligation

View Entire Section
Under the pre-1990 version of the Uniform Commercial Code (UCC), the obligation of
an accommodation party such as a guarantor may be discharged where a creditor gives a
debtor an extension of time to pay a note without the guarantor's consent. 8 Whether
the party seeking a discharge is a comaker or an accommodation party on an instrument
is critical, because the rule that an accommodation party is released from liability on a
note when it is extended without his consent does not apply to comakers. 9
Observation: A consent to an extension contained in an instrument, unless otherwise

specified, authorizes a single extension for a period not longer than the original period
of the obligation; such an extension is binding upon secondary parties and
accommodation makers, who therefore cannot claim to be released on the ground that
the extension was given without their agreement, unless the extension is given without
their consent for more than one time or for a period longer than that of the original
note. 10
Comment: The pre-1990 version of the UCC does not take into account the presence
or absence of loss to the surety resulting from an extension, in that a nonconsenting
surety simply is discharged unless the payee expressly reserves its rights against the
surety; the 1990 Revision of the UCC, on the other hand, requires proof of loss in order
for an extension to cause a discharge of a surety. 11
The 1990 Revision of the UCC explicitly provides that, if a person entitled to enforce an
instrument agrees, with or without consideration, to an extension of the due date of the
obligation of a party to pay the instrument, the extension discharges an indorser or
accommodation party having a right of recourse against the party whose obligation is
extended to the extent that the indorser or accommodation party proves that the extension
caused loss to him or her with respect to the right of recourse. 12
Comment: The rationale for having a different rule with respect to proof of loss
caused by extensions of the due date, as opposed to the presumption of loss caused by
other modifications, is that extensions are likely to be beneficial to the surety and they
are more often made; other modifications are less common and are likely to be
detrimental to the surety. 13
Caution: An accommodation party is not discharged by reason of an extension of

time unless the person entitled to enforce the instrument knows of the accommodation
or has notice that the instrument was signed for accommodation. 14
Footnotes
Footnote 8. Kellett v Stanley, 153 Ga App 854, 267 SE2d 282, 29 UCCRS 155 (stating
that, although UCC 3-606(1)(a) does not expressly provide that a nonconsenting surety
is discharged if the creditor grants an extension, the draftsmen intended that result).
As to the effect of an extension or renewal of an instrument on the liability of

nonconsenting comakers, see 200.
As to renewal or novation as a basis for discharge of an obligation, generally, see 398.

Footnote 9. Commercial Mortg. & Fin. Co. v American Nat'l Bank & Trust Co. (2d Dist)
253 Ill App 3d 697, 191 Ill Dec 745, 624 NE2d 933, 25 UCCRS2d 139, reh den (Jan 10,
1994) and app den 155 Ill 2d 563, 198 Ill Dec 541, 633 NE2d 3 (applying the pre-1990
version of the UCC, but noting that this distinction remains critical under 3-605(c) of
the 1990 Revision of the UCC adopted in Illinois as of January 1, 1992).
A shareholder who signed various loan documents, but received none of the proceeds of a
loan to her corporation, was an accommodation party whose obligation was discharged
when the loan was extended without her consent. Commercial Mortg. & Fin. Co. v
American Nat'l Bank & Trust Co. (2d Dist) 253 Ill App 3d 697, 191 Ill Dec 745, 624
NE2d 933, 25 UCCRS2d 139, reh den (Jan 10, 1994) and app den 155 Ill 2d 563, 198 Ill
Dec 541, 633 NE2d 3 (applying the pre-1990 version of the UCC since the case arose
prior to the January 1, 1992 effective date of the 1990 Revision).
Footnote 10. 419.
As to the presumption of loss by reason of modification and the burden on the enforcing
party to show a lesser loss, see 423.
Footnote 14. 418.
425 --Necessity of consideration for extension
View Entire Section

In applying the pre-1990 version of the Uniform Commercial Code (UCC), some courts
hold that a creditor's extension of the time for payment of a note will discharge a
nonconsenting guarantor even if no consideration is given for the extension. 15 The
courts of a number of other jurisdictions require, on the other hand, that the extension
agreement be a binding one supported by consideration in order for a discharge to occur.
16 The 1990 Revision of the UCC explicitly provides, however, that a discharge may
occur if a person entitled to enforce an instrument agrees to an extension with or without
consideration. 17

Footnotes
Footnote 15. North Bank v Circle Inv. Co. (1st Dist) 104 Ill App 3d 363, 60 Ill Dec 105,
432 NE2d 1004, 33 UCCRS 1430.
As to the requirement of consideration supporting an extension, generally, see 199.
Footnote 16. Seven Lakes Inv. Group, Inc. v Crowe, 297 SC 534, 377 SE2d 576, 9
UCCRS2d 173.
Footnote 17. 424.
426 By discharge of instrument or obligation
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the liability of all
parties is discharged when any party who has no right of action or recourse on the
instrument (1) reacquires the instrument in his or her own right, or (2) is discharged
under any provision of Article 3 of the UCC, except as otherwise provided with respect
to discharge for impairment of recourse or collateral. 18
Observation: Under the foregoing provision, the instrument is discharged when no

party is left with any rights against any other party to the instrument. 19
The furnishing of an instrument, such as a check or a renewal note, in payment of an

obligation causes a discharge of the underlying obligation when the instrument is
honored or paid; in the interim, the obligation is merely suspended and will be reinstated
if the instrument given as payment is not honored or paid. 20 A discharge of the
underlying obligation necessarily relieves an accommodation party of further liability. 21
However, although the taking of an instrument for an underlying obligation effects a
suspension of that obligation pro tanto until it is honored or paid, such a suspension is not
an extension, such as will discharge a debtor's surety who has not consented to the
additional time for payment. 22
Under both the pre-1990 version of the UCC and the 1990 Revision, any party is also
discharged from liability on an instrument by any act or agreement with such party which
would discharge an obligation to pay money under a simple contract. 23 As a result,
the law governing the discharge of a surety or guarantor of a simple contract for the
payment of money applies equally to a surety or guarantor of a negotiable instrument;
thus, for example, a novation that would discharge a surety or guarantor of an ordinary
contract will also discharge the liability of such persons to pay a negotiable instrument.
24

Footnotes
Footnote 18. 399.
Footnote 20. 139.
As to the discharge of an indorser or accommodation party by acceptance of a renewal

note, see 424.
Footnote 21. J. J. Schaefer Livestock Hauling, Inc. v Gretna State Bank, 229 Neb 580,
428 NW2d 185, 7 UCCRS2d 143 (holding that guarantees were discharged by the
discharge of the promissory notes to which they related).
The retirement of a note by reason of its payment released a guarantor, even though the
bank did not mark the instrument cancelled. Green v Foley (CA4 Va) 856 F2d 660, 12
FR Serv 3d 1446, cert den 490 US 1031, 104 L Ed 2d 204, 109 S Ct 1769, cert den 498
US 900, 112 L Ed 2d 215, 111 S Ct 257.
As to the liability of accommodation parties such as guarantors and sureties, generally,

see 434 et seq.
As to the defense of discharge by payment, see 616.
Footnote 23. 391.
As to acts which discharge a simple contract for the payment of money, see 397.
Footnote 24. Sewell v Akins, 147 Ga App 454, 249 SE2d 274.
As to discharge of an obligation by reason of a renewal or novation, see 398.
2. Discharge by Impairment of Recourse or Collateral [427-431]
427 Impairment of recourse
View Entire Section

The pre-1990 version of the Uniform Commercial Code provides that the holder
discharges any party to an instrument to the extent that, without that party's consent and
without an express reservation of rights, the holder:
(1) releases or agrees not to sue any person against whom the party has, to the knowledge
of the holder, a right of recourse;
(2) agrees to suspend the right to enforce against such a person the instrument or
collateral; or
(3) otherwise discharges such a person. 25
However, an agreement not to sue a party who is liable on the instrument will discharge a
person with a right of recourse only if there is an enforceable contract not to sue such a
party; the foregoing statutory provision is therefore inapplicable where the creditor has
made no enforceable promise not to sue a third party who had assumed the maker's
liability. 26 Furthermore, a discharge by reason of impairment of recourse will occur
only if the holder has knowledge that it is taking action with respect to a person against
whom the party asserting discharge has a right of recourse; in the absence of knowledge
of external facts to the contrary, the holder has the right to rely on the face of the
instrument as indicating which party has a right of recourse against the person it is
releasing. 27
A mere delay is not the equivalent of an agreement to suspend the right to enforce an
instrument of the type required for a discharge to occur. 28 That is, a mere delay by the
creditor in enforcing a note does not discharge an accommodation party where there has
been no agreement to forebear from enforcement. 29
A bank's release of a comaker from her obligations on a promissory note without the
consent of accommodation makers impairs the right of recourse of the accommodation
makers and discharges their liability to the bank. 30 Since one of two comakers of a
note, normally has a right of recourse against the other comaker for only one-half of the
amount of the note, however, where a creditor does not make an express reservation of
rights, a comaker who has not consented to the release of the other will not be discharged
from liability for more than one-half of the amount due. 31 Similarly, where a note
represents both a primary obligation of one comaker and a loan to the other comaker for
which the first is an accommodation party, the accommodating comaker will be
discharged only with respect to the portion of the loan for which he or she has a right of
recourse as an accommodation party. 32 Likewise, the holder of an instrument
discharges any party only to the extent that the holder releases or agrees not to sue any
person against whom the party has a right of recourse; since the release may be pro tanto,
where a person against whom the right of recourse is held is partially discharged,
secondarily liable parties are discharged only to the extent that their rights have been
impaired. 33
Footnotes
Footnote 25. UCC 3-606(1)(a) [1952].
Forms: Release of person liable on negotiable instrumentProvisionReservation of

rights on discharge. 19 Am Jur Legal Forms 2d, Uniform Commercial Code: Article

Footnote 26. Ward v Worthen Bank & Trust Co., N.A., 284 Ark 355, 681 SW2d 365.
Footnote 28. Mechanics Nat'l Bank v Shear, 7 Mass App 255, 386 NE2d 1299, 26
UCCRS 438.
Footnote 29. Farmers State Bank v Huebner (Iowa App) 475 NW2d 640, 16 UCCRS2d
426.
Footnote 30. Landmark KCI Bank v Marshall (Mo App) 786 SW2d 132.
Where the liability of each of several guarantors is limited to his or her own interest in a
joint venture, the release of one of the guarantors without the consent of the others does
not release the nonconsenting guarantors. Holcombe v Eng, 163 Ga App 343, 294 SE2d
568, 35 UCCRS 200.
A reservation of rights clause in a written release of one comaker was sufficient to

preserve the creditor's rights against the other comaker, regardless of the latter's failure to
consent to the release. Ramsey v First Nat'l Bank & Trust Co. (Ky App) 683 SW2d 947,
40 UCCRS 1769.
Footnote 31. Bishop v United Missouri Bank (Mo App) 647 SW2d 625, 36 UCCRS
1276.
Footnote 32. Agribank, FCB v Whitlock (4th Dist) 251 Ill App 3d 299, 190 Ill Dec 514,
621 NE2d 967, app den 154 Ill 2d 557, 197 Ill Dec 483, 631 NE2d 705.
145, 450 NE2d 833, 36 UCCRS 1284, later proceeding (App 1st Dist) 168 Ill Dec 225,
589 NE2d 625.
428 Impairment of collateral, generally
View Entire Section

The holder of an instrument discharges any party to an instrument to the extent that,
without that party's consent, the holder unjustifiably impairs any collateral for the
instrument given by or on behalf of any person against whom the party has a right of
recourse. 34 However, the creditor's impairment of collateral only discharges a debtor
if the creditor knew of the surety status at the time of the impairment. 35
Observation: The above provision concerning discharges by reason of impairment of

collateral imposes essentially the same duties on a secured holder in possession of the
collateral as a section of Article 9 of the Uniform Commercial Code (UCC) 36
imposes on secured parties in possession of collateral. 37

The impairment-of-collateral provision of the UCC applies whenever there is an unjust
impairment of collateral, without regard to whether it is in the hands of the creditor or the
debtor. 38 Whether or not an impairment is unjust depends on equitable considerations,
and the court should take into account all of the circumstances of the case, including the
nature and purpose of the security interest retained by the creditor and the transaction
which created the suretyship relationship. 39
Under the 1990 Revision of the UCC, if the obligation of a party to pay an instrument is
secured by an interest in collateral and a person entitled to enforce the instrument impairs
the value of the interest in collateral, the obligation of an indorser or accommodation
party having a right of recourse against the obligor is discharged to the extent of the
impairment; the burden of proving impairment is on the party asserting discharge. 40
Caution: The 1990 Revision of the UCC explicitly provides that an accommodation
party is not discharged by reason of impairment of collateral unless the person entitled
to enforce the instrument knows of the accommodation or has notice that the
instrument was signed for accommodation. 41
If the collateral is furnished by a nonaccommodation party, and if the party asserting a

right of discharge by reason of impairment of collateral is an accommodation party who
is not entitled to discharge, the party is treated as a comaker with a right of contribution
based on joint and several liability rather than a right to reimbursement. 42
According to one view, a guarantor under a separate agreement guaranteeing a note

executed by another party is not discharged from liability by reason of impairment of the
collateral given for the note, because to obtain a discharge from liability one must be
party to the instrument, and the separate guaranty agreement is not a negotiable
instrument governed by Article 3 of the UCC. 43 On the other hand, a guarantor may be
considered a party to the note or other negotiable instrument, despite the fact that the
guaranty is included in a separate document, where the guarantor is a known participant
in the matter and the note and guaranty agreement are executed contemporaneously as
part of an integrated transaction. 44
Footnotes
Footnote 34. UCC 3-606(1)(b) [1952].
Annotation: What constitutes unjustifiable impairment of collateral, discharging

parties to negotiable instrument, under UCC 3-606(1)(b), 95 ALR3d 962.
Who is "party" discharged on negotiable instrument to extent of holder's unjustifiable

impairment of collateral, under UCC 3-606(1)(b), 93 ALR3d 1283.
Forms: AnswerDefenseImpairment of interest in collateralDischarge of

accommodation party by release of collateral to maker. 6A Am Jur Pl & Pr Forms
AnswerDefenseImpairment of collateralDischarge of accommodation indorser by

failure to record mortgage given as security for note. 6A Am Jur Pl & Pr Forms (Rev),

Footnote 35. Hemenway v Miller, 116 Wash 2d 725, 807 P2d 863, 14 UCCRS2d 830.
As to a secured party's duty to preserve collateral under Article 9 of the UCC, see 68A
Am Jur 2d, Secured Transactions 524 et seq.
Footnote 38. Beneficial Finance Co. v Marshall (Okla App) 551 P2d 315, 18 UCCRS
1014.
Footnote 39. Hemenway v Miller, 116 Wash 2d 725, 807 P2d 863, 14 UCCRS2d 830
(holding that where the suretyship relationship has been created by operation of law, as
compared to creation by contract, there is less reason to find that inaction by the creditor
has unjustifiably impaired collateral so as to discharge the surety).
Footnote 41. 418.
As to the discharge of comakers by reason of impairment of collateral, see 428.
Footnote 43. Federal Deposit Ins. Corp. v Hardt (CD Ill) 646 F Supp 209, 2 UCCRS2d
996.
UCC 3-606(1)(b) applies only to parties to a negotiable instrument, and thus does not
apply to a guaranty which is not such an instrument. FDIC v F.S.S.S. (DC Alaska) 829 F
Supp 317, 23 UCCRS2d 493.
Footnote 44. Commerce Bank of St. Louis, N.A. v Wright (Mo App) 645 SW2d 17, 37
UCCRS 502.
429 --Extent of impairment
View Entire Section

The value of an interest in collateral is impaired to the extent that, the value of the
interest is reduced to an amount less than the amount of the right of recourse of the party
asserting discharge, 45 or the reduction in value causes an increase in the amount by
which the amount of the right of recourse exceeds the value of the interest. 46 However,
if it is shown that the collateral was worthless, there can be no unjustifiable impairment.
47

Footnotes
Footnote 45. UCC 3-605(e)(i) [1990 Rev].
Footnote 46. UCC 3-605(e)(ii) [1990 Rev].
Footnote 47. Lyons v Citizens Commercial Bank (Fla App D1) 443 So 2d 229, 37
UCCRS 1214.
Where the value of an airplane destroyed in a crash was only $1,000, the creditor's
release of its lien on the aircraft in exchange for a payment in that amount did not
constitute impairment of collateral. United States v Unum, Inc. (CA5 Tex) 658 F2d 300,
32 FR Serv 2d 955, 32 UCCRS 646, reh den (5 Tex) 664 F2d 289.
430 --By failure to perfect, or release of, security interest
View Entire Section

The 1990 Revision of the Uniform Commercial Code (UCC) explicitly provides that
impairment of the value of an interest in collateral, such as will discharge the obligation
of an accommodation party or indorser, includes a failure to obtain or maintain perfection
or recordation of the interest in collateral. 48 Under the more general provision of the
pre-1990 version of the UCC concerning impairment of collateral, 49 a failure to perfect
a security interest,likewise, may result in an impairment of security sufficient to justify a
discharge. 50 For example, a creditor's unreasonable failure to perfect its purchase
money security interest in distribution rights that it has sold to the debtor by filing a
financing statement in a timely manner, as a result of which a preexisting lien covering
the distribution rights that is held by a bank takes priority over the interest of the creditor,
effectively releases the collateral and discharges the guarantor of the promissory note
used to finance the purchase; because the creditor has released the collateral entirely by
failing to file properly, the guarantor's obligation is discharged entirely, rather than pro
tanto. 51
Comment: Impairment of collateral occurs where the payee of a secured note fails to
perfect a security interest in collateral which is owned by the principal debtor, who
subsequently files an action in bankruptcy; since the security interest is not enforceable
in bankruptcy as a result of the failure to perfect it, there is a total impairment of the
collateral justifying a complete discharge of a surety. 52
Observation: If the security interest is subject to Article 9 of the Uniform

Commercial Code, prevention of such impairment will require the obtaining and
continuing of perfection in the manner specified by Article 9; with respect to other
security interests, the law predating the Uniform Commercial Code has not been
displaced and therefore will govern. 53

A person also impairs the value of an interest in collateral by releasing the collateral
without substitution of collateral of equal value. 54 The protected party may suffer a
loss both when there is a release of a security interest in collateral and when there is a
physical surrender or release of tangible collateral itself in the control or possession of
the person claimed to have impaired it. 55 Thus, for example, where a bank releases
collateral under a security agreement without the consent of an indorser of the secured
notes, and the value of the released collateral would have been sufficient to satisfy the
outstanding indebtedness represented by the notes, the bank cannot recover against the
indorser. 56
Footnotes
Footnote 48. UCC 3-605(g)(i) [1990 Rev].
Forms: AnswerDefenseImpairment of collateralDischarge of accommodation

indorser by failure to record mortgage given as security for note. 6A Am Jur Pl & Pr
Footnote 49. UCC 3-606(1)(b) [1952].
Although a bank's failure to perfect a purchase money security interest in collateral given
to secure a note by properly filing a financing statement was an unjustifiable impairment
of collateral, the persons asserting a discharge by reason of the impairment were not
entitled to be discharged since they signed the note as makers rather than as
accommodation parties. Peoples Bank v Pied Piper Retreat, 158 W Va 170, 209 SE2d
573, 14 UCCRS 1398.
In a suit against a guarantor of a corporate debtor's liability for roofing materials, the
guarantor cannot claim to have been discharged from liability, where the guaranty
agreement is neither a negotiable instrument nor a guarantee of a specific negotiable
instrument. Consolidated Roofing & Supply Co. v Grimm (App) 140 Ariz 452, 682 P2d
457, 38 UCCRS 1684.
An individual's wholly-owned corporation was not a party to a deed of trust note

executed by the individual in conjunction with the purchase of a hotel, and thus could not
invoke impairment of collateral as a defense to a suit seeking to foreclose on its property
which had been pledged as additional security to satisfy the balance of the debt,
regardless of whether or not the holder had impaired any collateral for the note by failing
to properly perfect a security agreement covering personal property of the hotel. D.R.
Allen & Son, Inc. v Harwal, Inc. (App) 307 SC 315, 414 SE2d 805.
Footnote 51. Port Distrib. Corp. v Pflaumer (SD NY) 880 F Supp 204, 33 CBC2d 921, 28
UCCRS2d 235, affd (CA2 NY) 70 F3d 8, 28 UCCRS2d 248.
A holder's failure to record a note does not constitute unjustifiable impairment of

collateral, relieving an accommodation indorser of any further obligation on the note,
since the recording of a promissory note would not convert it into security interest in the
obligor's property. First State Bank v Raiton (ED Pa) 377 F Supp 859, 15 UCCRS 420.

While UCC 3-606 did not apply to discharge guarantors of a promissory note who
executed a separate guaranty agreement, since the guaranty was not a negotiable
instrument, the creditor's failure to record a chattel mortgage given by the debtor did
unjustifiably impair the collateral and discharge the guarantors under UCC 9-207.
Beneficial Finance Co. v Marshall (Okla App) 551 P2d 315, 18 UCCRS 1014.
Footnote 54. UCC 3-605(g)(ii) [1990 Rev].
Footnote 56. Guida v Exchange Nat'l Bank (Fla App D2) 308 So 2d 148, 16 UCCRS
1062.
431 --By failure to preserve value or improper disposition
View Entire Section

The 1990 Revision of the Uniform Commercial Code (UCC) explicitly provides that
impairment of the value of an interest in collateral such as will discharge the obligation
of an accommodation party or indorser includes the failure to perform a duty owed, under
Article 9 of the Uniform Commercial Code (UCC) or other law, to preserve the value of
collateral to a debtor or surety or other person secondarily liable. 57 Under the pre-1990
version of the UCC, a creditor in possession of property securing a debt also owes a duty
of ordinary care to secure and preserve that property, and if the creditor breaches that
duty, resulting in the destruction of or damage to the security, the surety is entitled to be
discharged from liability on the note to the extent of the reasonable value of such security
or to the extent of loss in value of the security. 58 However, a borrower's argument that
a bank's settlement with a second borrower and its subsequent foreclosure on the second
borrower's principal asset has destroyed the value of a promissory note which the second
borrower had given to the first and which the first borrower had deposited with bank as
collateral for first borrower's own debt, and that the resulting impairment of collateral in
turn has discharged the first borrower's debt to the bank, must fail; the UCC requires that
impairment be unjustifiable for a party to be discharged, and it is absurd to argue that it is
unjustifiable for a bank to foreclose on property for which it holds a mortgage when a
default has occurred on the secured debt. 59
Observation: The provisions of Article 3 of the UCC concerning discharges by

reason of impairment of collateral 60 impose essentially the same duties on a secured
holder in possession of the collateral as are imposed by a section of Article 9 61 of the
UCC. 62 Thus, the Article 9 description of the secured party's duty to preserve
collateral, 63 may be used to define "unjustifiable impairment of collateral" and to
show that failure to perfect security interest in collateral constituted an unjustifiable
impairment thereof. 64 However, Article 3 incorporates the standard suretyship
defense based on the creditor's unjustifiable impairment of the security, whereas
Article 9 requires a duty of reasonable or ordinary care of the creditor in possession of
the security. 65
The duty to preserve the value of collateral need not be directly imposed by law, but may
arise by virtue of a contract which is enforceable under the law; for example, a party may
be required by a separate contract to preserve collateral by maintaining insurance on it,
and a failure to do so results in an impairment in the event of an uninsured loss. 66
Impairment of the value of an interest in collateral also includes a failure to comply with
applicable law in disposing of the collateral. 67 In the case of a security transaction
under Article 9 of the UCC, a failure to dispose of collateral in the manner required by
statute 68 will result in an impairment of the collateral. 69
Observation: A party claiming that it has been discharged by virtue of

noncompliance with the law relating to the disposition of the collateral must also show
to what extent that failure had caused a loss to it; in many cases, however, it will not be
possible to prove that any loss resulted from the noncompliance. 70
Footnotes
Footnote 57. UCC 3-605(g)(iii) [1990 Rev].
Footnote 58. First Nat'l Bank v Helwig (Tex Civ App Austin) 464 SW2d 953, 9 UCCRS
98.
Although the Small Business Administration agreed to subordinate its lien priority to
help a borrower obtain a desperately needed bank line of credit, and this made the
subordination agreement justifiable with respect to the borrower, the subordination
agreement was not justifiable with respect to the guarantor; the guarantor therefore was
entitled to be released from his obligation. Alcock v Small Business Admin. (In re
Alcock) (CA9 Cal) 50 F3d 1456, 95 CDOS 2113, 95 Daily Journal DAR 3621, 26
UCCRS2d 376.
Footnote 59. Resolution Trust Corp. v Feldman (CA1 Mass) 3 F3d 5, summary op at
(CA1 Mass) 21 MLW 3362, 14 RILW 434 and amd (Aug 26, 1993) and cert den 510 US
1163, 127 L Ed 2d 537, 114 S Ct 1187 (also stating that the fact that the security was an
asset of a party who also had a debt to the first borrower, meaning that the first
borrower's situation has been worsened by the foreclosure, is the normal fate of an
unsecured creditor when a bankrupt's only asset is already pledged).
Footnote 60. UCC 3-606(1)(b) [1952].
Footnote 62. 428.

Footnote 64. Advance Process Supply Co. v Litton Industries Credit Corp. (7 Ill) 745 F2d
1076, 39 UCCRS 565.
Footnote 65. First Nat'l Bank v Helwig (Tex Civ App Austin) 464 SW2d 953, 9 UCCRS
98.
Footnote 67. UCC 3-605(g)(iv) [1990 Rev].
As to a secured creditor's right to dispose of collateral, see 68A Am Jur 2d, Secured
Transactions 624 it seq.
3. Particular Applications [ 432, 433]
432 Cases where discharge warranted
View Entire Section

Where the payee of note accepts a maker's postdated check and extends the time of
payment from the date the note became delinquent until the date when the check is
payable, and where the extension of time is granted without notice to or consent of the
accommodation parties to the note, the accommodation parties are relieved of further
liability on the note. 71 Likewise, the increase in the risk of nonpayment of a
promissory note executed by a purchaser in connection with the purchase of an apartment
building which results from the seller's subordination of the purchaser's second deed of
trust to a fourth deed of trust executed by subsequent buyers of the building is an
impairment of collateral; the original purchaser becomes, in effect, a surety on the
subsequent buyers' note by reason of the subordination and is entitled to be discharged
because the risk of nonpayment has been increased without consent. 72 Similarly, in a
suit by the holder of a note given for the purchase of realty against an individual who was
the original purchaser of the realty and the original maker of the note prior to its
assumption by a third party under a novation, the original maker of the note is a surety
entitled to protection from harmful impairment of the note's collateral; the holder of note
unreasonably impairs the value of its collateral by executing a subordination agreement
and releasing over 700 acres of the land which constitutes collateral, without the surety's
knowledge, and the surety is discharged by the impairment from liability on the note. 73
A bank which is named payee under a loss payable clause in a breach of warranty
insurance policy procured by a maker impairs the value of collateral by failing to pursue
a potential claim for available insurance coverage which could reduce or eliminate the
amount due on the note. 74 Where a bank negligently fails to perfect its security interest
in a growing corn crop by omitting a description of the real estate as required by statute,
75 thereby causing said collateral to be subordinated to the interest of a third party, there
is, likewise, an unjustifiable impairment of collateral which serves to discharge an
accommodation party from liability to the extent of the impairment. 76 Similarly, in a
creditor's suit against the guarantor of a note secured by a mortgage on the debtor's realty,
the creditor's failure to record the mortgage for one year impairs both the value of the
collateral and the guarantor's right as surety to be subrogated to all of the creditor's rights
against the debtor, including the right to proceed against any security of the debtor in the
creditor's hands. 77
An accommodation party is totally discharged by a secured creditor's impairment of

collateral where the collateral, although not in the possession of the creditor, is sold by
the principal debtor with the express authority of the secured creditor and where the value
of the collateral exceeds the amount of the debt. 78 Likewise, the guarantor of a note
made by the guarantor's son is released from liability under
unjustifiable-impairment-of-collateral provisions of the Uniform Commercial Code, 79
where the bank which is the payee of the note (1) uses the proceeds from the sale of
growing crops which are collateral for the note to pay off other obligations of the note's
maker that are not guaranteed by guarantor, (2) extends the time for payment of the note
sued on, by means of an extension agreement that is actually a new note made without
the guarantor's consent after the collateral for the note sued on has been disposed of, and
(3) increases the rate of interest on the loan. 80
In a suit by a payee as holder of a note executed by a husband and wife as debtors, which
is secured by a security interest in the inventory of the husband's business, the wife is
discharged from liability on the note to the extent of the collateral's value by reason of the
payee's failure to timely perfect the security interest in the inventory since:
(1) the impairment-of-collateral provision of the UCC 81 applies to all parties who
occupy the position of surety, including accommodation makers, comakers, endorsers,
guarantors, and acceptors;
(2) the wife is an accommodation comaker of the note in question because she signed it
as an accommodation to her husband to enable him to get a loan and has not received any
direct benefit from the loan;
(3) the lender had notice of the wife's accommodation status; and
(4) the lender's failure to perfect its security interest in the collateral for the note, which
has resulted in the loss of the entire collateral to another secured party, constitutes
unjustifiable impairment of collateral. 82
Where an automobile dealer assigns and indorses a contract of sale and note to a bank,
together with an insurance policy which is itself collateral for the note, and the bank fails
either to replace the policy when it is cancelled or to notify the dealer of the policy's
cancellation, the bank has impaired the collateral and the dealer's liability as an indorser
is thereby discharged. 83
Footnotes
Footnote 71. Lee Federal Credit Union v Gussie (4 Va) 542 F2d 887, 19 UCCRS 630.
Footnote 72. Haberl v Bigelow (Colo) 855 P2d 1368, 23 UCCRS2d 820.
Footnote 73. Hughes v Tyler (Miss) 485 So 2d 1026, 42 UCCRS 1699.
Footnote 74. Darien Bank v Miller, 208 Ga App 562, 431 SE2d 165, 93 Fulton County D
R 1797.
Footnote 76. In re Estate of Voelker (Iowa) 252 NW2d 400, 21 UCCRS 817.
Footnote 77. Langeveld v L.R.Z.H. Corp., 74 NJ 45, 376 A2d 931, 22 UCCRS 106, 95
ALR3d 949 (also holding that if the impairment of collateral can be measured in
monetary terms, the monetary amount of the impairment will measure the extent of the
guarantor's discharge from liability on a note, but if the monetary amount of impairment
cannot be ascertained the guarantor will be discharged of all liability on the instrument).
Footnote 78. Beneficial Finance Co. v Marshall (Okla App) 551 P2d 315, 18 UCCRS
1014.
Footnote 79. UCC 3-606(1)(b) [1952].
Footnote 80. Citizens Bank of Smithville v Lair (Mo App) 687 SW2d 268, 41 UCCRS
1360.
Footnote 81. UCC 3-606(1) [1952].
Footnote 82. El-Ce Storms Trust v Svetahor, 223 Mont 113, 724 P2d 704, 2 UCCRS2d
1593 (also holding that, since the wife was still liable on the note as a comaker, she was
obligated to pay the amount of the plaintiff's judgment, less the value of the collateral for
the note).
Footnote 83. Arlington Bank & Trust v Nowell Motors, Inc. (Tex Civ App Fort Worth)
511 SW2d 415, 15 UCCRS 146.
433 Cases where discharge not warranted
View Entire Section

The fact that a predecessor of the Resolution Trust Corporation (RTC) has orally agreed,
without a general partner's consent, not to file suit on notes given by a partnership does
not release the general partner from liability on a judgment against the partnership and
other partners, since unwritten agreements tending to defeat or diminish RTC's rights
under an instrument are unenforceable against the RTC; moreover, the general partner in
such a case is not a surety known to the creditor, even if he is considered to be a latent
surety, and the section of the Uniform Commercial Code (UCC) which deals with
discharge of a party to an instrument because of a holder's release of rights against a third
party 84 protects only known sureties. 85 Likewise, where a bank which holds a
partnership note is informed two or three days before the note is due that one partner is
buying the other partner's interest and is assuming all liabilities of the business and that
the withdrawing partner does not want the note extended and will not sign a renewal
note, evidence that bank twice accepts payment of interest from the continuing partner
after the note becomes due does not establish that the bank has made an enforceable
promise not to sue the continuing partner; thus, the withdrawing partner is not
discharged. 86
An accommodation comaker of a note executed by her husband in favor of a bank cannot

escape liability on the ground that the bank has unjustifiably impaired the value of
collateral by listing the note as unsecured in the husband's bankruptcy proceeding, when
in fact the note is secured, since the bank is not required to take affirmative action to
enforce its security in the absence of any implied duty to do so. 87 Moreover, an
assignee of promissory notes has no duty to monitor the condition of motels administered
by the sole general partner of a limited partnership; thus, no discharge for impairment of
collateral is warranted, even though the condition of the motels has deteriorated during
the time that the creditor has delayed foreclosure, resulting in a decrease in the fair
market value of the collateral. 88
Even if a creditor has forged the debtor's signature on a security agreement, that conduct
does not increase a guarantor's liability under a guaranty agreement, and thus, does not
impair collateral so as to discharge the guarantor's obligation, where the proceeds from
the sale of the collateral are applied to the balance due on the notes, reducing the liability
of the guarantors. 89 Likewise, in an action against a guarantor who has advised the
creditor to dispose of collateral over an extended period of time through a liquidator
specially recommended by the guarantor, the fact that the creditor disregards that advice
and sells the collateral at public auction for an amount less than the loan balance does not
constitute an unjustifiable impairment of collateral, where the guarantor has waived its
right to claim a discharge by consenting in its guaranty to an auction sale as an
appropriate method for disposal of the collateral. 90
A guarantor who unconditionally guarantees payment of a note and mortgage debt by a

separate contract is not a party to the instrument, meaning the promissory note, because
he has not signed the instrument; thus, the guaranty transaction is not within the scope of
the impairment-of-collateral statute 91 and the creditor's unjustified impairment of
collateral for the note and mortgage will not cause the guarantor to be discharged from
liability for payment of the sum guaranteed. 92

Footnotes
Footnote 84. UCC 3-606(1)(a) [1952].
As to discharges by reason of impairment of a right of recourse, see 427.
Footnote 85. Resolution Trust Corp. v Teem Partnership (DC Colo) 835 F Supp 563, 22
UCCRS2d 1094 (applying the pre-1990 version of the UCC, which was in effect in
Colorado until the January 1, 1995 effective date of the 1990 Revision).
Footnote 86. Glover v National Bank of Commerce, 258 Ark 771, 529 SW2d 333, 18
UCCRS 459.
As to discharges by reason of extensions and renewals of notes, see 424.
Footnote 87. Chemical Bank v Valentini (2d Dept) 84 App Div 2d 801, 444 NYS2d 154.
Footnote 88. Buckeye Federal Sav. & Loan Ass'n v Guirlinger, 62 Ohio St 3d 312, 581
NE2d 1352, 16 UCCRS2d 432.
Footnote 89. First City, N.A. v Treece (ED Tex) 848 F Supp 727, 25 UCCRS2d 161.
Footnote 90. Rhode Island Hosp. Trust Nat'l Bank v National Health Found., 119 RI 823,
384 A2d 301, 23 UCCRS 1237.
Footnote 91. UCC 3-606(1)(b) [1952].
Footnote 92. Crown Life Ins. Co. v La Bonte, 111 Wis 2d 26, 330 NW2d 201, 36
UCCRS 1232.
XI. LIABILITY OF PARTIES [434-545]
Research References
UCC 3-401 [1952]; UCC 3-119, 3-207, 3-401 [1990 Rev]
ALR Index: Accommodation Party, or Paper, Bills and Notes; Checks and Drafts;
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms 71 et seq; 6A Am Jur Pl & Pr
Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:19, 3:144 et
seq.
3B Am Jur Legal Forms 2d, Bills and Notes 41:111 et seq.; 19 Am Jur Legal Forms
2d, Uniform Commercial Code: Article 3Negotiable Instruments 253:2431 et seq.,
253:2594
UCC Pleadings and Practice Forms 3d, Article 3Negotiable Instruments 3:145-3:147,
3:177
3-401:4
434 Generally
View Entire Section

The liability of particular parties to commercial paperthe maker, comaker, drawer,

acceptor, indorser, guarantor, and suretydepends upon the particular engagement into
which they enter upon signing the instrument; the contracts of different parties are
independent and carry different obligations. 1
A person is not liable on an instrument unless either the person signed the instrument, 2
or the person is represented by an agent or representative who signed the instrument and
the signature is binding on the represented person. 3 Thus, an undisclosed principal is
not liable on a negotiable instrument. 4
Illustration: Where the names of the father and father-in-law did not appear on the
note, they could not be held liable thereon. 5
Observation: This section is not intended to affect any other law requiring a
signature by mark to be witnessed, or any signature to be otherwise authenticated, or
requiring any form of proof. 6
It is not necessary that the name of the obligor appear on the instrument, so long as there
is a signature that binds the obligor; signature includes an indorsement. 7 However, no
liability on the instrument can be imposed on the basis of an oral promise to pay the
instrument or on a promise made in another writing or letter. 8
Although no person is liable on an instrument unless his or her signature appears thereon,
if a corporate officer signs a note, the corporation may be liable on the underlying
obligation. 9
Caution: As an exception to the rule that a person is not liable on a check he or she
did not sign, a drawer whose negligence contributed to the forging of his or her name
on a check cannot hold the bank liable for cashing the check, as long as the bank meets
its burden of proving by a preponderance of the evidence that it complied with
reasonable commercial standards in so doing. 10 Thus, where a series of checks
drawn on a corporate account for which a "Mr. Sellers" was the authorized signatory
were signed "Seller," omitting the "s," the trial court's finding that the bank, by failing
to realize that the checks were forgeries even though the signature card contained a
"clearly evident" final "s," failed to comply with reasonable commercial standards was
not clearly erroneous. Thus, the bank was foreclosed from asserting as a defense that
the company's negligence had "substantially contributed" to those forgeries. 11
Parol evidence is admissible to identify the signer, and when the signer is identified the

signature is effective. 12
Illustration: The trial court erred in entering judgment against two corporations on a
note which did not mention their names and which was signed by two individuals, first
with their signatures preceded by the word "by" and a second time with the specific
designation "Individually." The fact that the individuals had signed in this manner
indicated that they signed in a representative capacity as well as individually, and parol
evidence was admissible to show, as between the immediate parties, that the
individuals had signed in a representative capacity so as to obligate the corporate
defendants, but the evidence was insufficient to establish that the corporate defendants
were obligated on the note. 13
Caution: The rule of nonliability of a non-signer applies only with respect to

liability for payment of the instrument. 14 A non-signer who has been an intermediate
nonindorsing holder of a bearer instrument may have warranty liability although he or
she does not have liability for payment of the paper. 15
Footnotes
Footnote 1. Amsinck v Rogers, 189 NY 252, 82 NE 134; Brunner v Smith (Tex Civ App
El Paso) 467 SW2d 565, 9 UCCRS 491.
Forms: Liabilities of parties. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms
71 et seq.
Liability of parties. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code, Negotiable

Instruments 3:144 et seq.
Rights and liabilities of parties. 3B Am Jur Legal Forms 2d, Bills and Notes
41:111 et seq.
Liability of parties. 19 Am Jur Legal Forms 2d, Uniform Commercial Code,

Negotiable Instruments 253:2431 et seq.
While there was no question but that a corporation eventually received proceeds of three
notes and used such proceeds for its own corporate purposes, the corporation's liability
on two notes signed by individuals was governed by the rule that a person is not liable on
an instrument unless his or her signature appears thereon. Seiffert v State (Tex Crim)
501 SW2d 124.
Forms: Complaint, petition, declarationAllegationDefendant signed instrument. 6A

3:147; UCC Pleading and Practice Forms 3d, Article 3Negotiable Instruments
3:145.

Commercial Code : Article 3Negotiable Instruments 3:148; UCC Pleading and
Practice Forms 3d, Article 3Negotiable Instruments 3:146.
(Rev), Commercial Code : Article 3Negotiable Instruments 3:149; UCC Pleading
and Practice Forms 3d, Article 3Negotiable Instruments 3:147.
Instruction to juryPresumption of authenticity of and authorization for signature. 6A

3:177.
As to agents and representatives and their principals, see 491 et seq.
Footnote 4. Opelika Production Credit Asso. v Lamb (Ala) 361 So 2d 95 (observing,

however, that an undisclosed principal may still be liable for the debt under the equitable
doctrine of quasi-contract).
Footnote 5. Bradford v McElroy (Tex App Austin) 746 SW2d 294.
As to the liability of agents and representatives, see 491 et seq.
Footnote 9. PWA Farms, Inc. v North Platte State Bank, 220 Neb 516, 371 NW2d 102,
41 UCCRS 869, 69 ALR4th 767 (holding however, that where a corporate officer signed
a note personally, and no corporate authority was given for the officer to borrow money
for the corporation, neither the corporation nor its officers received the benefits of the
loan, and there was no evidence that any of the loan was used for corporate expenses, the
corporation was not liable on the underlying obligation).
As to corporate liability on a note signed by a representative generally, see 491 et seq.
Footnote 10. American Sec. Bank, N.A. v American Motorists Ins. Co. (Dist Col App)
538 A2d 736, 5 UCCRS2d 1413.
Footnote 11. American Sec. Bank, N.A. v American Motorists Ins. Co. (Dist Col App)
538 A2d 736, 5 UCCRS2d 1413.
Footnote 12. Official Comment 2 to UCC 3-401 [1990 Rev], further providing that
indorsement in a name other than that of the indorser is governed by 3-204(d).
As to the use of parol evidence to prove the representative capacity of the signer, see
503.
Footnote 13. Dynamic Homes, Inc. v Rogers (Fla App D4) 331 So 2d 326, 19 UCCRS
560.

As to warranties generally and a discussion of UCC 3-416(a) [1990 Rev], see 511 et
seq.
435 Negotiable instrument required
View Entire Section

A personal money order issued with the bank's name printed on it may evidence the
bank's intent to be bound thereby. 16 "Money orders" differ from cashier's checks and
certified checks in that the latter contain the signature of a bank official, while money
orders do not. 17 While some states have held that money orders are not primary
obligations of the bank because of the lack of that signature (which the UCC says is
required for liability), there is other authority that the ultimate liability for payment of a
money order rests with the issuing bank anyway. 18
Caution: The Uniform Commercial Code is inapplicable to electronic funds transfers

("wire transfers"). 19 A wire transfer is not covered by Article 3 because it is not a
signed negotiable instrument. 20
Footnotes
Footnote 16. Sequoyah State Bank v Union Nat'l Bank, 274 Ark 1, 621 SW2d 683, 32
UCCRS 213; Mirabile v Udoh, 92 Misc 2d 168, 399 NYS2d 869, 23 UCCRS 101.
UCCRS2d 1239.
UCCRS2d 1239.
436 Effect of reacquisition
View Entire Section

Reacquisition of an instrument occurs if it is transferred to a former holder, by

negotiation or otherwise. A former holder who reacquires the instrument may cancel an
indorsement made after the reacquirer first became a holder of the instrument. If the
cancellation causes the instrument to be payable to the reacquirer or to bearer, the
reacquirer may negotiate the instrument. An indorser whose indorsement is canceled is
discharged, and the discharge is effective against any subsequent holder. 21
Comment: Section 3-207 restates former 3-208. Reacquisition refers to cases in

which a former holder reacquires the instrument either by negotiation from the present
holder or by a transfer other than negotiation. If the reacquisition is by negotiation, the
former holder reacquires the status of holder. Although this section allows the holder
to cancel all indorsement made after the holder first acquired holder status, cancellation
is not necessary. The status of holder is unaffected by whether cancellation is made.
However, if the reacquisition is not the result of negotiation the former holder can
obtain holder status only by striking the former holder's indorsement and any
subsequent indorsement. The latter case is an exception to the general rule that if an
instrument is payable to an identified person, the indorsement of that person is
necessary to allow a subsequent transferee to obtain the status of holder. 22
The cancellation of the reacquirer's indorsement and of subsequent indorsements will

ordinarily leave the instrument payable to the reacquirer or to bearer, depending upon
whether the last indorsement makes the instrument payable to the reacquirer or bearer. If
the instrument is payable to the reacquirer or bearer, it may then be renegotiated by the
reacquirer. 23
An indorser whose signature is not canceled by the reacquirer is not affected in any way
by the reacquiring of the instrument by a former holder. In contrast, any subsequent
holder whose indorsement is so canceled cannot be held liable for payment of the paper.
By the act of physically crossing out the indorsement, the indorser's liability for payment
of the paper is discharged. This discharge is effective not only as against the reacquirer
but as against all other persons, including a person who is a holder in due course. 24
Observation: X, a former holder, buys the instrument from Y, the present holder. Y
delivers the instrument to X but fails to indorse it. Negotiation does not occur because
the transfer of possession did not result in X's becoming holder. The instrument by its
terms is payable to Y, not to X. However, X can obtain the status of holder by striking
X's indorsement and all subsequent indorsement. When these indorsement are struck,
the instrument by its terms is payable either to X or to bearer, depending upon how X
originally became the holder. In either case X becomes the holder. 25 In another
example, X, the holder of an instrument payable to X, negotiates it to Y by special
indorsement. The negotiation is part of an underlying transaction between X and Y.
The underlying transaction is rescinded by agreement between X and Y, and Y returns
the instrument without Y's indorsement. X can obtain holder status by canceling X's
indorsement to Y. 26 In these cases, X acquired ownership of the instrument after
reacquisition, but X's title was clouded because the instrument by its terms was not
payable to X. Normally, X can remedy the problem by obtaining Y's indorsement, but
in some cases, X may not be able conveniently to obtain that indorsement. This statute
is a rule of convenience which relieves X of the burden of obtaining an indorsement

that serves no substantive purpose. The effect of any indorsement under this section is
to nullify it. Thus, the person whose indorsement is canceled is relieved of indorser's
liability. Because cancellation is notice of discharge, discharge is effective even with
respect to the rights of a holder in due course. 27
Footnotes
Where the holder of a note has notice that the note had been reacquired by a prior
indorser, such holder has notice of an intervening indorser's discharge under the
foregoing provision as against the reacquiring indorser. In such a case, however, the
intervening indorser's discharge has no effect on any guaranty of payment that the
intervening indorser might have made to the holder, a guaranty being an agreement
separate from the contract which arises by simple indorsement or transfer. Hewett v
Marine Midland Bank, N.A. (2d Dept) 86 App Div 2d 263, 449 NYS2d 745, 33 UCCRS
1696.
Forms: Complaint, petition, or declarationFor return of instrument improperly

negotiated, injunction against further negotiation, and impoundment of instrument. 6A
3:91.
437 Notice to third party
View Entire Section

In an action for breach of an obligation for which a third person is answerable over
pursuant to Article 3 28 or the Bank Deposits and Collections Law, 29 the defendant
may give the third person written notice of the litigation, and the person notified may
then give similar notice to any other person who is answerable over. If the notice states
that the person notified may come in and defend and that failure to do so will bind the
person notified in an action later brought by the person giving the notice as to any
determination of fact common to the two litigations, the person notified is so bound
unless after seasonable receipt of the notice the person notified does come in and defend.
30
Comment: This section is a restatement of former UCC 3-803. 31
Observation: The 1990 Revision expands the procedure to be available when the
liability is based upon either the revised Article 3 or Article 4. The prior Article 3
limited the procedure to cases in which the liability over was based on the prior Article
3 and did not include Article 4. 32
Footnotes
Footnote 28. UCC Article 3 [1990 Rev].
Footnote 29. UCC Article 4 [1990 Rev].
Annotation: Personal liability of officers or directors of corporation on corporate

checks issued against insufficient funds, 47 ALR3d 1250.
Forms: Notice of litigation to third person answerable over on negotiable instrument.

Footnote 31. Official Comment to UCC 3-119 [1990 Rev.].
438 Admissibility of parol evidence
View Entire Section

A promissory note is an unconditional contract of the maker to pay the holder according
to the tenor of the instrument. 33 Because the note is an unconditional promise, the
contract is complete as written, and parol evidence may not be used to impose conditions
that are not apparent on the face of the instrument. 34 Thus, an oral agreement between
the parties, made contemporaneously with the execution of the note or prior thereto,
which relates to a condition not expressed in the note itself, is incompetent to change the
contract as represented on the face of the note. 35
Caution: Parol evidence is admissible when it goes to the question whether the
parties agreed that the instrument was to be enforceable. 36 The parol evidence rule
does not apply to a situation where the instrument has been so framed as not to express
the true agreement where the parties, and in some cases extrinsic evidence relating to
the discrepancies in such things as quantities, disparate values, and omissions of setoffs
due are admissible to show a mutual mistake in fact in computing the principal amount
of the note. 37 Similarly, the parol evidence rule does not prevent a defendant from
asserting its defense of the failure to satisfy conditions precedent to the making of the
loan. 38
Footnotes
Footnote 33. Whiteside v Douglas County Bank, 145 Ga App 775, 245 SE2d 2, 24
UCCRS 171, related proceeding 146 Ga App 888, 247 SE2d 558.
Footnote 34. Blake v Coates, 292 Ala 351, 294 So 2d 433, 14 UCCRS 996; Simpson v
Milne (Colo App) 677 P2d 365, 36 UCCRS 1262; Metro Nat'l Bank v Roe (Colo App)
675 P2d 331, 37 UCCRS 1183; Grossman v Banco Industrial de Venezuela, C.A. (Fla
App D3) 534 So 2d 773, 13 FLW 2505, 7 UCCRS2d 1527; Cox v Farmers Bank, 159 Ga
App 148, 282 SE2d 762, 33 UCCRS 987; Whiteside v Douglas County Bank, 145 Ga
App 775, 245 SE2d 2, 24 UCCRS 171, related proceeding 146 Ga App 888, 247 SE2d
558; Tatum v Bank of Cumming, 135 Ga App 675, 218 SE2d 677, 18 UCCRS 171; Bank
of Suffolk County v Kite, 49 NY2d 827, 427 NYS2d 782, 404 NE2d 1323, 28 UCCRS
710.
Footnote 35. Whiteside v Douglas County Bank, 145 Ga App 775, 245 SE2d 2, 24
UCCRS 171, related proceeding 146 Ga App 888, 247 SE2d 558 (wherein the guarantor
of a note alleged that the payee had not obtained another person's signature to the note
and also had not obtained title to certain automobiles which were to be security for the
defendant's guaranty).
Footnote 36. Simpson v Milne (Colo App) 677 P2d 365, 36 UCCRS 1262 (holding that
where one of two allegedly offsetting notes was in the hands of plaintiff, its original
payee, and defendants claimed that the notes had been executed as a fiction to ease the
mind of plaintiff's dying wife, who "strongly felt" that a debt was owed her from a prior
business transaction, the evidence went to the question of whether the parties intended
the notes to show a legally enforceable debt and parol evidence was admissible).
Footnote 37. Brames v Crates (Ind App) 399 NE2d 437, 28 UCCRS 419 (criticized on
other grounds by Berkemeier v Rushville Nat'l Bank (Ind App) 438 NE2d 1054).
Footnote 38. Key Bank of Southeastern New York, N. A. v Strober Bros., Inc. (2d Dept)
136 App Div 2d 604, 523 NYS2d 855, 6 UCCRS2d 1517.
439 Joint, or joint and several, liability
View Entire Section

Except as otherwise provided in the instrument, two or more persons who have the same
liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint
payees, or anomalous indorsers are jointly and severally liable in the capacity in which
they sign. 39
Comment: Subsection (a) replaces subsection (e) of former UCC 3-118. 40 As

between comakers, they are presumed to be liable in equal amounts. 41 Comakers on
a note are jointly and severally liable, 42 even if the instrument contains such words as
"I promise to pay," 43 unless the language of the note clearly indicates the contrary. 44
Thus, a bankruptcy debtor who signed a real estate lien note both individually and as a
partner would be deemed a comaker of the note, jointly and severally liable for the
entire amount of the note, even though the note did not specify whether he signed as a
comaker or guarantor, where the loan explicitly provided that each maker was liable
for the entire amount of the note, and the promissory note stated on its face that each
maker was jointly and severally liable. 45
The statement "liable in the capacity in which they sign" means that regardless of how
many will be sued in one action the liability of each defendant remains the same as
though he or she were being sued alone, and that liability is determined according to the
capacity in which the defendant had signed the instrument. 46
Observation: If this subsection is literally interpreted, it does not apply either to an

indorser who guarantees payment, or to two or more joint indorsees who jointly
indorse the instrument. 47 A court following this literal interpretation and excluding
joint indorsees who jointly indorse will be required to rely on pre-Code law to
determine the rights and liabilities of the parties. 48
Caution: When a stay of proceedings, granted because of one comaker's bankruptcy,

prevents further proceedings against the other comaker, the action can be maintained
against latter comaker alone. 49
Practice guide: The common-law rule that a note evidencing a debt executed jointly
by husband and wife rendered the husband liable on the note, but not the wife, no
longer obtains. 50 When a husband and wife execute a note as comakers and then
separate, they remain jointly and severally liable unless they mutually consent to a
modification. 51
Footnotes

Forms: Complaint, petition, or declarationAgainst partners as makers on partnership

noteShort form. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 74.
Promissory noteProvisionJoint and several liability. 3B Am Jur Legal Forms 2d,

Complaint, petition, or declarationAgainst surviving partner as maker on partnership

noteShort form. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 75.
Footnote 41. Allison v Dilsaver (Mo App) 387 SW2d 206; Caldwell v Stevenson (Tex
Civ App Austin) 567 SW2d 278.
Footnote 42. Jessup Farms v Baldwin, 33 Cal 3d 639, 190 Cal Rptr 355, 660 P2d 813, 36
UCCRS 230; Rosa v Colonial Bank, 207 Conn 483, 542 A2d 1112, 7 UCCRS2d 490;
Ohio Student Loan Com. v Holley (Cuyahoga Co) 14 Ohio App 3d 318, 14 Ohio BR 383,
471 NE2d 159; Maurer v Western Gulf Sav. & Loan Asso. (Tex App Houston (1st Dist))
705 SW2d 736; Rahall v Tweel, 186 W Va 136, 411 SE2d 461, 16 UCCRS2d 1103.
Footnote 43. Hubert v Lawson, 146 Ga App 698, 247 SE2d 223.
Footnote 44. Grimes v Grimes, 47 NC App 353, 267 SE2d 372, 29 UCCRS 1332;
Retamco, Inc. v Dixilyn-Field Drilling Co. (Tex App Houston (14th Dist)) 693 SW2d
520.
Footnote 45. In re Ford (CA5 Tex) 967 F2d 1047, CCH Bankr L Rptr 74806, 18
UCCRS2d 1166, reh, en banc, den (CA5 Tex) 974 F2d 1337.
Footnote 46. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-116:7, further

providing that if the parties have made any agreement to depart from this rule of joint and
several liability, it must be so stated on the instrument.
Footnote 49. Bell v Citizens & Southern Nat'l Bank, 151 Ga App 126, 258 SE2d 774, 27
UCCRS 738.
Footnote 50. Grimes v Grimes, 47 NC App 353, 267 SE2d 372, 29 UCCRS 1332.
Footnote 51. Grand Island Production Credit Asso. v Humphrey, 223 Neb 135, 388
NW2d 807, 2 UCCRS2d 193 (holding that the wife was not relieved of her obligation
under the note by simply informing the bank of her separation from her husband where
the bank's commitment to loan the money had been made well before the bank was
informed of the separation, and the parties for the note had not mutually consented to its
modification).
440 Right to contribution
View Entire Section

Except as otherwise provided by statute or by agreement of the affected parties, a party

having joint and several liability who pays the instrument is entitled to receive from any
party having the same joint and several liability contribution in accordance with
applicable law. 52 The phrase "in accordance with applicable law" means that the court
may incorporate both the pre-Code law as to the extent of contribution and the pre-Code
procedure for enforcing the right to contribution. 53
Discharge of one party having joint and several liability by a person entitled to enforce
the instrument does not affect the right of a party having the same joint and several
liability to receive contribution from the party discharged. 54 Thus, a surviving spouse,
who, along with the decedent and his professional corporation, were comakers of a note,
was obligated for the full amount of the note. She and the other makers were jointly and
severally liable in the capacity in which they signed, therefore, if the surviving spouse
pays the note, she will be entitled to receive contribution from the other makers. 55
Comment: The discharge of a jointly and severally liable obligor does not affect the
right of other obligors to seek contribution from the discharged obligor. 56
The rights and liabilities of comakers between or among themselves depend upon the
terms of their contract. 57 In accordance with the rule that the right of contribution
exists where two or more obligors are jointly, or jointly and severally, bound as
principals upon an obligation founded in contract, if one of two or more such makers of a
note pays the note or an amount greater than his or her proportionate share, the maker is
entitled to proceed against his or her comakers for contribution. 58 Similarly, one of
several accommodation makers, or one of several sureties for a maker, who pays a note
or more than his or her share has a right to contribution against his or her comakers or
cosureties. 59 A comaker's right to contribution is unaffected by the marital relationship
of the parties to the note. 60
If one comaker is required to pay the entire obligation, he or she may seek contribution or
reimbursement from his or her comaker for one half of the amount paid. 61 However, if
it can be shown that the parties have by agreement made a different allocation as to their
liability, or one of the comakers has received a disproportionate benefit from the
transaction, then disproportionate contribution may be allowed. 62
Illustration: Cosigners of a note who benefited from consideration from the note in
proportions of 64 percent and 36 percent, respectively, were liable on the instrument in
similar proportions. 63
Practice guide: The right to contribution depends upon payment, but this may be
made in the form of a promissory note if the prior obligation is discharged thereby. 64
In addition, while under Article 3 of the Uniform Commercial Code two or more
persons who sign as maker are jointly and severally liable, where three comakers
signed a promissory note containing the language "we promise to pay," the liability is
again joint and several and an action on the note may be maintained against two of the
comakers, even though the third comaker has been dismissed from the action. 65
Footnotes

Forms: Complaint, petition or declarationBy joint makerAgainst comaker. 5 Am
Observation: This provision is subject to UCC 3-419(e) [1990 Rev]. If one of the
parties with joint and several liability is an accommodation party and the other is the
accommodated party, UCC 4-419(e) [1990 Rev] applies. Official Code Comment 1
to UCC 3-116 [1990 Rev]. An accommodation party who pays the instrument is
entitled to reimbursement from the accommodated party and is entitled to enforce the
instrument against the accommodated party. An accommodated party who pays the
instrument has no right of recourse against, and is not entitled to contribution from, an
accommodation party. UCC 3-419(e) [1990 Rev].
Comment: Indorsers normally do not have joint and several liability. Rather, an
earlier indorser has liability to a later indorser. However, indorsers can have joint and
several liability in two cases. If an instrument is payable to two payees jointly, both
payees must indorse. The indorsement is a joint indorsement and the indorsers have
joint and several liability and subsection (b) applies. The other case is that of two or
more anomalous indorsers. An anomalous indorsement normally indicates that the
indorser signed as an accommodation party. If more than one accommodation party
indorses a note as an accommodation to the maker, the indorsers have joint and several
liability and subsection (b) applies. Official Comment 2 to UCC 3-116 [1990 Rev].
Footnote 55. Lanasa v Willey, 251 Va 231, 467 SE2d 786, 29 UCCRS2d 539, subsequent
app sub nom Abbott v Willey (Va) 479 SE2d 528.
Footnote 57. Beneficial Finance Co. v Husner, 82 Misc 2d 550, 369 NYS2d 975, 17
UCCRS 477.

Footnote 58. Brown v Arcuri (3d Dept) 43 App Div 2d 993, 352 NYS2d 254, 14 UCCRS
464; Grimes v Grimes, 47 NC App 353, 267 SE2d 372, 29 UCCRS 1332; Caldwell v
Stevenson (Tex Civ App Austin) 567 SW2d 278; Lyons v McNaughton, 65 Wash 2d 297,
396 P2d 885.
Footnote 59. Dillenbeck v Dygert, 97 NY 303; Bronner v Walrath, 208 App Div 758, 202
NYS 577; Sand v Steinberg, 144 Misc 126, 258 NYS 131; Anderson v Wright, 132 Misc
844, 230 NYS 617.
Annotation: Right of guarantor or surety, in order to avoid paying amount in excess of

his or her proportionate share, to compel coguarantors or cosureties to pay their share
to creditor, 38 ALR3d 680.
Footnote 60. Grimes v Grimes, 47 NC App 353, 267 SE2d 372, 29 UCCRS 1332 (an

ex-wife, who had personally obligated herself by executing a note jointly with her
husband, from whom she was then separated, had an absolute and unconditional
obligation under the note as comaker).
Footnote 61. Dittberner v Bell (Tex Civ App Amarillo) 558 SW2d 527, 23 UCCRS 369,
writ ref n r e (Apr 5, 1978); Rahall v Tweel, 186 W Va 136, 411 SE2d 461, 16 UCCRS2d
1103.
Footnote 62. Rahall v Tweel, 186 W Va 136, 411 SE2d 461, 16 UCCRS2d 1103.
Footnote 63. Dittberner v Bell (Tex Civ App Amarillo) 558 SW2d 527, 23 UCCRS 369,
writ ref n r e (Apr 5, 1978).
Footnote 64. Lee v Larkin, 125 App Div 302, 109 NYS 480; Fitch v Fraser, 109 App Div
440, 96 NYS 85, affd 188 NY 605, 81 NE 1164; Rindskopf v Zimmer, 88 Misc 28, 150
NYS 73.
Footnote 65. Hubert v Lawson, 146 Ga App 698, 247 SE2d 223.
B. Particular Types of Parties [441-471]
Research References
UCC 3-116, 3-204, 3-407, 3-408, 3-412, 3-413, 3-414, 3-415, 3-416, 3-418, 3-419,
3-503, 3-504, 4-207, 4-303, 4-401, 4-403, 4-405 [1990 Rev]
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms 2-4, 61, 72-77, 80, 81, 91,
111; 6A Am Jur Pl & Pr Forms (Rev), Commercial Code, Negotiable Instruments, Forms
3:56, 3:57, 3:78, 3:151-3:153; 6A Am Jur Pl & Pr Forms (Rev) 3:173, 3:175, 3:200,
3:202, 3:203, 3:206, 3:216-3:218, 3:220.1-3:222, 3:224-3:228, 3:230, 3:231, 3:233-3:235,
3:237, 3:241, 3:292, 3:293
Uniform Commercial Code: Article 3Negotiable Instruments 253:2461-253:2463,
253:2484, 253:2485, 253:2513-253:2517
UCC Pleadings & Practice Forms 3d, Article 3Negotiable Instruments 3:149-3:151,
3:171, 3:198, 3:219, 3:220, 3:222-3:226, 3:228, 3:229, 3:231-3:233, 3:235, 3:239, 3:287
3-116:5 through 3-116:8, 3-204:5, 3-408:5, 3-415:7, 3-415:8, 3-415:9, 3-503:5, 3-503:6,
3-506:9)
1. Maker [441-444]
441 Generally
View Entire Section

A payee's remedy is against the "maker," that is, the party undertaking to pay; an issuer's
obligation is to the instrument's holder; and an issuer of a cashier's check is also the
maker of a note. 66
The issuer of a note or cashier's check or other draft drawn on the drawee is obliged to
pay the instrument:
(1)According to its terms at the time it was issued, or, if not issued, at the time it first
came into the hands of a holder; or 67
(2)If the issuer signed an incomplete instrument, according to its terms as completed, to
the extent provided. 68
Thus, where the defendant's signature appears on a promissory note and the note fails to
name any party represented by the defendant or demonstrate that the defendant signed it
in a representative capacity, the defendant's unambiguous status as the maker of the note
compels the conclusion that he or she is the obligor and, thus, the appropriate party from
whom to seek payment. 69
Illustration: A wife who, along with her deceased husband, had negotiated a
promissory note to a farm machinery dealer as payment for prior farm equipment sales,
was liable on the note because the wife, as maker, contracted to pay the instrument
according to its tenor at the time she made the instrument, and she failed to establish a
good defense against the dealer, who was a holder in due course. 70
Comment: Section 3-412 states the obligation of the maker of a note and is
consistent with former UCC 3-413(1). It does not in substance change former law.
71
The obligation is owed to a person entitled to enforce the instrument or to an indorser

who paid the instrument. 72
Observation: Under the former version of UCC 3-413(1), which provided that the
maker or acceptor engaged that he would pay the instrument according to its tenor "at
the time of his engagement," the "time of his engagement" was defined as the time
when the maker issued and delivered the instrument. 73
Footnotes
Footnote 66. Hall-Mark Elecs. Corp. v Sims (In re Lee) (BAP9 Cal) 179 BR 149, 95
CDOS 2727, 27 BCD 1, 33 CBC2d 1360, 26 UCCRS2d 386, affd (CA9) 108 F3d 239, 97
CDOS 1591, 97 Daily Journal DAR 3065, 30 BCD 628, CCH Bankr L Rptr 77289.
See also UCC 3-105(c), defining "issuer" as the maker or drawer of an instrument.

Footnote 68. UCC 3-412(ii) [1990 Rev].
Footnote 69. Parlay Enterprises, Inc. v R-B-Co., of Bossier (La App 2d Cir) 504 So 2d
660, cert den (La) 508 So 2d 819 and (among conflicting authorities on other grounds
noted in American Bank & Trust Co. v Vinson (La App 2d Cir) 528 So 2d 693); Marine
Midland Bank v Di Marzo (4th Dept) 57 App Div 2d 733, 395 NYS2d 791; Community
Bank v Wright, 221 Va 172, 267 SE2d 158, 29 UCCRS 1329.
Footnote 70. McCarthy v Sessions (3d Dept) 170 App Div 2d 25, 572 NYS2d 749, 15
UCCRS2d 933.
Forms: Complaint, petition, or declarationBy bearerAgainst maker. 5 Am Jur Pl &

Complaint, petition, or declarationOn note payable in installmentsBy

corporationAgainst maker. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 3.
Complaint, petition, or declarationOn lost noteAgainst maker. 5 Am Jur Pl & Pr

Forms (Rev), Bills and Notes, Form 4.
Complaint, petition, or declarationBy holder in due courseAgainst maker and

indorser. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 61.
Complaint, petition, or declarationOn negotiable note payable in chattelsAgainst

maker. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 72.
Complaint, petition, or declarationBy legatee of noteAgainst maker. 5 Am Jur Pl &

Complaint in federal courtDiversity of citizenshipAgainst maker. 5 Am Jur Pl & Pr

Instruction to juryEffectiveness of indorsement in name of payee where maker did not

intend payee to have interest. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Complaint, petition, or declarationFailure or maker to pay promissory note on

maturity. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:216.
Complaint, petition, or declarationFailure of maker to pay promissory note on

maturityBy restrictive indorsee. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code
Complaint, petition or declarationAllegationFailure of drawer to pay promissory

note on maturityProvision for recovery of costs and attorneys' fees. 6A Am Jur Pl &

Where after the parties' divorce, the husband paid the wife $5,000 and gave her a note
for an additional $5,000 as a lump-sum settlement of future alimony payments, and the
wife remarried, and the husband then refused to pay the note on its maturity, the note
was a valid negotiable instrument and the defendant as maker was liable; the husband's
defense of failure of consideration, which allegedly stemmed from the wife's
remarriage, could not be sustained because of the wife's status as holder in due course.
Turney v Seale (La App 1st Cir) 473 So 2d 855, 41 UCCRS 1747, cert den (La) 477 So
2d 715.
Footnote 73. First Sec. Bank v Goddard, 181 Mont 407, 593 P2d 1040, 26 UCCRS 429
(holding that the note was delivered when it was mailed to the bank, that the time of such
mailing was the "time of his engagement," and that at that time the maker became
obligated to the creditor).
442 Issuer of cashier's check
View Entire Section

Section 3-412 applies to the issuer of a cashier's check or other draft drawn on the
drawer. 74 Under other sections of the Uniform Commercial Code, a cashier's check or
other draft drawn on the drawer is treated as a draft to reflect common commercial usage,
but the liability of the drawer is stated by 3-412 as being the same as that of the maker
of a note rather than that of the drawer of a draft. 75
A cashier's check is accepted by the act of issuance and becomes an irrevocable

obligation of the issuing bank. 76 The bank's certification of a check constitutes
acceptance and is the bank's signed engagement to pay the check on presentment when
properly indorsed. 77
Caution: While a cashier's check is an engagement by the bank to pay the instrument
according to its tenor, one who takes the instrument with notice that it is voidable
because of its fraudulent procurement is not a holder in due course and cannot enforce
payment. 78
The statutory effect of the certification renders the bank directly liable on the instrument
when properly indorsed. 79 Neither the bank nor the purchaser has any authority to
countermand the check after issuance. 80
Practice guide: Although issuance of a cashier's check is generally considered as an

acceptance of the check which would preclude the bank's right to countermand, the
acceptance is not effective until completed by delivery or notification. 81 Where the
purchaser fails to negotiate the check to the payee, the bank's duties to the payee as
drawer of the check are not in effect. 82 Therefore, the check is subject to
cancellation by agreement between the bank and the purchaser. 83

The contracts of a maker of a note and the acceptor of a draft are identical in that each
engages that he or she will pay the instrument according to its tenor at the time of his or
her engagement or as completed. 84 Thus, whether a bank is considered to have
accepted a cashier's check, as a draft, by the act of its issuance, or is considered to be the
maker of a note, it is primarily obligated on the instrument. 85
Illustration: A cashier's check is a bill of exchange drawn by a bank upon itself and
accepted by the act of issuance; thus, where the drawee bank, in exchange for two
checks drawn by its customer payable to a creditor of the customer on which the
payee's indorsement had been forged by the payee's employee, issued two cashier's
checks for the same amounts payable to the same payee and delivered them to the
employee who also forged the payee's indorsements on the cashier's checks and
deposited them in an account he maintained at another bank, the drawee bank which
issued the cashier's checks, and not its customer, was primarily liable thereon. 86
Footnotes
Footnote 74. Official Comment 1 to UCC 3-412 [1990 Rev], stating further that
3-412 does not in substance change former law and stating that under former 3-118(a),
since a cashier's check or other draft drawn on the drawer was "effective as a note," the
drawer was liable under former 3-413(1) as a maker.
Footnote 75. Official Comment 1 to UCC 3-412 [1990 Rev], referring to UCC
3-103(a)(6), 3-104(f) [1990 Rev].
Footnote 76. Kaufman v Chase Manhattan Bank, Nat'l Asso. (SD NY) 370 F Supp 276,
13 UCCRS 477; Resolution Trust Corp. v Gill (CA3 Pa) 960 F2d 336, 92-1 USTC
50199, 17 UCCRS2d 541, 69 AFTR2d 92-1120, on remand (WD Pa) 1992 US Dist
LEXIS 15743, affd (CA3 Pa) 1993 US App LEXIS 11862; In re Kimball (BC MD Fla)
16 BR 201, CCH Bankr L Rptr 68531, 33 UCCRS 627; Hospital of St. Raphael v New
Haven Sav. Bank, 205 Conn 604, 534 A2d 1189, 5 UCCRS2d 110; Joseph v United of
America Bank (1st Dist) 131 Ill App 2d (abstract) 434, 266 NE2d 438, 8 UCCRS 1098;
Dziurak v Chase Manhattan Bank, N. A., 44 NY2d 776, 406 NYS2d 30, 377 NE2d 474,
23 UCCRS 958.
Footnote 77. Central Bank & Trust Co. v First Northwest Bank (ED Mo) 332 F Supp
1166, 10 UCCRS 442, affd (CA8 Mo) 458 F2d 511; Clinger v Clinger (Colo App) 503
P2d 363, 11 UCCRS 1026.
Footnote 78. Mid-Continent Nat'l Bank v Bank of Independence (Mo App) 523 SW2d
569, 16 UCCRS 1286.
Footnote 79. Clinger v Clinger (Colo App) 503 P2d 363, 11 UCCRS 1026.
Footnote 80. In re Kimball (BC MD Fla) 16 BR 201, CCH Bankr L Rptr 68531, 33
UCCRS 627; Hospital of St. Raphael v New Haven Sav. Bank, 205 Conn 604, 534 A2d
1189, 5 UCCRS2d 110.
Footnote 81. State, Dep't of Treasury v Bank of Commonwealth, 111 Mich App 553, 314
NW2d 688, 33 UCCRS 314.

NW2d 688, 33 UCCRS 314.
NW2d 688, 33 UCCRS 314.
Footnote 84. Banco Ganadero y Agricola, S.A., Agua Prieta v Society Nat'l Bank (ND
Ohio) 418 F Supp 520, 21 UCCRS 233.
Footnote 85. Tubin v Rabin (ND Tex) 382 F Supp 193, 15 UCCRS 1106, supp op (ND
Tex) 389 F Supp 787, 16 UCCRS 1056, affd (CA5 Tex) 533 F2d 255, 19 UCCRS 556;
Banco Ganadero y Agricola, S.A., Agua Prieta v Society Nat'l Bank (ND Ohio) 418 F
Supp 520, 21 UCCRS 233; Crosby v Lewis (Fla App D5) 523 So 2d 1154, 13 FLW 186,
5 UCCRS2d 1249.
Footnote 86. Society Nat'l Bank v Capital Nat'l Bank (Cuyahoga Co) 30 Ohio App 2d 1,
59 Ohio Ops 2d 1, 281 NE2d 563, 10 UCCRS 831.
443 --Defenses available
View Entire Section

There is a split of authority on the issue of whether a bank should be permitted to raise
any defense to its obligation to pay a cashier's check. 87 Some jurisdictions apply the
rule that the nature and usage of cashier's checks in the commercial world is such that
public policy does not favor a rule that would permit stopping payment on them. 88 In
other jurisdictions, notwithstanding the public's perception of cashier's checks as being
the equivalent of cash, acceptance of a cashier's check does not preclude a bank from
refusing to pay it under certain circumstances. 89 Thus it has been held that a bank may
refuse to honor its cashier's check for failure of consideration when it is presented by a
party to the instrument with whom the bank has dealt. In this limited situation the policy
concerns which justify a rule against dishonor do not exist. 90
Footnotes
Footnote 87. Tokai Bank of California v First Pacific Bank (2nd Dist) 186 Cal App 3d
1664, 231 Cal Rptr 503, 2 UCCRS2d 983.
Although the bank is the check's drawer it cannot "stop payment" as a technical matter,
but the bank can still refuse to pay the check either for its own reasons or as an
accommodation to its customer (the check's purchaser, who cannot "stop" the check's
payment either). Hall-Mark Elecs. Corp. v Sims (In re Lee) (BAP9 Cal) 179 BR 149, 95
CDOS 1591, 97 Daily Journal DAR 3065, 30 BCD 628, CCH Bankr L Rptr 77289.

Footnote 88. State ex rel. Chan Siew Lai v Powell (Mo) 536 SW2d 14, 19 UCCRS 626
(wherein a stop order issued by the purchaser of a cashier's check, and legal process
issued in connection with an injunction suit against the bank, which were received by and
served upon the bank after it had issued the cashier's check, came too late to terminate or
suspend the bank's obligation to honor and pay it).
CDOS 1591, 97 Daily Journal DAR 3065, 30 BCD 628, CCH Bankr L Rptr 77289;
Clinger v Clinger (Colo App) 503 P2d 363, 11 UCCRS 1026; Quistgaard v EAB
European American Bank & Trust Co. (1st Dept) 182 App Div 2d 510, 583 NYS2d 210,
18 UCCRS2d 242.
The bank issuing a cashier's check may assert, as a defense to payment of its check and as
against the payee thereof, such defenses as lack of consideration and fraud. In re Johnson
(ED Va) 18 UCCRS 1223.
Some courts have reasoned that a cashier's check should be treated as a promissory note
rather than an accepted draft; other courts reasoned that whether a cashier's check is
characterized as a note or an accepted draft, the bank's ability to assert defenses against
liability on a cashier's check is governed by UCC 3-305 and 3-306; a third view is that
a cashier's check is an accepted draft and that 3-418 controls the bank's ability to assert
defenses to liability; whether the cashier's check in suit is regarded as an accepted draft or
a promissory note, the bank was entitled to assert defenses to liability. Farmers &
Merchants State Bank v Western Bank (CA9 Or) 841 F2d 1433, 5 UCCRS2d 372.
Footnote 90. Travi Constr. Corp. v First Bristol County Nat'l Bank, 10 Mass App 32, 405
NE2d 666, 29 UCCRS 188.
444 Primary liability of maker
View Entire Section

The obligation of a maker, even an accommodation maker, is primary, absolute, and

unconditional. 91 No presentment for payment is necessary in order to hold him or her
liable. 92 However, when the maker of a note appears at the place payable to pay the
note, but the note is not at such place and payment is not made, reasonable notice of the
whereabouts of the note must be given the maker before the holder can declare a default.
93 One is not bound by a promissory note executed by another merely because part of
the consideration therefor flowed to him or her. 94
Observation: The liability of an accommodation maker is subject to the same rules

as the liability of any other maker, 95 except that an accommodation maker has no
right to contribution from an accommodated party. 96

Footnotes
Footnote 91. Hough v State Bank of New Smyrna, 61 Fla 290, 55 So 462; Goldberg v
Albert, 161 Misc 281, 291 NYS 855; Ewan v Brooks-Waterfield Co., 55 Ohio St 596, 45
NE 1094.
Footnote 92. Greeley v Whitehead, 35 Fla 523, 17 So 643; Weinstein v Susskind (Fla
App D3) 162 So 2d 683.
Footnote 93. Schas v Spencer, 98 Fla 335, 123 So 733.
Footnote 94. Falk v Salario, 108 Fla 135, 146 So 193; Southeastern Home Mortg. Co. v
Roll (Fla App D3) 171 So 2d 424.
Footnote 95. UCC 3-419(b) [1990 Rev], providing that an accommodation party may
sign the instrument as maker, drawer, acceptor, or indorser and is obliged to pay the
instrument in the capacity in which the accommodation party signs.
2. Drawee or Acceptor [445-450]
445 Obligation of drawee
View Entire Section

A check or other draft does not of itself operate as an assignment of funds in the hands of
the drawee which are available for its payment, and the drawee is not liable on the
instrument until the drawee accepts it. 97 Until the instrument is accepted, the payee or
holder must look to the drawer for protection. 98
Distinction: This section is a restatement of former UCC 3-409(1). Subsection (2)

of former 3-409 is deleted as misleading and superfluous. Comment 3 says of
subsection (2): "It is intended to make it clear that this section does not in any way
affect any liability which may arise apart from the instrument." In reality, subsection
(2) did not make anything clear and was a source of confusion. If all it meant was that
a bank that has not certified a check may engage in other conduct that might make it
liable to a holder, it stated the obvious and was superfluous. Section 1-103 is adequate
to cover those cases. 99
Once the drawee accepts the draft the drawee becomes primarily liable for its payment. 1
Conversely, a drawee bank that does not "accept" the checks, has no legal obligation to
honor them. 2 Thus, a drawee bank is not liable to a holder in due course of stolen
personal money orders since such personal money orders are the legal equivalent of
unaccepted checks and are to be distinguished from traveler's and teller's checks. 3

As a general rule, a drawee bank is not liable on a check until it accepts the check in
writing. 4 Thus, a drawee bank does not become contractually liable on the draft where
it does not accept the draft in writing. 5 However, a bank is not liable to the drawer for
paying on a check that contains no endorsement, where the proceeds of the check are
paid to the payee of the check as intended by the drawer. 6
Caution: Unauthorized indorsement of a checkeither a forged indorsement or one

made by an agent exceeding its authorityis ordinarily ineffective to pass title or
authorize the drawee bank to pay, so that the drawee bank generally may not debit a
drawer's account when it pays such a check. 7 Another section of the Uniform
Commercial Code recognizes a cause of action for conversion against a drawee who
pays on a forged indorsement. 8
Observation: Liability with respect to drafts may arise under other law. For
example, UCC 4-302 imposes liability on a payor bank for late return of an item. 9
Thus, a drawee who fails to accept an item may be liable in tort because of its
representation that it has accepted or that it intends to accept the item. 10
Footnotes
Footnote 98. First Nat'l Bank v Ford Motor Credit Co. (DC Colo) 748 F Supp 1464, 13
UCCRS2d 810; Deen v De Soto Nat'l Bank, 97 Fla 862, 122 So 105; Heurtematte v
Morris, 101 NY 63, 4 NE 1; Lipten v Columbia Trust Co., 194 App Div 384, 185 NYS
198.
Forms: AnswerDefenseBy draweeDraft never accepted. 6A Am Jur Pl & Pr

Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:200; UCC
Pleading and Practice Forms 3d, Article 3Negotiable Instruments 3:198.
Complaint, petition, or declarationAllegationAcceptance of draft. 6A Am Jur Pl &

Footnote 1. General Motors Acceptance Corp. v Abington Casualty Ins. Co., 413 Mass
583, 602 NE2d 1085, 18 UCCRS2d 1151; Heurtematte v Morris, 101 NY 63, 4 NE 1;
General Motors Acceptance Corp. v General Acci. Fire & Life Assurance Corp. (4th
Dept) 67 App Div 2d 316, 415 NYS2d 536, 26 UCCRS 97; Anglo & London-Paris Nat'l
Bank v S. A. Jacobson Co., 196 App Div 51, 187 NYS 508; Dubler v Toscana Straw
Goods Corp., 142 Misc 369, 254 NYS 464.
Forms: Instruction to juryAcceptance defined. 6A Am Jur Pl & Pr Forms (Rev),

Footnote 2. Garden Check Cashing Service, Inc. v First Nat'l City Bank (1st Dept) 25
App Div 2d 137, 267 NYS2d 698, 3 UCCRS 355, affd 18 NY2d 941, 277 NYS2d 141,
223 NE2d 566, 4 UCCRS 322; Happy Cattle Feeders, Inc. v First Nat'l Bank (Tex Civ
App Amarillo) 618 SW2d 424, 34 UCCRS 602, writ ref n r e (Oct 7, 1981).
Footnote 3. Adam Int'l Trading, Ltd. v Manufacturers Hanover Trust Co. (1st Dept) 150
App Div 2d 294, 542 NYS2d 1, 9 UCCRS2d 1255, app dismd without op 74 NY2d 844,
546 NYS2d 560, 545 NE2d 874.
Footnote 4. Galaxy Boat Mfg. Co. v East End State Bank (Tex App Houston (14th Dist))
641 SW2d 584, 35 UCCRS 180.
Footnote 5. First Nat'l Bank v Anderson Ford-Lincoln-Mercury, Inc. (Tex App Dallas)
704 SW2d 83, 42 UCCRS 1684, writ ref n r e (Nov 27, 1985).
Footnote 6. Bank One, Columbus, N.A. v Hochstadt (Fla App D3) 515 So 2d 332, 12
FLW 2581, 5 UCCRS2d 1030; Northeast Bank of Clearwater v Bentley (Fla App D2)
413 So 2d 480.
Footnote 7. Prudential-Bache Secur., Inc. v Citibank, N.A., 73 NY2d 263, 539 NYS2d
699, 536 NE2d 1118, 7 UCCRS2d 1345 (stating that a drawee bank can, however, shift
its loss to prior indorsers by an action for breach of warranty of good title, with the loss
ultimately placed on the forger or the party taking from forger).
Footnote 8. Smith v General Casualty Co. (3d Dist) 75 Ill App 3d 971, 31 Ill Dec 602,
394 NE2d 804, 27 UCCRS 493 (referring to former UCC 3-419(2)).
Annotation: Recovery, on theory of quasi contract, unjust enrichment, or restitution,

of money paid in reliance upon unenforceable promise to accept a bill of exchange or
draft, 81 ALR2d 587.
Footnote 10. First Nat'l Bank v Anderson Ford-Lincoln-Mercury, Inc. (Tex App Dallas)
704 SW2d 83, 42 UCCRS 1684, writ ref n r e (Nov 27, 1985).
446 --Check or draft not an assignment
View Entire Section

A check or draft does not in itself operate as an assignment of any funds held by the
drawee even though available for payment. Neither the fact that the amount of the
drawer's funds held by the drawee is greater than nor that it is exactly the same amount of
the check or draft alters this rule. 11 However, the fact that a check or draft is not in
itself an assignment does not preclude the parties from making a separate agreement of
assignment which agreement is to be performed by the delivery of the check or draft to
the agreed assignee. 12
Footnotes
447 Obligation of acceptor
View Entire Section

The acceptor of a draft is obliged to pay the draft:
(1)according to its terms at the time it was accepted, even though the acceptance states
that the draft is payable "as originally drawn" or equivalent terms; 13
(2) if the acceptance varies the terms of the draft, according to the terms of the draft as
varied; 14 or
(3) if the acceptance is of a draft that is an incomplete instrument, according to its terms
as completed, as provided. 15
Comment: Subsection (a) is consistent with former UCC 3-413(1). 16
Observation: An accommodation party may sign the instrument as maker, drawer,

acceptor, or indorser and is obliged to pay the instrument in the capacity in which the
accommodation party signs. 17
An accommodation acceptor, by accepting a bill of exchange, becomes the principal

debtor and occupies the same position as one who accepts with funds as to all persons
who receive the bill for value, whether they know that it is an accommodation acceptance
or not. 18 Thus, one who accepts for the accommodation of another, and thereby
procures a benefit to such other, cannot refuse to meet his or her obligation to him who
conferred such benefit, because of want of consideration. 19
Footnotes
Forms: Complaint, petition, or declarationRefusal of payment after acceptance and

certification of check. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article

Complaint, petition, or declarationAllegationBy indorseeAgainst
acceptorNonpayment of accepted draft. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationAllegationBy holderAgainst acceptorBreach of

contract to accept bill of exchange. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Code : Article 3Negotiable Instruments 3:226; UCC Pleading and Practice Forms
3d, Article 3Negotiable Instruments 3:224.
Complaint, petition, or declarationAllegationBy holderAgainst

acceptorNonpayment of bill of exchange payable in foreign currency. 6A Am Jur Pl
& Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:227;
UCC Pleading and Practice Forms 3d, Article 3Negotiable Instruments 3:225.
Complaint, petition, or declarationAllegationBy assigneeAgainst acceptor of

draftRefusal of acceptor to pay balance due on assigned draft. 6A Am Jur Pl & Pr
Complaint in federal courtDiversity of citizenshipBy holderAgainst acceptor of bill

of exchangeTo recover amount due on bill. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationAllegationBy holder of bill of exchangeAgainst

drawer, acceptor, and indorserNonpayment of bill. 6A Am Jur Pl & Pr Forms (Rev),
Footnote 17. 472 et seq., discussing UCC 3-419(b) [ 1990 Rev] and the
liability of accommodation parties.
Footnote 18. Cuesta, Rey & Co. v Newsom, 102 Fla 853, 136 So 551, 2 USTC 792, 10
AFTR 809; Deen v De Soto Nat'l Bank, 97 Fla 862, 122 So 105.
Footnote 19. Deen v De Soto Nat'l Bank, 97 Fla 862, 122 So 105.
448 --Amount of obligation
View Entire Section

If the certification of a check or other acceptance of a draft states the amount certified or
accepted, the obligation of the acceptor is that amount. If the certification or acceptance
does not state an amount, the amount of the instrument is subsequently raised, and the
instrument is then negotiated to a holder in due course, the obligation of the acceptor is
the amount of the instrument at the time it was taken by the holder in due course. 20
Comment: This provision has primary importance with respect to certified checks.
It protects the holder in due course of a certified check that was altered after
certification and before negotiation to the holder in due course. A bank can avoid
liability for the altered amount by stating on the check the amount the bank agrees to
pay. The subsection applies to other accepted drafts as well. 21
Footnotes
449 Liability to drawer
View Entire Section

The drawee has the responsibility to ascertain the status of the drawer's account with him
or her before accepting or paying a draft upon presentment. 22 After acceptance of the
payment, the drawee has no power to revoke because of the drawer's insolvency or
breach of contract. 23 If the drawee refuses to accept when he or she has funds for the
purpose, the drawee becomes liable to the drawer for the wrong done to his or her credit.
24
Footnotes
Footnote 22. Farmers & Merchants Nat'l Bank v Boardwalk Nat'l Bank, 101 NJ Super
528, 245 A2d 35, 5 UCCRS 575, certif den 52 NJ 492, 246 A2d 452.
Footnote 23. Farmers & Merchants Nat'l Bank v Boardwalk Nat'l Bank, 101 NJ Super
528, 245 A2d 35, 5 UCCRS 575, certif den 52 NJ 492, 246 A2d 452.
Footnote 24. Deen v De Soto Nat'l Bank, 97 Fla 862, 122 So 105.
450 Admissions arising from acceptance
View Entire Section


Except for recovery of bank payments under Article 4 on Bank Deposits and Collections
25 and recovery for breach of warranty on presentment under Article 3 on Commercial
Paper, acceptance of any instrument is final in favor of a holder in due course or a person
who has in good faith changed his or her position in reliance on the payment. 26 The
issuer/acceptor of drafts made payable to joint payees, which does not have the
indorsement of the payee entitled to the proceeds, does not admit the genuineness or
presence of the payees' indorsements by its acceptance of the drafts. 27
Footnotes
Footnote 27. Phoenix Assurance Co. v Davis, 126 NJ Super 379, 314 A2d 615, 13
UCCRS 1105.
3. Drawer [451-458]
451 Generally; obligation of drawer
View Entire Section

If an unaccepted draft is dishonored, the drawer is obliged to pay the draft:
(1) according to its terms at the time it was issued or, if it was not issued, at the time it
first came into possession of a holder; 28 or
(2) if the drawer signed an incomplete instrument, according to its terms as completed. 29
This obligation is owed to a person entitled to enforce the draft or to an indorser who
paid the draft. 30 Thus, the drawer is bound to pay, on its drawer's contract, the amount
due on two checks dishonored by the drawee bank after the depository bank has indorsed
them, forwarded them to the drawee bank for presentment, and permitted the payees to
withdraw funds. 31
This provision does not apply to cashier's checks or other drafts drawn on the drawer. 32
Although the drawee of an instrument is relieved of any obligation of an instrument

revoked by the drawer, the drawer remains liable on the instrument in the absence of a
good defense. 33 The drawer's promise that payment will be made on presentment of the
instrument is an intrinsic element of the instrument, and in such a case, the action is on
the instrument, not on the underlying obligation represented by it. 34 Specifically, the
drawer of a check undertakes that the drawee will be found at the place where the drawee
is described to be and that the sum specified will be there paid to the holder when the
check is presented; the drawer is bound to pay at the place named. 35 Thus, the drawer
of a bill does not contract to pay the money in the foreign place on which it is drawn, but
only guarantees its acceptance and payment in that place by the drawee. 36 If the
check is not honored, the drawer is personally liable, 37 and agrees, in default of such
payment upon due notice, to reimburse the holder for the principal and damages at the
place where he or she entered into the contract. 38
Footnotes
Footnote 29. UCC 3-414(b)(ii) [1990 Rev].
Forms: Complaint, petition, or declarationBy payeeAgainst drawer of check. 5 Am

Complaint, petition, or declarationBy holder against drawer seeking payment of

unaccepted draft. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
3Negotiable Instruments 3:220.1.
Complaint, petition, or declarationAllegation against drawer by holder of

draftRefusal of drawee to accept or pay. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationAllegation against drawer by holder of

draftRefusal of drawee to pay draft after having accepted it. 6A Am Jur Pl & Pr
Complaint, petition, or declarationAllegationBy holder of promissory noteAgainst

drawer, payee, and indorserFailure of drawer to pay note on due presentment by
indorsee. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:230; UCC Pleading and Practice Forms 3d, Article 3Negotiable
Instruments 3:228.
Complaint, petition, or declarationAllegationBy holder of bill of exchangeAgainst

drawer, acceptor, and indorserNonpayment of bill. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationBy accommodation acceptor for indemnification

from drawer. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
3Negotiable Instruments 3:241; UCC Pleading and Practice Forms 3d, Article
Complaint, petition, or declarationNonacceptance of draftAgainst drawer. 5 Am Jur

AnswerDefenseDrawer liable where drawee paid instrument in good faith. 6A Am


3:171.
Forms: Complaint, petition, or declarationBy payeeAgainst drawer of check. 5 Am

Comment: This provision states the obligation of the drawer on an unaccepted draft.
It replaces former UCC 3-413(2). The requirement under former Article 3 of notice
of dishonor or protest has been eliminated. Under revised Article 3, notice of dishonor
is necessary only with respect to an indorser's liability. The liability of the drawer of
an unaccepted draft is treated as a primary liability. Under former 3-102(1)(d) the
term "secondary party" was used to refer to a drawer or indorser. The quoted term is
not used in revised Article 3. Official Comment 2 to UCC 3-414 [1990 Rev].
Footnote 31. Apollo Sav. & Loan Co. v Star Bank, N.A. (Hamilton Co) 90 Ohio App 3d
536, 630 NE2d 13, 23 UCCRS2d 1176.
The obligation of the issuer of a cashier's check is stated in another section. Official
Comment 1 to UCC 3-414 [1990 Rev], referring to UCC 3-412.
Footnote 33. Charlotte Guyer & Associates v Franklin Factors (2nd Dist) 211 Cal App 2d
690, 27 Cal Rptr 575.
Footnote 34. Charlotte Guyer & Associates v Franklin Factors (2nd Dist) 211 Cal App 2d
690, 27 Cal Rptr 575.
Footnote 35. Raphael v People's Bank of Benicia, 45 Cal App 115, 187 P 53.
Footnote 36. Amsinck v Rogers, 189 NY 252, 82 NE 134; Gonzalez v Industrial Bank
(1st Dept) 16 App Div 2d 347, 228 NYS2d 81, stay gr 11 NY2d 1114, reported in full
11 NY2d 1110, 230 NYS2d 733, 184 NE2d 320 and revd on other grounds 12 NY2d 33,
234 NYS2d 210, 186 NE2d 410.
Footnote 37. Leonard v Gallagher (2nd Dist) 235 Cal App 2d 362, 45 Cal Rptr 211
(holding that check carries the general personal credit of the drawer).
A check is a contract which imports an obligation on the part of the drawer to pay it, if on
due presentment at the bank payment is refused. Roff v Crenshaw, 69 Cal App 2d 536,
159 P2d 661.
Footnote 38. Amsinck v Rogers, 189 NY 252, 82 NE 134; Gonzalez v Industrial Bank
(1st Dept) 16 App Div 2d 347, 228 NYS2d 81, stay gr 11 NY2d 1114, reported in full
11 NY2d 1110, 230 NYS2d 733, 184 NE2d 320 and revd on other grounds 12 NY2d 33,
234 NYS2d 210, 186 NE2d 410.

452 Dishonor of accepted draft
View Entire Section

If a draft is accepted by a bank, the drawer is discharged, regardless of when or by whom

the acceptance was obtained. 39
Distinction: This subsection changes former UCC 3-411(1), which provided that
the drawer is discharged only if the holder obtains acceptance. Holders that have a
bank obligation do not normally rely on the drawer to guarantee the bank's solvency.
A holder can obtain protection against the insolvency of a bank acceptor by a specific
guaranty of payment by the drawer or by obtaining an indorsement by the drawer. 40
Observation: Once a draft is accepted or certified by a bank, the liability of the

drawer on the draft is discharged. Consequently, the drawer is not under any
obligation to pay the draft if it is thereafter dishonored by nonpayment, without regard
to when or by whom the acceptance is obtained. The fact that it is obtained by the
holder instead of by the drawer or that it is obtained after delivery rather than before
issue is immaterial. The fact of acceptance by the bank discharges the drawer from any
liability to pay the instrument. A person desiring to retain the liability of the drawer
should obtain a separate guaranty of the draft or have the drawer also indorse the draft.
41
Footnotes
Footnote 40. Official Comment 3 to UCC 3-414 [1990 Rev], citing UCC 3-205(d).
453 Nonbank acceptor
View Entire Section

If a draft is accepted and the acceptor is not a bank, the obligation of the drawer to pay
the draft if the draft is dishonored by the acceptor is the same as the obligation of an
indorser. 42
Comment: This subsection states the liability of the drawer if a draft is accepted by a
drawee other than a bank and the acceptor dishonors. The drawer of an unaccepted

draft is the only party liable on the instrument. The drawee has no liability on the
draft. When the draft is accepted, the obligations change. The drawee, as acceptor,
becomes primarily liable and the drawer's liability is that of a person secondarily liable
as a guarantor of payment. The drawer's liability is identical to that of an indorser, and
this subsection states the drawer's liability that way. The drawer is liable to pay the
person entitled to enforce the draft or any indorser that pays. The drawer in this case is
discharged if notice of dishonor is required and is not properly given. A drawer that
pays has a right of recourse against the acceptor. 43
Footnotes
Footnote 42. UCC 3-414(d) [1990 Rev], referring to the obligation of an indorser under
UCC 3-415 [1990 Rev].
454 No recourse draft
View Entire Section

If a draft states that it is drawn "without recourse" or otherwise disclaims liability of the
drawer to pay the draft, the drawer is not liable to pay the draft if the draft is not a check.
A disclaimer of the liability is not effective if the draft is a check. 44
Comment: This subsection does not permit the drawer of a check to avoid liability
by drawing the check without recourse. There is no legitimate purpose served by
issuing a check on which nobody is liable. Drawing without recourse is effective to
disclaim liability of the drawer if the draft is not a check. 45
Illustration: Suppose, in a documentary sale, Seller draws a draft on Buyer for the
price of goods shipped to Buyer. The draft is payable upon delivery to the drawee of
an order bill of lading covering the goods. Seller delivers the draft with the bill of
lading to Finance Company that is named as payee of the draft. If Seller draws without
recourse, Finance Company takes the risk that Buyer will dishonor. If Buyer
dishonors, Finance Company has no recourse against Seller but it can obtain
reimbursement by selling the goods which it controls through the bill of lading. 46
Footnotes

455 Delay and suspension of drawee bank
View Entire Section

A drawer's liability may be discharged in full or partially if there is a presentment delay

followed by a bank suspension which causes the drawer to lose funds that were available
to pay the check. 47 Thus, if a check is not presented for payment or given to a
depositary bank for collection within 30 days after its date, the drawee suspends
payments after expiration of the 30-day period without paying the check, and, because of
the suspension of payments, the drawer is deprived of funds maintained with the drawee
to cover payment of the check, the drawer to the extent deprived of funds may discharge
its obligation to pay the check by assigning to the person entitled to enforce the check the
rights of the drawer against the drawee with respect to the funds. 48
Comment: This subsection is derived from former UCC 3-502(1)(b). It is

designed to protect the drawer of a check against loss resulting from suspension of
payments by the drawee bank when the holder of the check delays collection of the
check. 49
Illustration: X writes a check payable to Y for $1,000. The check is covered by

funds in X's account in the drawee bank. Y delays initiation of collection of the check
for more than 30 days after the date of the check. The drawee bank suspends payments
after the 30-day period and before the check is presented for payment. If the $1,000 of
funds in X's account have not been withdrawn, X has a claim for those funds against
the drawee bank. 50
Footnotes
Comment: This provision retains the phrase "deprived of funds maintained with the
drawee" appearing in former 3-502(1)(b). The quoted phrase applies if the
suspension of payments by the drawee prevents the drawer from receiving the benefit
of funds which would have paid the check if the holder had been timely in initiating
collection. Thus, any significant delay in obtaining full payment of the funds is a
deprivation of funds. The drawer can discharge drawer's liability by assigning rights
against the drawee with respect to the funds to the holder. Official Comment 6 to UCC
3-414 [1990 Rev].
Forms: Notice of assignment to obtain discharge for delay in presentment. 19 Am Jur

253:2484.
Notice of assignment to obtain discharge for delay in presentment. 6A Am Jur Pl & Pr
Legal Forms 3d, Article 3Negotiable Instruments 3:128.
Assignment by maker to holderOf claim against bankUnexcused delay on part of

holder in making presentment. 19 Am Jur Legal Forms 2d, Uniform Commercial
Code: Article 3Negotiable Instruments 253:2485; UCC Legal Forms 3d, Article
456 Stopping payment
View Entire Section

A customer, or any person authorized to draw on the account if there is more than one
person, may stop payment of any item drawn on the customer's account by an order to the
bank describing the item with reasonable certainty received at a time and in a manner that
affords the bank a reasonable opportunity to act on it prior to the taking of certain
specified actions by the bank. 51 A stop-payment order is effective for six months, but it
lapses after 14 calendar days if the original order was oral and not confirmed in writing
within that period. 52 A stop-payment order may be renewed for additional six-month
periods by a writing given to the bank within a period during which the stop-payment
order is effective. 53 The burden of establishing the fact and amount of loss resulting
from the payment of an item contrary to a binding stop-payment order is on the customer.
54
Caution: A stop-payment order does not discharge the drawer's liability on the
check. 55
There is no right to stop payment on an accepted instrument such as a certified check. 56

In addition, a bank may not stop payment on bank money orders 57 or cashier's checks.
58 A cashier's check or teller's check purchased by a customer whose account is debited
in payment for the check is not a check drawn on the customer's account within the
meaning of this subsection. 59 A cashier's check is accepted by the mere act of issuance
when it becomes the primary obligation of the bank, rather than the purchaser, to pay it
from its own assets upon demand, and a purchaser has no authority to countermand a
cashier's check because of fraud allegedly practiced on the purchaser by the payee. 60
Distinction: Because a personal check is simply an order to pay, a customer has the
right to revoke the order before it is carried out. In comparison, a cashier's check is
payable from the issuing bank's own account. Because the bank, as both drawer and
drawee, is its own customer when it issues a cashier's check, the bank cannot be liable

to itself for failing to stop payment on the check. 61
Any necessary presentment, notice of dishonor, or protest is excused when the party to be
charged has countermanded payment or otherwise has no reason to expect, or right to
require, that the instrument be accepted or paid. 62
Payment can be stopped against a holder in due course, 63 but the right to stop payment
cannot be exercised so as to prejudice the rights of holders in due course without
rendering the drawer liable on the instrument to such holders. 64 A holder in due course
of an instrument upon which payment has been stopped has a right to recover from the
drawer of the instrument. 65 The drawer remains liable to the holder in due course, and
the drawee, if it pays, becomes subrogated to the rights of the holder in due course
against the drawer. 66
Illustration: In action against the drawer of a dishonored check, where the drawer
wrote a check on his account at the drawee bank, payable to a contractor for building a
house, the payee deposited the check in his account at the plaintiff depositary bank, the
plaintiff cashed the check, covered the overdrafts on the payee's account, credited the
main part of the check's proceeds to such account, and paid the payee the remainder in
cash, after the plaintiff had cashed the check, the drawer filed a stop-payment order on
it, resulting in its dishonor, and the plaintiff, despite its normal practice of withholding
credit on a check until five days after its deposit, waived such waiting period as to the
check in suit because it believed the drawer to be a responsible person and because it
had also obtained verification from the drawee bank that the check was good at that
time, the plaintiff was a holder in due course since, at the time it cashed the check, it
had no notice of any defenses thereto and had no reason to believe that the drawer
would not honor it. In such circumstances, the plaintiff's extension of immediate credit
on the check did not manifest bad faith, since the Uniform Commercial Code, although
not requiring a depositary bank to give immediate credit on a check, encourages such
practice by granting the bank rights against the drawer of a check on which immediate
credit is extended, and since the plaintiff was a holder in due course, it took the check
in suit free from all but a limited number of defenses to it. 67
Observation: In a contest between a garnishing creditor of the depositor and the

depositary bank over funds owed the depositor by the maker of a check deposited in
the depositor's account, upon which credit was extended by substantial advances,
payment of which check was then stopped and the check then released to the depositor
for reissue in a lesser amount by the maker, the security interest of the bank was
superior to that of the garnishing creditor. 68
Footnotes
Footnote 51. UCC 4-403(a) [1990 Rev], providing further that if the signature of more
than one person is required to draw on the account, any of these persons may stop
payment.

Footnote 55. Sawgrass Builders, Inc. v Realty Cooperative, Inc., 172 Ga App 324, 323
SE2d 243, 40 UCCRS 159.
A vendee of realty, who gave a co-broker a check for the co-broker's share of an
additional 2-percent commission that was omitted from the transaction's closing
statements and then stopped payment on the check, was liable to the co-broker for the
amount of the check. Sawgrass Builders, Inc. v Realty Cooperative, Inc., 172 Ga App
324, 323 SE2d 243, 40 UCCRS 159.
Footnote 57. United States v Second Nat'l Bank (CA5 Fla) 502 F2d 535, 74-2 USTC
9739, 15 UCCRS 870, 34 AFTR2d 74-5973, cert den 421 US 912, 43 L Ed 2d 777, 95
S Ct 1567 (holding that the United States was a holder in due course and could enforce
the money orders against the bank, where the money orders, blank as to the payee's name,
were delivered to the Internal Revenue Service to pay tax deficiencies, instead of being
used for the purpose originally intended).
Footnote 58. State ex rel. Chan Siew Lai v Powell (Mo) 536 SW2d 14, 19 UCCRS 626.
Footnote 60. State ex rel. Chan Siew Lai v Powell (Mo) 536 SW2d 14, 19 UCCRS 626.
Footnote 61. Warren Finance, Inc. v Barnett Bank of Jacksonville, N.A. (Fla) 552 So 2d
194, 14 FLW 567, 9 UCCRS2d 1196, corrected on other grounds (Fla) 14 FLW 574.
Footnote 62. UCC 3-504(a)(ii)(iv)(v) [1990 Rev].
For a discussion of the complete excuse of presentment, notice, or protest, see 202.
Footnote 64. Hebel v Ebersole (CA7 Ill) 543 F2d 14, 22 FR Serv 2d 1122, 20 UCCRS
965; Citizens Nat'l Bank v Ft. Lee Sav. & Loan Asso., 89 NJ Super 43, 213 A2d 315, 2
UCCRS 1029; Bank of Ft. Mill v Rollins, 217 SC 464, 61 SE2d 41.
Footnote 65. First of Am. Bank-Northeast Ill., N.A. v Bocian (2d Dist) 245 Ill App 3d
495, 185 Ill Dec 449, 614 NE2d 890, 23 UCCRS2d 122.
The bank was a holder in due course and had recourse against the defendant/drawer of
the check despite the defendant's having stopped payment on check, where the check was
deposited in the customer's checking account, which became overdrawn when the bank
honored other checks written by the customer against the account between the time of the
deposit and the time it received notice of the stop-payment order and did not receive
payment on the defendant's check. First of Am. Bank-Northeast Ill., N.A. v Bocian (2d
Dist) 245 Ill App 3d 495, 185 Ill Dec 449, 614 NE2d 890, 23 UCCRS2d 122.

Footnote 67. Frantz v First Nat'l Bank (Alaska) 584 P2d 1125, 25 UCCRS 240.
Footnote 68. Schnitger v Backus, 10 Wash App 754, 519 P2d 1315, 14 UCCRS 750.
457 Death or incompetence of drawer
View Entire Section

The death or incompetence of the drawer of a draft, including a check, before its
acceptance or payment, generally operates as a countermand or revocation of the
drawee's authority to pay. 69 However, with respect to bank deposits and collections,
neither death nor incompetence of a customer revokes the authority of the drawee or
payor bank to accept or pay the instrument until the bank knows of the fact of death or of
an adjudication of incompetence and has a reasonable opportunity to act on it. 70 Even
with knowledge, a bank may for 10 days after the date of death pay or certify checks
drawn on or prior to that date unless an order to stop payment is made by a person
claiming an interest in the account. 71
Comment: The reason for permitting a bank to pay checks within 10 days after the
drawer's death is to avoid the filing of claims in probate, since such checks are
normally given in immediate payment of an obligation and there is almost never any
reason why they should not be paid. 72
Caution: Notwithstanding that the check was postdated 15 years and the maker died
before the date of the check, the check was a negotiable instrument enforceable against
the maker's estate, where the check contained the maker's endorsement that the amount
should be taken from the maker's estate at death. 73
Footnotes
Footnote 69. Blair v Davis (Fla App D4) 281 So 2d 247.
Footnote 73. Smith v Gentilotti, 371 Mass 839, 359 NE2d 953, 20 UCCRS 1222.
458 Liability to drawee or acceptor

View Entire Section
The rule that the drawee who pays a draft or check is entitled to recover the amount of
the payment on an implied contract of indemnity but has no action on the instrument
itself, as its vitality is destroyed by the payment, is expressed in Article 4 of the Uniform
Commercial Code with respect to bank deposits and collections by a provision providing
that an item is properly payable if it is authorized by the customer and is in accordance
with any agreement between the customer and bank. 74
If the drawee of a draft is without funds of the drawer, and pays the draft, he or she is
entitled to be reimbursed by the drawer. 75 If there are several drawers, some of whom
are securities for the others, all are alike liable to reimburse the drawee in the absence of
any understanding to the contrary. 76
The drawer of a draft on another party is only secondarily liable thereon in that he
promises to pay if the drawee fails to carry out the order to it, and the holder makes
presentment and gives notice of dishonor. Acceptance of the draft by the drawee does
not affect the drawer's automatic liability on the instrument, but simply interposes the
drawee's primary independent liability. 77
Caution: Accommodation drawers and acceptors of bills of exchange, as between

themselves, are not, in the absence of any agreement to the contrary, cosureties for the
payees or liable to contribution. There is no implied obligation on the part of a drawer
of a bill of exchange, drawn for the sole accommodation of the payees, and accepted by
the drawee for the same purpose, to reimburse the acceptors, where, owing to the
insolvency of the payees, heor she is compelled to pay the bill. 78
Footnotes
Footnote 74. UCC 4-401(a)
Forms: AnswerDefenseDrawer liable where drawee paid instrument in good faith.

Instruments 3:173.
Footnote 75. Sexton v Fensterer, 154 App Div 542, 139 NYS 811, affd 213 NY 641, 107
NE 1085.
A wife who was an authorized signer of checks drawn on a bank account with her
husband, and who personally signed checks constituting an overdraft on such account
and cashed them by indorsing the back of each check without qualification, was liable on
the checks as a matter of law. Granville v Capital Bank (Fla App D3) 456 So 2d 960, 9
FLW 2132 (rejecting the wife's contention that she had acted as an agent in signing the
checks because the principal for which she professed to act was an unincorporated
association with no separate legal existence).
Footnote 76. Church v Swope, 38 Ohio St 493 (holding that one who signs his or her

name on the back of a bill of exchange made payable to another, at the time of its
execution, becomes a party to the request upon the drawee to pay the bill, and in an
action by the drawee to recover the amount paid in taking up the bill, is to be regarded as
a drawer).
Footnote 77. General Motors Acceptance Corp. v General Acci. Fire & Life Assurance
Corp. (4th Dept) 67 App Div 2d 316, 415 NYS2d 536, 26 UCCRS 97.
As to the drawee's primary liability on an accepted draft, see 447.
Footnote 78. Barnet v Young, 29 Ohio St 7.
4. Indorser [459-471]
459 Generally; obligation of indorser
View Entire Section

Except as otherwise provided, if an instrument is dishonored, an indorser is obliged to

pay the amount due on the instrument:
(1) according to the terms of the instrument at the time it was indorsed; 79 or
(2) if the indorser indorsed an incomplete instrument, according to its terms when
completed. 80
If a draft is accepted by a bank after an indorsement is made, the liability of the indorser
is discharged. 81
Footnotes
Comment: This provision restates the substance of former 3-414(1). Official

Annotation: Liability of indorser, other than payee or transferee, of nonnegotiable

instrument, 18 ALR3d 647.
Guaranty of payment as covering principal debtor's liability as an indorser on third

person's note or other negotiable instrument, 85 ALR2d 1183.

Forms: Complaint, petition, or declarationBy holder in due courseAgainst maker

and indorser. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 61.
Complaint, petition, or declarationBy corporate payee Against subsequent indorser

who cashed checks with forged indorsements. 5 Am Jur Pl & Pr Forms (Rev), Bills
and Notes, Form 80.
Complaint, petition, or declarationAllegationDefendant signed as indorser. 6A Am

3:149.
AnswerDefenseDefendant did not sign as indorser. 6A Am Jur Pl & Pr Forms

Instruction to juryWhen signature considered indorsement. 6A Am Jur Pl & Pr Forms

Complaint, petition, or declarationOn protested noteBy indorseeAgainst indorser.

AnswerDefenseDenial of indorsement of note. 6A Am Jur Pl & Pr Forms (Rev),

Complaint, petition, or declarationAllegation that note unpaid by makerTo recover

on indorsement. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Complaint, petition, or declarationAllegation that maker abscondedTo recover on

Complaint, petition, or declarationBy holder of noteAgainst maker, payee, and

indorser. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:231.
Contract of indorser; Order of liability. 19 Am Jur Legal Forms 2d, Uniform

Comment: This provision is similar in effect to 3-414(c) if the draft is accepted by

a bank after the indorsement is made, in which case the indorser incurs the obligation

stated in subsection (a). Official Comment 3 to UCC 3-415 [1990 Rev].
460 Liability as dependent upon contract
View Entire Section

An indorsement is a written contract 82 of which the law declares the effect. 83
An unrestricted and unqualified indorsement on a negotiable instrument is a conditional

contract by the indorser to pay the amount of the instrument to the holder in the event of
the default of the primary obligor. 84 The indorser engages that on due presentment the
instrument will be paid according to its tenor, and that if it is dishonored, and the
necessary proceedings on dishonor are taken, he will pay the amount thereof to the
holder. 85 Thus, the transferor of an instrument who merely signs his name on the back
assumes liability for repayment, on the maker's default, of the adjusted unpaid balance
due on the instrument. 86
Caution: Where a note was made payable to a husband and wife, who later became
separated, a separation agreement stated that the wife had "assigned" her interest in the
note to her husband, and the wife also specially endorsed and delivered the note to her
husband, and the makers later defaulted on the note because the note sued on did not
refer to the separation agreement, such agreement was not admissible to show that the
wife had signed the note in any capacity other than that of indorser, and the wife was
liable on the note under the indorser's contract because she had failed to endorse the
note "without recourse." 87
Indorsers of negotiable certificates of deposit are subject to the same liabilities as

indorsers of other negotiable instruments. 88 A corporation which indorses an
instrument through an authorized agent is liable as an indorser. 89
Footnotes
Footnote 82. Haines v Tharp, 15 Ohio 130.
Footnote 83. Haines v Tharp, 15 Ohio 130.
Footnote 84. Bemis v McKenzie, 13 Fla 553; Nevada State Bank v Fischer, 93 Nev 317,
565 P2d 332, 21 UCCRS 1384.
Footnote 85. Worley v Johnson, 60 Fla 294, 53 So 543.
Footnote 86. Val Zimmermann Corp. v Leffingwell, 107 Wis 2d 86, 318 NW2d 781.
Footnote 87. Alves v Baldaia (Lucas Co) 14 Ohio App 3d 187, 14 Ohio BR 205, 470
NE2d 459, 39 UCCRS 1362.

Footnote 88. Pardee v Fish, 60 NY 265.
Footnote 89. East Coast Lumber & Supply Co. v Maxwell, 77 Fla 62, 80 So 741 (holding
that a corporation, through its secretary, indorsing a negotiable instrument for its own
purposes and benefit, is liable thereon).
As to the liability of corporations for indorsements by agents, generally, see 500 et

seq.
A bank was entitled to summary judgment in a cause of action seeking to impose

indorser's liability on a commercial-checking-account customer with respect to checks
indorsed by the customer and deposited in its account, which were subsequently
dishonored by the payor banks, where the customer's answer admitted indorsement of the
checks; timely dishonor of the checks was established by the bank's proof (copies of
returned checks) that each check had been returned with the purported stamp of the payor
bank which stated that acceptance or payment was refused for reasons consistent with
dishonor; and timely notice of dishonor by the bank to the customer was also established
by the declaration of the bank officer responsible for the customer's account which stated
that the president of customer was personally advised of each check's dishonor within
one day after the bank had learned of such dishonor. Security Pacific Nat'l Bank v
Associated Motor Sales (2nd Dist) 106 Cal App 3d 171, 165 Cal Rptr 38, 28 UCCRS
1412.
461 Conditional nature of engagement
View Entire Section

The contract of indorsement into which an indorser of a negotiable instrument enters is a

contract to pay upon certain conditions; unless the conditions are performed, waived, or
excused, the liability of the indorser does not become absolute, so as to entitle the holder
of the instrument to an action against him or her. 90 The indorser is obligated to pay
only in the event that the instrument is dishonored and the person primarily liable does
not pay; and even then he or she is liable only on further conditions that the necessary
proceedings on dishonor are taken. 91 Thus, the liability of an indorser prior to
maturity of any negotiable paper is contingent upon due presentment for payment and
notice of dishonor. 92 After presentment and notice, the contract of the indorser, which
was previously contingent, becomes fixed, and thereafter he or she is as liable to pay as is
the maker or acceptor. 93
Footnotes
Footnote 90. Chemical Nat'l Bank v Kellogg, 183 NY 92, 75 NE 1103; Nearpass v
Tilman, 104 NY 506, 10 NE 894; Solomon v Family Food Thrift Club, Inc. (4th Dept) 2
App Div 2d 507, 156 NYS2d 692; Goldstein v Brastone Corp., 254 App Div 288, 4
NYS2d 909, affd 279 NY 775, 18 NE2d 862.
Footnote 91. Lockport Exchange Trust Co. v Hyde, 274 NY 1, 8 NE2d 38, 110 ALR
1145; Colonial Nat'l Bank v Duerr, 108 App Div 215, 95 NYS 810.
Footnote 92. Nearpass v Tilman, 104 NY 506, 10 NE 894; Parker v Stroud, 98 NY 379;
Solomon v Family Food Thrift Club, Inc. (4th Dept) 2 App Div 2d 507, 156 NYS2d 692;
Goldstein v Brastone Corp., 254 App Div 288, 4 NYS2d 909, affd 279 NY 775, 18 NE2d
862; Colonial Nat'l Bank v Duerr, 108 App Div 215, 95 NYS 810; Standard Premium
Plan Corp. v Wolf, 56 Misc 2d 522, 288 NYS2d 987, 5 UCCRS 161.
Footnote 93. St. John v Roberts, 31 NY 441.
462 Indorsement as new contract; independent from maker's promise
View Entire Section

The contract of an indorser is separate and distinct from that of the maker. 94 It is a new
contract between the indorser and the subsequent parties to the paper. 95 Just as the
contract of an indorser is separate from that of the maker, each indorsement is a contract
separate and apart from that made by any other indorser. 96
Footnotes
Footnote 94. Chemical Nat'l Bank v Kellogg, 183 NY 92, 75 NE 1103; Patchogue
Citizens Bank & Trust Co. v Wilson, 245 App Div 766, 280 NYS 763; First Bank of
Notasulga v Jones, 156 App Div 277, 141 NYS 304; G. H. Bussing & Co. v Scott, 7 O
Dec Rep 252, 2 WLB 18; Kautzman v Weirick, 26 Ohio St 330.
Footnote 95. Case v Heffner, 10 Ohio 180.
Footnote 96. Chemical Nat'l Bank v Kellogg, 183 NY 92, 75 NE 1103; King v Kerr's
Adm'rs, 5 Ohio 154.
463 Payee as indorser
View Entire Section

The payee, by signing his or her name on the back of an instrument, becomes an indorser
and can be held chargeable in no other capacity unless he or she adds proper words to
create a different relationship. 97

Illustration: A payee of a negotiable promissory note who places his or her name on
the back of the note under the words "we, as endorsers, waive demand, notice and
protest, and guarantee payment of this note, and acknowledge that we sign with full
understanding of this contract," is an indorser, since by the indorsement he does not
clearly indicate by appropriate words his or her intention to be bound in some other
capacity. 98
Where the payee of a note which should have been payable to another indorses it to such
other, who in turn indorses it to a third party for value, and the third party recovers a
judgment from the payee as an indorser, the payee cannot recover for the judgment from
his or her indorsee, but must sue the maker. 99
Footnotes
Footnote 97. Crawford v Turnbaugh, 86 Ohio St 43, 98 NE 858; Seattle-First Nat'l Bank
v Kim, 38 Wash App 101, 684 P2d 773, 39 UCCRS 537, review den 102 Wash 2d 1019.
Footnote 98. Hopkins v Commercial Bank, 64 Fla 310, 60 So 183.
Footnote 99. Barry v Willard, 121 Fla 348, 163 So 689 (implying, however, that the
payee's indorsee might be joined in a suit by the payee against the maker).
464 Failure to notify of dishonor
View Entire Section

If notice of dishonor is required and the appropriate notice of dishonor is not given to an
indorser, the liability of the indorser to pay the amount due on the instrument is
discharged. 1
Observation: As an academic matter, it may be preferable to state that the transferee

or holder is barred from enforcing the liability of the indorser, rather than stating that
the liability of the indorser is discharged, because the indorser is subjected to
secondary liability by his or her act of indorsing. 2
Dishonor and proper notice are merely conditions precedent that must be satisfied before
the indorser's liability may be enforced. If the notice is not timely given, the indorser's
liability can never be enforced. Thus, the liability of the indorser has the same status as
the liability of the maker or acceptor which in a given case cannot be enforced because
the statute of limitations has run. 3
Footnotes

465 Delay in use of check
View Entire Section

If an indorser of a check is liable and the check is not presented for payment, or given to
a depositary bank for collection, within 30 days after the day the indorsement was made,
the liability of the indorser is discharged. 4 This provision is more than a mere
presumption of payment arising from delay and the rule can not be rebutted or overcome
by contrary evidence. 5
Distinction: This subsection modifies former UCC s 3-503(2)(b) and 3-502(1)(a)

by stating a 30-day rather than a seven-day period, and stating it as an absolute rather
than a presumptive period. 6
Footnotes
Forms: AnswerDefenseBy indorserDefendant discharged by holder's unexcused

delay in presentment for payment. 6A Am Jur Pl & Pr Forms (Rev), Commercial
466 Requirement of notice of dishonor
View Entire Section

The obligation of an indorser and the obligation of a drawer may not be enforced unless:
(1) the indorser or drawer is given proper notice of dishonor of the instrument; 7 or
(2) notice of dishonor is excused. 8

Observation: This subsection is consistent with the 1952 statute 9 but notice of
dishonor is no longer relevant to the liability of a drawer except for the case of a draft
accepted by an acceptor other than a bank. 10 Under the former statute, unless
excused, notice of dishonor was necessary to charge an indorser. 11
The notice of dishonor required to enforce the liability of a drawer or indorser may be
given by any person. 12 There is no requirement that such a person be a party to the
dishonored instrument or the authorized agent of any party. 13
Practice guide: A question may arise as to whether an indorser or drawer should be

held liable on the statement of an unknown person that the instrument has been
dishonored. In most cases, the content of the notice will allay any fears that the notice
is not reliable. The fact that the notice comes from an unknown person is not
significant because in many cases the subsequent holder of the instrument will be
unknown to the drawer or indorser. 14
The notice of dishonor may be given in any form and in any manner that is
"commercially reasonable." 15 When an instrument is taken for collection by a
collecting bank, the time for giving notice of dishonor is stated in terms of whether it is
given by the collecting bank or by any other person. 16
Footnotes
Forms: Notice of dishonorNonpayment. 19 Am Jur Legal Forms 2d (Rev), Uniform

Commercial Code: Article 3 Negotiable Instruments 253:2513.
Notice of dishonorNonacceptance. 19 Am Jur Legal Forms 2d (Rev), Uniform

Notice of dishonorPromissory note. 19 Am Jur Legal Forms 2d (Rev), Uniform

Affidavit of having given notice of dishonorBy mail. 19 Am Jur Legal Forms 2d

(Rev), Uniform Commercial Code: Article 3Negotiable Instruments 253:2516.
Affidavit denying receipt of notice of dishonorBy officer or corporate indorser. 19

Am Jur Legal Forms 2d (Rev), Uniform Commercial Code: Article 3Negotiable
Because one who indorses a check warrants that on dishonor of the instrument and
relevant notice thereof, he or she will pay the instrument according to its tenor at the time
of his or her indorsement, dishonor and notice of dishonor are prerequisites to an
indorser's liability. Dozier v First Ala. Bank, N.A. (Ala Civ App) 363 So 2d 781, 25
UCCRS 802.

Forms: AnswerDefense by indorserDefendant discharged by holder's unexcused
delay in presentment for payment. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Code : Article 3Negotiable Instruments 3:293; UCC Pleading Practice Forms 3d,
Footnote 9. UCC 3-501(2)(a) [1952].
Footnote 10. Official Comment 1 to UCC 3-503 [1990 Rev], referring to Comments 2
and 4 to UCC 3-414.
Footnote 11. Standard Premium Plan Corp. v Wolf, 56 Misc 2d 522, 288 NYS2d 987, 5
UCCRS 161; Lincoln Nat'l Bank v Govern (NY Sup) 5 UCCRS 382; Makel Textiles, Inc.
v Dolly Originals, Inc. (NY Sup) 4 UCCRS 95; Binford v L.W. Lichtenberger Estate, 62
Or App 439, 660 P2d 1077, 37 UCCRS 805.
467 Transfer warranties
View Entire Section

A person who transfers an instrument by indorsement warrants to the transferee and any
subsequent transferee that:
(1) the warrantor is a person entitled to enforce the instrument; 17
(2) all signatures on the instrument are authentic and authorized; 18
(3) the instrument has not been altered; 19
(4) the instrument is not subject to a defense or claim in recoupment of any party which
can be asserted against the warrantor; 20
(5) the warrantor has no knowledge of any insolvency proceeding commenced with
respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer. 21
These warranties cannot be disclaimed with respect to checks. 22
Additional similar warranties are given by customers and collecting banks on the transfer
and presentment of items in the bank collection process. 23 The provisions in Article 3
fix the same warranties for the collection of items through the banking system that the
parallel provision in Article 4 establishes for the transfer of commercial paper not
collected through the banking system. 24
Footnotes
Footnote 17. 522.
Footnote 18. 523.
Footnote 19. 524.
Footnote 20. 525.
Footnote 21. 526.
Footnote 22. 530.
Footnote 24. Sun'n Sand, Inc. v United California Bank, 21 Cal 3d 671, 148 Cal Rptr
329, 582 P2d 920, 24 UCCRS 667, 21 UCCRS2d 1003 (criticized on other grounds in
Roy Supply, Inc. v Wells Fargo Bank (3rd Dist) 39 Cal App 4th 1051, 46 Cal Rptr 2d
309, 95 CDOS 8401, 95 Daily Journal DAR 14450, 27 UCCRS2d 1363).
468 Without recourse indorsement
View Entire Section

If an indorsement states that it is made "without recourse" or otherwise disclaims liability

of the indorser, the indorser is not liable under to pay the instrument. 25
Comment: This provision restates the substance of former 3-414(1). 26 This

immunity from liability may be asserted against any transferee or any holder of the
instrument, without regard to whether the holder has the rights of a holder in due
course. 27 This disclaimer of liability is limited to liability for payment of the face of
the instrument. It does not affect liability for warranties made on transfer or on
presentment for payment. In order to disclaim such warranty liability, there must also
be in the indorsement words indicating that the indorsement is made without
warranties. 28
Footnotes

Forms: Indorsement disclaiming liability. 19 Am Jur Legal Forms 2d, Uniform

Commercial Code: Article 3Negotiable Instruments 253:2463; UCC Legal Forms
By extending the enumerated warranties "regardless of the form of the assignment," the
parties intended the "without recourse" indorsement to be effectual in limiting the
contractual bases of liability only. In as much as the cause of action was predicated on a
breach of warranty theory, there was no indication of an intent that the remedy of
repurchase be the exclusive remedy in the event of the breach of any of the warranties
enumerated. Vandergriff Chevrolet Co. v Forum Bank (Tex Civ App Fort Worth) 613
SW2d 68.
469 Parol evidence
View Entire Section

Regardless of the intent of the signer, a signature and its accompanying words is an
indorsement unless the accompanying words, terms of the instrument, place of the
signature, or other circumstances unambiguously indicate that the signature was made for
a purpose other than indorsement. 29 In determining whether a signature on an
instrument is an indorsement, the testimony of the signer as to his subjective intent is
generally irrelevant. However, the "other circumstances" provision appears to allow the
admission of parol evidence as to any matter relating to whether the signing was intended
as an indorsement. 30
Caution: The admissibility of a wide array of other circumstances does not have a
significance as broad as it first appears, because "other circumstances" that do not
appear on the instrument cannot be asserted as a defense against a holder in due course
or a person having the rights of a holder in due course. 31
Footnotes

470 Parties to whom indorser is liable
View Entire Section

The obligation of the indorser is owed to a person entitled to enforce the instrument or to
a subsequent indorser who paid the instrument. 32
Illustration: Suppose the subsequent indorser can prove an agreement with the prior
indorser under which the prior indorser agreed to treat the subsequent indorser as a
guarantor of the obligation of the prior indorser. Rights of the two indorsers between
themselves would be governed by the agreement. Under suretyship law, the
subsequent indorser under such an agreement is referred to as a sub-surety. Under the
agreement, if the subsequent indorser pays the instrument there is a right to
reimbursement from the prior indorser; if the prior indorser pays the instrument, there
is no right of recourse against the subsequent indorser. 33
A party who indorses a check in blank is strictly liable to the person to whom the
indorsed check is delivered. 34
Footnotes
Caution If the prior indorser and the subsequent indorser are both anomalous
indorsers, this rule does not apply. In that case, UCC 3-116 applies. Under
3-116(a), the anomalous indorsers are jointly and severally liable and if either pays the
instrument the indorser who pays has a right of contribution against the other. The
right to contribution in 3-116(b) is subject to "agreement of the affected parties."
Official Comment in 5 to UCC in 3-415 [ in 1990 Rev].
Footnote 34. Cincinnati Cent. Credit Union v Goss (Mun Ct) 66 Ohio Misc 2d 60, 642
NE2d 1176, 27 UCCRS2d 165.
471 Joint and several liability
View Entire Section

Indorsers normally do not have joint and several liability. Rather, an earlier indorser has
liability to a later indorser. However, indorsers can have joint and several liability in two
cases. If an instrument is payable to two payees jointly, both payees must indorse. The
indorsement is a joint indorsement and the indorsers have joint and several liability. 35
The other case is that of two or more anomalous indorsees. An anomalous indorsement
normally indicates that the indorser signed as an accommodation party. If more than one
accommodation party indorses a note as an accommodation to the maker, the indorsers
have joint and several liability. 36
Footnotes
As to joint and several liability on an instrument in general, see 439.
Forms: Complaint, petition, or declarationAllegationBy holder of noteIndorsers

jointly and severally liable. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Article 3Negotiable Instruments 3:56; UCC Pleading and Practice Forms 3d, Article
AnswerDefenseBy indorser of noteDenial of joint liability with prior indorser. 6A

3:57; UCC Pleading and Practice Forms 3d, Article 3Negotiable Instruments 3:57.
Complaint, petition, or declarationAllegation that note unpaid by makerAgainst

general indorser by indorsee who paid note. 6A Am Jur Pl & Pr Forms (Rev),
C. Accommodation Parties [472-490]
Research References
UCC 3-419 [1990 Rev]
ALR Digest: Bills and Notes 8, 116, 117, 136, 160, 172; Contribution 4; Guaranty
1 et seq.; Principal and Agent 36, 59, 108; Principal and Surety 2.5; Signature
1 et seq.
ALR Index: Accommodation Party or Paper; Agents and Agency; Bills and Notes;
Contribution; Checks and Drafts; Guaranty; Indorsement; Parol Evidence; Principal and
Surety; Signatures; Suretyship; Uniform Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 78, 79; 6A Am Jur Pl & Pr Forms
(Rev), Commercial Code : Article 3Negotiable Instruments 3:239-3:244
3B Am Jur Legal Forms 2d, Bills and Notes 41:115 et seq., 41:121; 9A Am Jur Legal
Forms 2d, Guaranty 132:31-132:95, 132:264; 19 Am Jur Legal Forms 2d, Uniform
Commercial Code, Negotiable Instruments 253:2471-253:2475
UCC Pleading and Practice Forms 3d, Article 3Negotiable Instruments 3:237-3:242
UCC Legal Forms 3d, Article 3Negotiable Instruments 3:122 et seq.

7 Am Jur POF2d 283, Status as Accommodation Party
6A Anderson, Uniform Commercial Code 3d [Rev] 3-419:5, 3-419:7 through 3-419:9
1. In General [472-476]
472 Accommodation paper and parties; generally
View Entire Section

If an instrument is issued for value given for the benefit of a party to the instrument
("accommodated party") and another party to the instrument ("accommodation party")
signs the instrument for the purpose of incurring liability on the instrument without being
a direct beneficiary of the value given for the instrument, the instrument is signed by the
accommodation party "for accommodation." 37 An accommodation party is a person
who signs an instrument to benefit the accommodated party either by signing at the time
value is obtained by the accommodated party or later. 38 An accommodation party will
usually be a comaker or anomalous indorser. 39 Thus, the pre-Code principle that a
comaker of a promissory note may be an accommodation party is not altered by the
Uniform Commercial Code. 40
Although "accommodation makers" are popularly referred to as "comakers," their

contract is one of suretyship 41 and should be distinguished from the contract of a joint
maker. 42 One who signs a promissory note as a maker cannot be an accommodation
maker, even though the purpose and effect of signing the note is the securing of funds for
a third party, where the third party is not shown on the face of the instrument to be a
party to the note. 43
An accommodation indorser has the right to revoke his loan of credit at any time prior to
negotiation of the instrument to a holder for value. 44
Footnotes
Annotation: Who is accommodation party under Uniform Commercial Code 3-415,

90 ALR3d 342.
Practice References 7 Am Jur POF2d 283, Status as Accommodation Party.
Forms: AnswerDefenseDenial of accommodation status. 6A Am Jur Pl & Pr Forms

and Practice Forms 3d, Article 3, Negotiable Instruments 3:241.

Footnote 40. Buchta v Seng (Ind App) 444 NE2d 1250; Le Roy v Marquette Nat'l Bank
(Minn) 277 NW2d 351, 25 UCCRS 1390.
Footnote 41. Palmetto Leasing Co. v Chiles (2d Dist) 235 Ill App 3d 986, 176 Ill Dec
770, 602 NE2d 77, 19 UCCRS2d 487; V. I. P. Commercial Contractors v Alkas (Tex
Civ App San Antonio) 553 SW2d 656.
As to the suretyship character of accommodation makers, see 473.
Footnote 42. Duke v First Nat'l Bank (Tex App Beaumont) 698 SW2d 230, 42 UCCRS
487.
Footnote 43. Jones v San Angelo Nat'l Bank (Tex Civ App Beaumont) 518 SW2d 622, 16
UCCRS 787, writ ref n r e (Jun 4, 1975); Wortham v Lake Jackson State Bank (Tex Civ
App Houston (14th Dist)) 435 SW2d 612, writ ref n r e (Mar 12, 1969).
Footnote 44. L. H. Wagener, Inc. v Kendall (Iowa) 278 NW2d 18, 26 UCCRS 738.
473 Suretyship character of accommodation party
View Entire Section

An accommodation party is always a surety. 45 A surety who is not a party to the

instrument, however, is not an accommodation party. 46
Illustration: If M issues a note payable to the order of P, and S signs a separate

contract in which S agrees to pay P the amount of the instrument if it is dishonored, S
is a surety, but is not an accommodation party. In such a case, S's rights and duties are
determined under the general law of suretyship. 47
Caution: In unusual cases, two parties to an instrument may have a surety

relationship that is not governed by Article 3 of the Uniform Commercial Code,
because the requirements of 3-419(a) are not met. In those cases, the general law of
suretyship applies to the relationship. 48
Distinction: Under former law, an accommodation party was always a surety and
had the rights and liabilities of a surety. It made no difference whether he was
compensated or uncompensated. 49
The relation of principal and surety is the result of an express agreement between the
parties, or a contract that may be fairly implied from the situation. 50 Parol evidence is
admissible to prove such an agreement, 51 except as against a holder in due course. 52
Observation: Under pre-Code law, it was not clear whether an accommodation

indorser was considered a surety, although decisions under pre-Code law indicate that
a surety, both in effect and reality, was an accommodation maker. 53
Except to the extent that it is displaced by provisions of Article 3, the general law of
suretyship also applies to the rights of accommodation parties. 54 Thus, as between the
accommodation party and the holder, the law of suretyship applies. 55 The party
claiming suretyship status must prove that he or she signed the instrument for the sole
purpose of helping another signatory obtain credit under an agreement; that the
accommodated party is principally responsible, or that the instrument was executed for
limited purpose; and that the payee knew of his or her relation as surety, where it is not
apparent from the face of the note. 56 A known accommodation party may raise any of
the suretyship defenses, such as the failure of the creditor to disclose facts material to the
risk, such as the existence of a default as to interest payments and the making of other
secret loans to the accommodated party. 57
Footnotes
Footnote 49. Comments 1-5 to former UCC 3-415.
Where one signs a note so that the proceeds may be used to pay an obligation of a
comaker, the relationship between the two signatories to the instrument is that of
principal and surety. Furlong v Leybourne (Fla App D3) 138 So 2d 352.
Where the insured financed the first year's premium with a bank and the insurer's agent
indorsed the note as an accommodation for him to obtain the bank loan with which to pay
the premium does not make the agent anything other than an accommodation indorser,
even though the agent subsequently received a commission from the insurance company
for having made the sale. Beardmore v Abbott (Fla App D3) 218 So 2d 807, cert den
(Fla) 225 So 2d 537.
Footnote 50. FDIC v F & A Equip. Leasing (Tex App Dallas) 854 SW2d 681 (decided
under pre-1990 UCC).
Footnote 51. Haddock, Blanchard & Co. v Haddock, 192 NY 499, 85 NE 682; Goldberg
v Albert, 161 Misc 281, 291 NYS 855; FDIC v F & A Equip. Leasing (Tex App Dallas)
854 SW2d 681 (decided under pre-1990 UCC).
Footnote 52. Dalton v George B. Hatley Co. (Tex App Austin) 634 SW2d 374, 34
UCCRS 213.
Practice References Proof that party signed negotiable instrument as accommodation

party. 7 Am Jur POF2d 283, Status as Accommodation Party 8 et seq.

Footnote 53. McGowan v Cosmopolitan Bank & Trust Co., 121 Ohio St 503, 169 NE
574; Crawford v Turnbaugh, 86 Ohio St 43, 98 NE 858; Richards v Market Exch. Bank
Co., 81 Ohio St 348, 90 NE 1000; In re Estate of Fouts (Clark Co) 103 Ohio App 313, 3
Ohio Ops 2d 353, 145 NE2d 440; Roof v National Surety Corp. (Logan Co) 92 Ohio App
295, 49 Ohio Ops 365, 110 NE2d 159; Goddard v Pollock (Ashtabula Co) 10 Ohio App
1.
Footnote 55. Sims v Asian International, Ltd. (La App 1st Cir) 521 So 2d 411, 6
UCCRS2d 171, cert den (La) 523 So 2d 1337; Bixenstine v Palacios (Tex App Corpus
Christi) 805 SW2d 889 (decided under pre-1990 UCC).
Footnote 56. FDIC v F & A Equip. Leasing (Tex App Dallas) 854 SW2d 681 (decided
under pre-1990 UCC).
Footnote 57. Camp v First Financial Federal Sav. & Loan Asso., 299 Ark 455, 772 SW2d
602.
474 Liability in capacity in which party signed
View Entire Section

An accommodation party may sign the instrument as maker, drawer, acceptor, or indorser
and, except as otherwise provided, is obliged to pay the instrument in the capacity in
which the accommodation party signs. 58 In most cases, that capacity will be either
that of a maker or indorser of a note. 59
Illustration: Even if officers of the plaintiff bank were aware that proceeds of the
loan to the defendant were to be paid over to a third party and that the defendant was
executing the loan as an accommodation to the third party, the bank could recover the
proceeds of the loan from the defendant as the sole signatory on the note, since an
accommodation party is liable in the capacity in which the accommodation party has
signed the note, even though the lender knows of the accommodation. 60
Practice guide: To determine whether a party is an accommodation maker of a note,

the entire transaction should be viewed as a whole. 61
The liability of an accommodation party is to the payee, where the accommodation party
signs, as a comaker, for the accommodation of a maker, who is the principal obligor. 62
Likewise, the liability of an indorser, who indorses a promissory note for the
accommodation of the maker is to the payee. 63
Illustration: In a suit by a bank against an attorney for payment of a renewal note,

the attorney was precluded from asserting either that there had been no consideration
for his original note, which he executed in exchange for a note previously given the

bank by his client. 64
Distinction: Former Article 3 of the Uniform Commercial Code was confusing

because the obligation of a guarantor was covered both in 3-415 and in 3-416.
The latter section suggested that a signature accompanied by words of guaranty created
an obligation distinct from that of an accommodation party. Revised Article in 3
eliminates that confusion by stating in 3-419 the obligation of a person who uses
words of guaranty. 65
The principles which make an accommodation party liable in the capacity in which he
signed the instrument are in accord with pre-Code law. 66 Such an accommodation
maker, as a surety, became primarily liable to any party lawfully holding the paper, his
liability to pay being absolute. 67 Likewise, under pre-Code law, an indorsement for
accommodation, like every other indorsement, was an original contract binding the
indorser in favor of the holder. 68 The indorser for accommodation was considered to
have lent credit without any constraint as to its manner of use, and the fact that the
purchaser of the paper had notice of its accommodation character did not affect his right
to hold the accommodation party liable. 69
Footnotes
Footnote 58. UCC 3-419(b) [1990 Rev], providing that if the signature of the
accommodation party is accompanied by words indicating unambiguously that the party
is guaranteeing collection rather than payment of the instrument, liability is limited to
that stated in UCC 3-419(d) [1990 Rev].
An accommodation party who signed a note and deed of trust as a maker was bound on
such instruments to the same extent as his comaker. Caito v United California Bank, 20
Cal 3d 694, 144 Cal Rptr 751, 576 P2d 466.
Annotation: Liability of indorser, other than payee or transferee, of nonnegotiable

instrument, 18 ALR3d 647.
Insanity of maker, drawer, or indorser as defense against holder in due course, 24

ALR2d 1380.
Forms: Complaint, petition, or declarationBy obligeeAgainst accommodation

partyGuaranty of payment Accommodated party unable to pay. 6A Am Jur Pl & Pr
Pleading and Practice Forms 3d, Article 3, Negotiable Instruments 3:240.
Complaint, petition, or declarationAgainst irregular indorser as true indorser. 5 Am

Footnote 59. Official Comment 4 to UCC 3-419 [1990 Rev], providing further that if
the signature of the accommodation party is accompanied by words indicating
unambiguously that the party is guaranteeing collection rather than payment of the
instrument, liability is limited to that stated in subsection (d), which is based on former
UCC 3-416(2).

A defendant who added his signature to a demand note made by a corporation and some
of its shareholders after the bank had demanded payment of the note was liable to the
bank as an accommodation maker for the corporation and the other comakers. Arlington
Trust Co. v Pappalardo, 383 Mass 870, 417 NE2d 426, 31 UCCRS 622.
Footnote 60. Berkshire Bank v Schwartz (1st Dept) 191 App Div 2d 260, 595 NYS2d
19, app dismd without op 81 NY2d 1067, 601 NYS2d 584, 619 NE2d 662 and app den
83 NY2d 753, 612 NYS2d 108, 634 NE2d 604.
Footnote 61. Stockwell v Bloomfield State Bank, 174 Ind App 314, 367 NE2d 42, 22
UCCRS 726 (criticized on other grounds by Farner v Farner (Ind App) 480 NE2d 251)
and (criticized on other grounds as stated in Farmers Loan & Trust Co. v Letsinger (Ind
App) 635 NE2d 194).
Footnote 62. V. I. P. Commercial Contractors v Alkas (Tex Civ App San Antonio) 553
SW2d 656 (decided under pre-1990 version); Musey v Dickinson Social Club (Tex Civ
App Houston (1st Dist)) 466 SW2d 84; Warren v Washington Trust Bank, 19 Wash App
348, 575 P2d 1077, 23 UCCRS 966, mod on other grounds 92 Wash 2d 381, 598 P2d
701.
Footnote 63. First Nat'l Bank v Hargrove (Tex Civ App Texarkana) 503 SW2d 856, 14
UCCRS 154 (where accommodation indorser was anomalous or irregular indorser).
Whether technically classified as an accommodation party, maker, or surety, a truck

purchaser who signed a note assuming the original purchaser's obligation, whose every
request, wish, and desire was granted by the vendor's senior vice-president, and who
exercised dominion over and had the use and possession of the truck for a number of
months, paying a series of installment payments before falling into default, was liable on
the instrument he signed. Duke v First Nat'l Bank (Tex App Beaumont) 698 SW2d 230,
42 UCCRS 487.
Footnote 64. Frank v Intercontinental Bank of Miami Beach (Fla App D3) 372 So 2d
543.
Footnote 65. Official Comment 4 to UCC 3-419 [1990 Rev], providing further that
portions of former 3-416 are preserved; former 3-416(2) is reflected in 3-419(d)
and former in 3-416(4) is reflected in 3-419(c); words added to an anomalous
indorsement indicating that payment of the instrument is guaranteed by the indorser do
not change the liability of the indorser as stated in 3-415, which is a change from
former in 3-416(5).
Footnote 66. Rapp v Demmerle (Fla) 61 So 2d 481; Treadwell v Exchange Nat'l Bank,
127 Fla 40, 172 So 914; Bass v Geiger, 73 Fla 312, 73 So 796, cert den 244 US 653, 61
L Ed 1373, 37 S Ct 652.
Footnote 67. Shelfer v American Agr. Chemical Co., 113 Fla 108, 152 So 613; Scott v
National City Bank, 107 Fla 810, 139 So 367; Marinelli v Weaver (Fla App D2) 187 So
2d 690.
Footnote 68. Burton v McCaskill, 79 Fla 173, 83 So 919.
The president of a corporate maker of a demand promissory note who indorsed the note
subsequently to execution and delivery, and at a time when the corporation was behind in
payments and when certain collateral securities securing the obligation had decreased
materially in value, is an accommodation indorser and may be held liable under the terms
of the note that the payee has a right to demand additional securities to the satisfaction of
the payee. Conn v Boulevard Nat'l Bank (Fla App D3) 148 So 2d 758.
Footnote 69. Bass v Geiger, 73 Fla 312, 73 So 796, cert den 244 US 653, 61 L Ed 1373,
37 S Ct 652.
Allegations of defendants that their indorsement was for the sole purpose of
accommodating plaintiff in the negotiation and discounting of the note, and was not for
the purpose of accommodating the maker of said note, are mere conclusional allegations
and not well-pleaded facts. Kohen v H. S. Crocker Co. (CA5 Fla) 260 F2d 790.
475 Necessity of consideration or value
View Entire Section

The obligation of an accommodation party may be enforced notwithstanding any statute

of frauds and whether or not the accommodation party receives any consideration for the
accommodation. 70 The liability of an accommodation maker is supported by the
consideration that flows from the creditor to the principal debtor. 71
Observation: If the term "consideration" is used accurately, the accommodation

party always receives consideration, because he obtains certain action or conduct in
return for his signing. If he signs as an original party, the consideration is the making
of a loan or the extension of credit to the accommodated party. If he signs after the
original execution of the instrument, he is seeking to obtain forbearance of the holder.
In either case, the accommodation party obtains the action or inaction that he desires
and, therefore, receives consideration although he does not receive any actual payment
of money or delivery of property. 72
Practice guide: Only the maker of the note, and not the accommodation maker, can
assert failure of consideration as a defense. 73 An accommodation maker's
consideration is the receipt by the primary obligor of the proceeds of the loan, and no
separate consideration need run to the accommodation maker. 74
It does not matter whether an accommodation party signs gratuitously either at the time
the instrument is issued or after the instrument is in the possession of a holder. 75
The obligation of the accommodation party is supported by any consideration for which
the instrument is taken before it is due. 76 This section of the Uniform Commercial
Code is intended to change occasional decisions holding that there is no sufficient
consideration where an accommodation party signs a note after it is in the hands of a
holder who has given value. 77 The accommodation party is liable to the holder in such
a case, even though there is no extension of time or other concession. 78

Illustration: In an action by a bank as the payee of a note against comakers who had
defaulted thereon, and the note's indorser, which note had been executed on the bank's
making a loan to the comakers to enable them to buy a construction company from the
indorser, (1) the defendant indorser was an accommodation indorser, even though he
had received proceeds of the loan to the comakers, since the Official Comments 2 and
3 to former UCC 3-415 clearly indicate that it is immaterial whether an
accommodation party receives a benefit from signing the instrument. 79
Observation: Inasmuch as the Official Comment to Revised 3-419 regarding

accommodation parties states that it "takes the view stated in Comment 3" to its
predecessor section in old Article 3 ( 3-415) that "there need be no consideration
running to the accommodation party," the court construes old 3-415 (applicable here
to events that occurred prior to Wyoming's adoption of Revised Article 3) as not
requiring consideration. 80
The original consideration on an instrument will support the obligation of an subsequent

indorser. 81 Thus, the fact that the accommodation party did not receive consideration
for his act of signing the instrument is not a defense. 82
Illustration: The plaintiff was an accommodation party on replacement notes and,

thus, could bring suit against the maker, where the plaintiff was a comaker on
replacement notes to the bank, although she had not been on the original notes, and
received no consideration for accommodating the maker, and, after paying off the notes
to the bank and receiving assignment of the payee's rights, she brought an action
against the maker. 83
Footnotes
Compare UCC 3-416(6) [1952], providing that any guaranty written on the instrument
is enforcible notwithstanding any statute of frauds.
Footnote 71. Pitrolo v Community Bank & Trust, N.A., 171 W Va 317, 298 SE2d 853,
35 UCCRS 192.
App) 635 NE2d 194); Warren v Washington Trust Bank, 19 Wash App 348, 575 P2d
1077, 23 UCCRS 966, mod on other grounds 92 Wash 2d 381, 598 P2d 701.
App) 635 NE2d 194).

Where the wife of the maker of two notes signed both notes as a comaker 30 days after
the notes were executed, at a time when all transactions surrounding the execution of the
notes had been completed and there was no factual change between the parties except the
addition of her signature, the wife was an accommodation maker and was liable to the
holders who took the notes for value, notwithstanding they were not holders in due
course and there was no consideration for the wife's signature, since no consideration was
necessary to make her liable as accommodation party. Cissna Park State Bank v Johnson
(4th Dist) 21 Ill App 3d 445, 315 NE2d 675, 15 UCCRS 667.
Footnote 79. Bank of Ripley v Sadler (Tenn) 671 SW2d 454, 39 UCCRS 544.
Footnote 80. Transamerica Commercial Fin. Corp. v Naef (Wyo) 842 P2d 539, 21
UCCRS2d 704 (holding that there cannot be an accommodation party on a writing that is
not a negotiable instrument).
Footnote 81. Pan American Bank, N.A. v Sullivan (Fla App D4) 375 So 2d 338.
Footnote 83. Polo v Correa (Fla App D3) 645 So 2d 144, 19 FLW D2399, 25 UCCRS2d
494.
476 Corporate accommodation paper
View Entire Section

As a general rule in the absence of statute, the execution or indorsement of

accommodation paper for the benefit of third persons is an act beyond the scope of
corporate powers. 84 An agent or an officer of a corporation has no implied authority to
bind a corporation by an accommodation indorsement. 85
Caution: A person who signs a corporate note in both his representative capacity as
the president of such corporation and also in his individual capacity cannot escape
liability on the ground that he was a mere accommodation maker who had neither
borrowed nor received any money from holder, since an accommodation party is
always a surety and the term "surety" includes a "guarantor." 86

Footnotes
Footnote 84. J. Schnarr & Co. v Virginia-Carolina Chemical Corp., 118 Fla 258, 159 So
39; Citizen's Nat'l Bank v Florida Tie & Lumber Co., 81 Fla 889, 89 So 139.
Footnote 85. Citizen's Nat'l Bank v Florida Tie & Lumber Co., 81 Fla 889, 89 So 139.
In an action by payee-holder of a corporate note against the corporate officer who

indorsed it, the defendant's testimony that the loan, for which the note in suit was
executed, was exclusively the debt of the corporate maker and was to be repaid out of
corporate funds failed to rebut the inference that the defendant was an accommodation
indorser of the note who had bound himself to pay it according to its tenor at the time of
his indorsement. Bizzoco v Chinitz, 193 Conn 304, 476 A2d 572, 39 UCCRS 540.
A corporation which signed a promissory note as a comaker together with five

shareholders and their wives was the primary debtor on a note along with the individual
shareholders and their wives, rather than an accommodation party, because the note on its
face did not indicate that some signers were principals while others were sureties, and the
evidence showed that the corporation alone received the entire benefit from the note's
proceeds. Harrington v United States (DC Del) 605 F Supp 53, 85-1 USTC 9336, 55
AFTR 2d 85-769.
Annotation: Authority of officer or agent to bind corporation as guarantor or surety,

34 ALR2d 290.
Footnote 86. V. I. P. Commercial Contractors v Alkas (Tex Civ App San Antonio) 553
SW2d 656, holding that, under these circumstances, the defendant stood in the position of
a surety, even though he was primarily liable on the instrument, since his liability was
subject to no conditions precedent.
2. Determination of Accommodation Character [476-482]
477 Generally; admission of parol evidence
View Entire Section

In some cases, an examination of the instrument will not in itself disclose the existence of
an accommodation relationship. 87 This is the case when there are coparties, such as
comakers and nothing is added to the instrument to show that one of them is signing for
an accommodation. 88
Illustration: In an action by a bank against a former wife who, with her former
husband entered into a mortgage in regard to property of which she subsequently
became the sole owner, the defendant was an accommodation party where the
defendant's status was not disclosed by loan documents, where the plaintiff bank knew

of the long term separation and pending divorce of the couple, and initially looked to
the husband and ignored the wife for payments on the note, where the defendant took
no part in the negotiations prior to the execution of the note, where her participation in
earlier related loans was as a guarantor, and where she received no direct benefits from
the loan proceeds in that she did not write checks on the portion of the proceeds which
were deposited in a joint account with her former husband. 89
In such cases, parol evidence is admissible to determine the existence of that character.
90 Thus, parol evidence is admissible to show that a maker is an accommodation maker
and therefore may assert suretyship defenses. 91
Practice guide: The appellate court may remand the action to the trial court to admit
evidence to determine whether parties signed as accommodation comakers or had acted
in a representative capacity when their status is not apparent from the face of the
instrument and the reverse side bears some of their signatures as guarantors. 92
Footnotes
Where the blank signature on back of note did not indicate the capacity in which the
signer signed the instrument, (1) the signer was an indorser and not a maker, and (2)
since the signer's indorsement was clearly not in the instrument's chain of title, such
indorsement made the signer an accommodation indorser. King v Finnell (Okla) 603 P2d
754, 27 UCCRS 1048.
Footnote 89. Godfrey State Bank v Mundy (4th Dist) 90 Ill App 3d 142, 45 Ill Dec 549,
412 NE2d 1131, 30 UCCRS 1070.
Footnote 91. Cohen v Northside Bank & Trust Co., 207 Ga App 536, 428 SE2d 354, 93
Fulton County D R 241, clarified, reconsideration den (Ga App) 93 Fulton County D R
790.
Footnote 92. First City Bank v 740 Esplanade Ave. (La App 4th Cir) 611 So 2d 715, cert
den (La) 613 So 2d 979, subsequent app (La App 4th Cir) 665 So 2d 1190, cert den (La)
667 So 2d 1059.
478 Presumption of accommodation character
View Entire Section


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
guarantor with respect to the obligation of another party to the instrument. 93 This
provision establishes a presumption that an indorsement which shows that it was not
made for the purpose of transfer is an accommodation indorsement made for another
party. 94 A party challenging accommodation party status would have to rebut this
presumption by producing evidence that the signer was ,in fact, a direct beneficiary of the
value given for the instrument. 95
Except as otherwise provided, the obligation of an accommodation party to pay the

instrument is not affected by the fact that the person enforcing the obligation had notice
when the instrument was taken by that person that the accommodation party signed the
instrument for accommodation. 96
Footnotes
Footnote 94. Gavin v Hinrichs (Ala) 375 So 2d 1063, 27 UCCRS 750.
As to guarantors generally, see 487 et seq.
A woman who signed a promissory note and her pledged savings passbook as an
accommodation for her brother is liable to the payee of the note as an accommodation
maker, notwithstanding that as a condition for signing the note and pledging her
collateral, the plaintiff required her brother to obtain credit insurance for the six months
term of the note, the note was thereafter extended without notice to her, and her brother
died during the extended term, where the plaintiff voluntarily signed the note as maker,
without being deceived in any way as to its contents or legal effect, where in the note she
affirmatively agreed to continue use of her collateral in case of extension and
affirmatively agreed to extension or renewal of note without notice to her, and where she
did not require, as a condition for renewal of the note, credit insurance also being
extended or renewed. Vinick v Fourth Nat'l Bank (Okla) 531 P2d 327, 15 UCCRS 886.
Annotation: Guaranty of payment as covering principal debtor's liability as an

indorser on third person's note or other negotiable instrument, 85 ALR2d 1183.
Notes 41:115 et seq.; UCC Legal Forms 3d, Article 3Negotiable Instruments
3:122 et seq.
Guaranty of payment of instruments. 19 Am Jur Legal Forms 2d, Uniform


479 Question of fact
View Entire Section

Whether a person is an accommodation party is a question of fact. 97 The factual

inquiry is whether the individual acted as a surety in signing the instrument. 98
It is almost always the case that a comaker who signs with words of guaranty after the
signature is an accommodation party. 99 The same is true of an anomalous indorser. 1
In either case, a person taking the instrument is put on notice of the accommodation
status of the comaker or indorser. 2
The courts are inclined to recognize one as an accommodation maker on a note when:
(1) the party did not participate in negotiations for credit or subsequent modifications of
credit arrangements;
(2) the evidence shows that the creditor was aware the party was not the one seeking the
credit;
(3) the party is not the one to whom proceeds are credited; and
(4) the party has no interest in the purpose for which the proceeds are used. 3
Practice guide: Subsequent events do not change a party from an accommodation

party into a comaker, because once a signer's status has been established, it is not
subject to change. 4
Footnotes
621 NE2d 967, app den 154 Ill 2d 557, 197 Ill Dec 483, 631 NE2d 705; Campo v
Maloney, 122 NH 162, 442 A2d 997, 33 UCCRS 1712.

1994) and app den 155 Ill 2d 563, 198 Ill Dec 541, 633 NE2d 3.
480 Factors considered
View Entire Section

The intention of the parties is a significant element in determining whether a party is an

accommodation maker or a comaker. 5 The essential element that the party claiming
accommodation status must prove is that the party claimed to be accommodated received
the signature of the surety for the sole purpose of obtaining credit thereby, under an
agreement that the accommodated party is principally responsible for payment at
maturity, or that the instrument was executed for a limited purpose. 6
There is a slight variation among the jurisdictions regarding the factors used to determine
whether a signer on an instrument is an accommodation maker or a comaker. In some
jurisdictions, the factors are identified as follows:
(1) the party did not participate in negotiations for credit or subsequent modifications of
credit arrangements;
(2) the creditor was aware that party was not the one seeking the credit;
(3) the party is not the one to whom the proceeds were credited; and
(4) the party has no interest in the purpose for which the proceeds were used. 7
Illustration: When a corporation's officer agreed, at the lender's request, to cosign

the corporation's mortgage note, the officer did so as an accommodation party, and not
as a comaker. The officer did not personally receive any of the loan proceeds, and was
not involved in negotiating the loan. In addition, there is no evidence that the
corporation was a "paper corporation" through which the officer directly received the
benefit of the loan. Accordingly, the officer's obligation was discharged when the
payment period on the note was extended without her consent. 8
In other jurisdictions, the factors used to determine whether a party has signed a note in
an accommodation or principal maker status are:
(1) the location of the signature on the note;
(2) the language of the note;
(3) whether the maker received any loan proceeds; and
(4) the intent of the parties. 9

Caution: It is reversible error to limit a jury considering whether a party is an
accommodation party to a consideration of whether the party received "any direct
benefit," as the jury should consider the party's purpose in signing the note, the intent
of the other parties, whether the party took part in the negotiations leading to the
financing, the purpose of the loan, whether the accommodation party received any
benefit from the transaction, and whether the party's signature was necessary to secure
the loan. 10
Another factor determinative of a signing party's status is their purpose in executing the
instrument. 11
Footnotes
Footnote 5. Darien Bank v Miller, 208 Ga App 562, 431 SE2d 165, 93 Fulton County D
R 1797; Palmetto Leasing Co. v Chiles (2d Dist) 235 Ill App 3d 986, 176 Ill Dec 770,
602 NE2d 77, 19 UCCRS2d 487; General Motors Acceptance Corp. v Jackson (La App
4th Cir) 614 So 2d 302; Ashland State Bank v Elkhorn Racquetball, 246 Neb 411, 520
NW2d 189, 24 UCCRS2d 968; Branch Banking & Trust Co. v Thompson, 107 NC App
53, 418 SE2d 694, 18 UCCRS2d 506, review den 332 NC 482, 421 SE2d 350;
Commerce Union Bank v Davis (Tenn App) 581 SW2d 142, 26 UCCRS 971; FDIC v F
& A Equip. Leasing (Tex App Dallas) 854 SW2d 681 (decided under pre-1990 UCC);
Bixenstine v Palacios (Tex App Corpus Christi) 805 SW2d 889 (decided under pre-1990
UCC).
Footnote 6. Airstream v CIT Fin. Servs., 115 Idaho 569, 768 P2d 1302; Bixenstine v
Palacios (Tex App Corpus Christi) 805 SW2d 889 (decided under pre-1990 UCC).
A father who signed a consumer collateral-installment note as a comaker with his minor
stepson was an accommodation maker. Murphy v Bank of Dahlonega, 151 Ga App 264,
259 SE2d 670, 27 UCCRS 1046.
Conversely, when land was conveyed to the comakers of a note, the general conclusory
statement by one of them that he was acting primarily for the benefit of the other was
insufficient to show that he intended to act as an accommodation party. Florio v Cross
(3d Dept) 194 App Div 2d 136, 605 NYS2d 533, 23 UCCRS2d 1191.
Caution Where the instrument did not specify otherwise, the father who cosigned his
son's note on the line in the note's lower-right corner for the maker's signature was
liable as a maker, even though the father's signing was accommodation for the son.
Gennings v First Nat'l Bank (Wyo) 654 P2d 154.
1994) and app den 155 Ill 2d 563, 198 Ill Dec 541, 633 NE2d 3; Aurora Firefighter's
Credit Union v Harvey (2d Dist) 163 Ill App 3d 915, 114 Ill Dec 873, 516 NE2d 1028,
app den 119 Ill 2d 553, 119 Ill Dec 381, 522 NE2d 1240; Rahall v Tweel, 186 W Va 136,
411 SE2d 461, 16 UCCRS2d 1103.

1994) and app den 155 Ill 2d 563, 198 Ill Dec 541, 633 NE2d 3 (noting that although
former Article 3 applies to this case and not Revised Article 3, the facts fall squarely
within the illustration in Official Comment 1 to 3-419 [1990 Rev]).
Footnote 9. In re Baker & Getty Financial Services, Inc. (CA6 Ohio) 974 F2d 712, 27
CBC2d 1112, CCH Bankr L Rptr 74813, 20 UCCRS2d 1008, later proceeding (CA6
Ohio) 106 F3d 1255, 30 BCD 448, CCH Bankr L Rptr 77285, reh den (CA6) 1997 US
App LEXIS 4728, holding that the co-founder of a stock brokerage and financial services
firm was the principal maker of notes, as opposed to an accommodation maker, where his
signature appeared below the comaker's and above the line reading "Borrower's
Signature," where the place for the comaker to sign as accommodation party was not
used, where there was no language of limitation, where the note stated that the cofounder
was to receive the proceeds along with the comaker, where the cofounder pledged
collateral for the loan, and where after bonds purchased with the loan were sold, the
proceeds of the sale were deposited in the cofounder's account.
Footnote 11. Bank South v Jones, 185 Ga App 125, 364 SE2d 281, 5 UCCRS2d 644.
Where the buyer of lumber paid the seller by a promissory note made payable to the
order of the seller's bank and the seller indorsed the note to obtain cash from the bank, the
seller became liable on the note as an indorser when the buyer defaulted on the note, but
since the seller indorsed the note in order to negotiate it with its bank and not to lend its
name to the buyer, the seller was not an accommodation party. N. J. Gendron Lumber
Co. v Great Northern Homes, Inc., 8 Mass App 411, 395 NE2d 457, 27 UCCRS 1042.
A person is not an accommodation party when he accommodates merely by writing a

check as a means of transmitting payment for another person. Palmetto Leasing Co. v
Chiles (2d Dist) 235 Ill App 3d 986, 176 Ill Dec 770, 602 NE2d 77, 19 UCCRS2d 487.
481 Direct benefits test
View Entire Section

One factor to consider in determining accommodation party status is whether the party
claiming to be a surety received a direct benefit from the execution of the instrument. 12
Illustration: A signer receives a benefit from a loan made to a hotel to enable it to

keep running when the signer has an option to acquire an ownership interest in the
hotel and would receive a commission if he secured a buyer for the hotel. 13
If the party received no direct benefit, he or she is likely to be regarded as an

accommodation party. 14 Therefore, the fact that a comaker received none of the
proceeds of the loan was some evidence that he was an accommodation maker. 15
The fact that the signer receives some benefit from the transaction does not disqualify
him from being an accommodation party, but he is not such a party if he receives the
primary benefit of the transaction. 16 The receipt of substantial benefit and
consideration by the indorser of a promissory note is sufficient to preclude the indorser's
alleged status as an accommodation party. 17 A person receiving the primary benefit
from the transaction is not an accommodation party, because such receipt of benefits is
inconsistent with the concept of benefiting another party to the paper. 18
The benefit that may bar a party from claiming accommodation status may be an indirect
benefit, as when the business owned by the signer receives a direct benefit. 19 Thus, a
stockholder or director who personally indorses his or her corporation's note, thereby
securing a loan for such corporation, derives a substantial personal benefit and good
consideration therefor and cannot claim to be an accommodation indorser or maker. 20
Practice guide: By virtue of pre-Code law that continues under the Uniform
Commercial Code, an accommodation maker has a right of contribution from
co-accommodation makers. 21
Footnotes
Footnote 12. ABB Vecto Gray v First Nat'l Bank (In re Robinson Bros. Drilling) (CA10
Okla) 9 F3d 871, 24 BCD 1490, 30 CBC2d 134, CCH Bankr L Rptr 75513, 22
UCCRS2d 291.
Footnote 14. Bank South v Jones, 185 Ga App 125, 364 SE2d 281, 5 UCCRS2d 644;
Farmers State Bank v Cooper, 227 Kan 547, 608 P2d 929, 28 UCCRS 733; General
Motors Acceptance Corp. v Jackson (La App 4th Cir) 614 So 2d 302; FDIC v F & A
Equip. Leasing (Tex App Dallas) 854 SW2d 681 (decided under pre-1990 version);
Hendel v Medley, 66 Wash App 896, 833 P2d 448, 18 UCCRS2d 1180.
Footnote 15. Dalton v George B. Hatley Co. (Tex App Austin) 634 SW2d 374, 34
UCCRS 213.
Under this test, the president of the debtor corporation who, together with the
corporation, executed a note payable to the creditor in return for the creditor's dismissing
a lawsuit then pending against both parties was not an accommodation party since the
trustee in bankruptcy failed to show that the president lent his name to the note without
receiving a direct personal benefit in return therefor. ABB Vecto Gray v First Nat'l Bank
(In re Robinson Bros. Drilling) (CA10 Okla) 9 F3d 871, 24 BCD 1490, 30 CBC2d 134,
CCH Bankr L Rptr 75513, 22 UCCRS2d 291.
18 UCCRS2d 506, review den 332 NC 482, 421 SE2d 350.
Footnote 17. Wortham v Lake Jackson State Bank (Tex Civ App Houston (14th Dist))
435 SW2d 612, writ ref n r e (Mar 12, 1969).
18 UCCRS2d 506, review den 332 NC 482, 421 SE2d 350.

Footnote 20. Federal Deposit Ins. Corp. v Blanton (CA5 Tex) 918 F2d 524, 13
UCCRS2d 626, reh den (CA5 Tex) 923 F2d 851; Jones v San Angelo Nat'l Bank (Tex
Civ App Beaumont) 518 SW2d 622, 16 UCCRS 787, writ ref n r e (Jun 4, 1975).
Footnote 21. Landmark KCI Bank v Marshall (Mo App) 786 SW2d 132.
A maker of a promissory note was entitled to a judgment for contribution from a comaker
of the note where the maker had satisfied the obligation under the note, despite the
comaker's claim that he signed the note as an accommodation party; the note indicated
that the defendant was a comaker; nothing on the note itself demonstrated that the
defendant was accommodating the maker in order for the maker to receive the proceeds
on the note; moreover it appeared that the defendant received the benefit of the proceeds
acquired as a result of the note since those proceeds were used for the parties' jointly
operated business. Glimcher v Reinhorn (Franklin Co) 68 Ohio App 3d 131, 587 NE2d
462, 18 UCCRS2d 511, dismd, motion overr 62 Ohio St 3d 1475, 581 NE2d 1097.
482 --Direct benefit and indirect benefit distinguished
View Entire Section

The receipt of value in exchange for the signing of an instrument does not automatically
negate a party's status as an accommodation maker. 22 The Uniform Commercial Code
section dealing with instruments signed for accommodation distinguishes between direct
and indirect benefit. 23 Under both revised Article 3 and the prior Article 3 an
accommodation party was one who lent his name to another party on the instrument, for a
fee or otherwise, without being the direct beneficiary of the value given for the
instrument. 24
Illustration: If X cosigns a note of Corporation that is given for a loan to

Corporation, X is an accommodation party if no part of the loan was paid to X or for
X's direct benefit. This result is true, even though X may receive indirect benefit from
the loan because X is employed by Corporation or is a stockholder of Corporation, or
even if X is the sole stockholder so long as Corporation and X are recognized as
separate entities. 25
Footnotes

Footnote 24. ABB Vecto Gray v First Nat'l Bank (In re Robinson Bros. Drilling) (CA10
Okla) 9 F3d 871, 24 BCD 1490, 30 CBC2d 134, CCH Bankr L Rptr 75513, 22
UCCRS2d 291.
3. Relationship And Liabilities Between Accommodation Party And Accommodated Party

[483-486]
483 Liability of accommodated party to accommodation party
View Entire Section

An accommodation party who pays the instrument is entitled to reimbursement from the
accommodated party and is entitled to enforce the instrument against the accommodated
party. 26 The rationale behind this rule is that an accommodation party is a surety and
accommodated party is a principal, and if the surety is forced to pay the instrument, then
the surety has a right of recourse against the principle. 27 Payment of the obligation by
an accommodation party is a condition precedent to the right of recovery by way of
indemnification from the accommodated party. 28 Thus, where securities, pledged as
collateral to secure a loan to the debtor, were not applied on a specified date to discharge
the debtor's obligation, no payment of the obligation occurred on such date, and the
pledgor sustained no loss which would provide the accommodation party a right of
recourse on the instrument against party accommodated. 29 Similarly, there was no
right to indemnification where the original loan was made directly to the sole
shareholders of a corporation individually, and not to the corporation, the entire amount
of the loan was received by them individually and then transferred to the corporation, and
the corporation was not even a party to loan, the individual shareholder was not an
accommodation party and was not entitled to recover, as such, from the corporation. 30
It is immaterial whether the payment was made voluntarily or under threat of being sued.
31 If the instrument was secured by collateral, an accommodation party who pays the
instrument is subrogated to the rights of the creditor in such collateral. 32 Thus,
accommodation makers have a right of recourse against the other parties to the
instrument and the collateral that is pledged as security. 33
Illustration: The plaintiff was an accommodation party on replacement notes and

could bring suit against the maker, where the plaintiff was a comaker on replacement
notes to the bank, although she had not been on the original notes, and received no
consideration for accommodating the maker, and, after paying off the notes to the bank
and receiving assignment of the payee's rights, she brought an action against the maker.
34 In occasional cases, the accommodation party might pay the instrument, even
though the accommodated party had a defense to its obligation that was available to the
accommodation party. 35 In such cases, the accommodation party's right to
reimbursement may conflict with the accommodated party's right to raise its defense.
36 If the accommodation party pays the instrument without being aware of the
defense, then the accommodation party should be entitled to reimbursement. 37 If the
accommodation party paid the instrument with knowledge of the defense, then to the
extent of the defense reimbursement ordinarily would not be justified, but under some
circumstances reimbursement may be justified depending upon the facts of the case. 38
The resolution of this conflict is left to the general law of suretyship. 39
Illustration: In an action for contribution by one indorser of a note against the

second indorser for the second indorser's virile share of the amount paid by the plaintiff
on the note as surety for the note's maker, the evidence showed that the plaintiff and
defendant had signed the note as accommodation indorsers; as accommodation
indorsers, the plaintiff and defendant were cosureties for the maker, and thus,
suretyship rules applied to determine their respective rights and liabilities; under
suretyship rules, contribution would be permitted, even if the debt was not paid in
response to a lawsuit, provided that the cosureties had knowledge that the debt was due
or that they had consented to its payment; and the plaintiff, as solidary surety for the
note's maker, was not required to pay the debt on the note in consequence of a lawsuit
in order to preserve his right of contribution against the defendant. 40
Practice guide: Although an accommodation maker may, on paying the note,

recover from the party accommodated under UCC 3-415(5), this is not his sole
recourse, even where a judgment has intervened to extinguish the note by merger. In
such a case, the accommodation maker, as the assignee of the judgment creditor, can
enforce the judgment against the party accommodated. 41
Footnotes
Forms: Complaint, petition, or declarationBy maker of accommodation note after

paymentAgainst payee. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 79.
Complaint, petition, or declarationIn state courtBy accommodation party who paid

noteAgainst accommodated party. 6A Am Jur Pl & Pr Forms (Rev), Commercial
3d, Article 3Negotiable Instruments 3:238, 3:239.
Complaint, petition, or declarationBy accommodation acceptor for indemnification

from drawer. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
Complaint in federal courtDiversity of citizenshipBy maker of accommodation

noteTo recover from accommodated payee who negotiated note. 6A Am Jur Pl & Pr
Footnote 27. Caito v United California Bank, 20 Cal 3d 694, 144 Cal Rptr 751, 576 P2d
466; Home Center Supply, Inc. v Certainteed Corp., 59 Md App 495, 476 A2d 724, 38
UCCRS 1300.
Footnote 28. Savings Bank of Manchester v Kane, 35 Conn Supp 82, 396 A2d 952; New
England Merchants Nat'l Bank v Latshaw, 12 Mass App 150, 421 NE2d 1264;
Williamson Leasing Co. v Kephart (Tenn App) 627 SW2d 683; Kennedy v Bank of
Ephraim (Utah) 594 P2d 881, 26 UCCRS 558.
Where the plaintiff cosigned a note with the defendant, but did so as an accommodation
to the defendant, the proceeds of the note being applied to the balance due the plaintiff on
a construction contract with the defendant, and the plaintiff was compelled to pay the
principal and accrued interest to the holder of the note when the defendant defaulted, the
plaintiff was an accommodation party with a right of recourse against the party
accommodated, and his cause of action against the defendant was not one for collection
of compensation for the performance of the original contract, which was barred because
the plaintiff was an unregistered contractor, but was an action based on a new right which
accrued when the plaintiff paid the holder of the note. Ilg v Andrews, 10 Wash App 936,
520 P2d 1385, 14 UCCRS 1186.
Footnote 29. New England Merchants Nat'l Bank v Latshaw, 12 Mass App 150, 421
NE2d 1264.
Footnote 30. Jones v San Angelo Nat'l Bank (Tex Civ App Beaumont) 518 SW2d 622, 16
UCCRS 787, writ ref n r e (Jun 4, 1975).
Footnote 32. 6A Anderson, Uniform Commercial Code 3d [Rev] 3-419:8; Official

Footnote 33. Executive Bank of Ft. Lauderdale v Tighe (2d Dept) 66 App Div 2d 70,
411 NYS2d 939, 25 UCCRS 786; Payne v Payne, 219 Va 12, 245 SE2d 133, 24 UCCRS
387.
Footnote 34. Polo v Correa (Fla App D3) 645 So 2d 144, 19 FLW D2399, 25 UCCRS2d
494.
Footnote 40. Chaisson v Daigle (La App 3d Cir) 499 So 2d 675, 3 UCCRS2d 1033.
Footnote 41. Anna Nat'l Bank v Wingate (5th Dist) 63 Ill App 3d 676, 21 Ill Dec 84, 381
NE2d 19, 25 UCCRS 200.
484 Liability of accommodation party to accommodated party

View Entire Section
An accommodation party's liability to a principal does not affect his relationship with the
party accommodated. 42 Thus, an accommodated party who pays the instrument has no
right of recourse against, and is not entitled to contribution from, an accommodation
party. 43
Summary judgment may not be granted the payee of a promissory note against defendant
makers where defendants allege that they are accommodation makers and that the payee
is the accommodated party. 44 The prohibition against an accommodated party who has
paid the instrument from bringing an action for contribution against an accommodation
party, does not apply if the purported accommodation party has merely signed a separate
guaranty agreement. 45 This result occurs, because unless one signs the instrument, one
does not qualify as an "accommodation party" within the meaning of the Code. 46
Nonetheless, even in this situation, the common law would preclude the guarantor from
being sued for contribution. 47
Practice guide: The holder's knowledge that a party is an accommodation party does
not affect the latter's liability, but if the holder does not have the rights of a holder in
due course the accommodation party may raise suretyship defenses against the holder.
48
Footnotes
Footnote 42. Buchta v Seng (Ind App) 444 NE2d 1250.
In suit by a payee of corporate notes against the corporate defendant and the
accommodation indorser of notes, the accommodation indorser's contention, if sustained,
that he indorsed the note to accommodate payee in payee's efforts to discount the
instruments would render accommodation indorser not liable to payee as the party
accommodated. Mormile Bros., Inc. v Prairie Constr. Corp. (2d Dept) 67 App Div 2d
700, 412 NYS2d 405.
In an action by a divorced wife against her former husband for his contributive share of
payments made by the wife to satisfy two promissory notes signed jointly by the wife and
husband, where clear and convincing evidence showed that the proceeds of the notes had
been used for purposes of a business owned solely by the wife and that the wife had
considered the notes to be business obligations, the trial justice properly concluded that
the wife was the real maker of the notes, that the husband was an accommodation party
who was not liable to the party accommodated since he had not received any benefit from
the execution of the notes, and that the wife was therefore not entitled to prevail in the
action. Kerney v Kerney, 120 RI 209, 386 A2d 1100, 24 UCCRS 384.
In a suit seeking reimbursement for one-half of the amount paid to the bank by a comaker
when the promissory notes became due wherein the maker claimed to have been only an

accommodation party, and thus, not liable to the comaker, the trial court erred by giving
an instruction which restricted the jury's consideration of the maker's status as an
accommodation party solely to whether the maker received any direct remuneration for
signing the instrument, and compounded the error with an accompanying special
interrogatory which focused exclusively on that factor; the jury was not instructed to
consider such other factors as the intention of the parties, the purpose of the loan, or
whether the bank would have given the comaker a loan without the maker's signature.
Rahall v Tweel, 186 W Va 136, 411 SE2d 461, 16 UCCRS2d 1103.
As to the factors considered in determining whether a party is an accommodation party

and the direct benefit test, see 481.
Forms: Complaint, petition, or declarationIn state courtBy accommodation party

who paid noteAgainst accommodated party. 6A Am Jur Pl & Pr Forms (Rev),
Footnote 44. Gehrig v Ray (Fla App D1) 332 So 2d 703, 19 UCCRS 886.
But see Community Nat'l Bank v Dawes, 369 Mass 550, 340 NE2d 877, 18 UCCRS 723
(although an accommodation party is not liable to the party accommodated, in the
absence of any specific facts relating to dealings between the plaintiff bank and the
defendant who had signed on the back of a note given to the bank by a corporation, the
defendant's claim that he had signed the note as an accommodation to the bank did not
preclude the granting of summary judgment for the plaintiff).
Footnote 45. Johnson v Guerra (Va Cir Ct) 26 UCCRS2d 178.
Footnote 48. Cohen v Northside Bank & Trust Co., 207 Ga App 536, 428 SE2d 354, 93
Fulton County D R 241, clarified, reconsideration den (Ga App) 93 Fulton County D R
790.
485 Subrogation of accommodation party
View Entire Section

An accommodation party who pays an instrument is entitled to reimbursement from the

accommodated party and is entitled to enforce the instrument against the accommodated
party. 49 This right of recourse would, by traditional terminology, be called
subrogation, a conclusion that is confirmed by the statement of the previous Official
Comment to the Uniform Commercial Code that "an accommodation party who pays is
subrogated to the rights of the holder paid." 50
Decisions under the Code declare, in general terms, that the accommodation party on
making payment of the paper is subrogated to the rights of the holder who has been paid.
51
Practice guide: The subrogated accommodation party may enforce his subrogation
rights by suit, even though he does not have possession of the paper. 52
In view of the Code's preservation of principles of equity, the pre-Code law as to

subrogation continues under the Code, and determines the scope of the right of recourse.
53
The accommodation party has no cause of action against the accommodated party until
the accommodation party has paid the holder, and the mere fact that a judgment has been
entered against the accommodation party for the amount of the paper is not in itself
"payment" that entitles the accommodation party to proceed against the accommodated
party. 54 When the payee recovers a judgment against the accommodation maker and
the accommodated indorser, it is premature to enter a judgment in favor of the maker
against the indorser before the maker has paid the payee's judgment, and the court should
enter an order that upon the maker's paying the payee's judgment, the maker would be
subrogated to the rights of the payee in the judgment. 55
Footnotes
Footnote 49. 483, discussing UCC 3-419(e) [ 1990 Rev].
Footnote 50. Official Comment 5 to UCC 3-419 [1990 Rev], stating that subsection (e)
restates former 3-415(5).
Footnote 51. Lindsey v Zeller, 10 Kan App 2d 4, 690 P2d 394, 39 UCCRS 1367; Bank of
Jena v Clark (La App 3d Cir) 452 So 2d 428, cert den (La) 458 So 2d 476; Landmark
KCI Bank v Marshall (Mo App) 786 SW2d 132; Pearis v Goldschmidt (3d Dept) 37 App
Div 2d 1001, 325 NYS2d 506; Seale v Hudgens (Tex Civ App San Antonio) 538 SW2d
459, writ dism w o j (Oct 27, 1976).
Footnote 52. Warren v Washington Trust Bank, 19 Wash App 348, 575 P2d 1077, 23
UCCRS 966, mod on other grounds 92 Wash 2d 381, 598 P2d 701.
Footnote 53. Bank South v Jones, 185 Ga App 125, 364 SE2d 281, 5 UCCRS2d 644; Le
Roy v Marquette Nat'l Bank (Minn) 277 NW2d 351, 25 UCCRS 1390.
Footnote 54. First American Bank & Trust Co. v Pullin (Okla App) 720 P2d 744, 1
UCCRS2d 1593.
Footnote 55. First American Bank & Trust Co. v Pullin (Okla App) 720 P2d 744, 1
UCCRS2d 1593.
486 Accommodation between spouses

View Entire Section
Where a loan is obtained by husband and wife to assist the purposes of one spouse, the
other spouse is deemed an accommodation maker. 56
When the wife of a partner signs as comaker in order to enable the partnership to obtain a
loan from the bank, the wife is the accommodation party as to both partners and is not
merely such a party as to her husband. 57 When the wives of partners sign as comakers
to enable the partnership to obtain a business loan, each wife is an accommodation party
as to each partner, without regard to whether a wife had the subjective intent to
accommodate only her husband. 58
When a husband and wife sign a note to purchase property and the spouses directly
benefit by the use and possession of the property, neither spouse is an accommodation
party and the husband and wife are jointly and severally liable as comakers. 59 A
married woman who signs a note as a comaker with her husband is personally liable
thereon both during the marriage and after a legal separation. 60 The fact that the
husband signs as accommodation maker does not prevent the note from being a
community liability. 61
Footnotes
Footnote 56. Seaboard Finance Co. v Dorman, 4 Conn Cir 154, 227 A2d 441, 4 UCCRS
86; Fithian v Jamar, 286 Md 161, 410 A2d 569, 27 UCCRS 481; El-Ce Storms Trust v
Svetahor, 223 Mont 113, 724 P2d 704, 2 UCCRS2d 1593.
Where the wife signed a promissory note on behalf of her new business, which she solely
owned and operated, and the husband also signed in an individual capacity as required by
the lender bank, although the exact status of husband as signer was not clear from the
face of the instrument, the evidence established that the husband received no loan
proceeds, and the intent of the parties as determined by the court necessitated the court's
holding that husband was an accommodation maker, and thus, secondarily liable as a
surety on the note. Bank South v Jones, 185 Ga App 125, 364 SE2d 281, 5 UCCRS2d
644.
The wife was neither a comaker nor an accommodation party on a promissory note she
signed in order to keep husband's business open, and her signature on the note could not
be enforced against her as either as comaker or an accommodation party, though the court
would probably have had to hold that she was liable as an accommodation party if the
only facts presented were evidence showing that she had no interest in the business for
which she was signing, did not wish to sign, was pressured into signing the promissory
note without any indication that her credit was needed to approve the line, and only
signed after an inventory financier's representative told her that her signature was not
important, where that evidence was coupled with evidence that the financier acted under
a blanket, illegal, and unreasonable policy of requiring spousal signatures. Transamerica
Commercial Fin. Corp. v Naef (Wyo) 842 P2d 539, 21 UCCRS2d 704.
Footnote 57. Fithian v Jamar, 286 Md 161, 410 A2d 569, 27 UCCRS 481.
Footnote 58. Fithian v Jamar, 286 Md 161, 410 A2d 569, 27 UCCRS 481.
Footnote 59. In re Estate of Wray v Wray (Mo App) 842 SW2d 211.
Footnote 60. Friendly Loans, Inc. v Robinson (La App 1st Cir) 268 So 2d 710.
Footnote 61. Malotte v Gorton, 75 Wash 2d 306, 450 P2d 820.
4. Guarantor [487-490]
487 Generally
View Entire Section

A guaranty is a collateral promise to enter for the debt or obligation of another, and,
absent language in the instrument to the contrary, a guarantor's liability is usually equal
to that of the principal debtor. 62 Thus, when the instrument states that if it is not
paid, a named party will supply security for the payment of the instrument, that party is a
guarantor. 63
Illustration: Where the husband signed a corporate note in his representative

capacity as the corporation's president, and the husband and wife, at the time the
corporate note was executed, executed a "Guarantee of Payment" of the corporate loan
and a deed of trust to secure the obligation created by the corporate note, the husband
and wife were accommodation guarantors of the corporate note, and the lender could
properly proceed against them and the corporation itself. 64
A guaranty in a separate writing is subject to Article 3 when it:
Is executed contemporaneously with a negotiable instrument
Is affixed to such instrument
Expressly guarantees the obligation of the instrument. 65
The finding that a party is liable for payment of a note in the capacity as maker is not
inconsistent with a finding that he is also a guarantor of the note. 66
Practice guide: In an action between comakers, parol evidence is admissible to show

that it was intended that one of the parties was to be a guarantor. 67 Article 3 does not
govern guaranties that are not ancillary to negotiable instruments; guaranties alone are
not negotiable instruments, because they are merely conditional promises to pay a sum
certain. 68 Thus, separate continuing guaranties are not instruments for the purpose of
the Code. 69

A guarantor of a promissory note is considered an accommodation party and, as such, is
entitled to notification of a sale of collateral. 70 The legislature's adoption of the revised
Code eliminates any suggestion that a guarantor is not an accommodation party or has
any obligation distinct from that of an accommodation party. 71
Footnotes
Footnote 62. First Interstate Bank v Colcott Partners IV (Colo App) 833 P2d 876, holding
that the fact that the principal debtor could not be sued for a deficiency judgment under a
non-recourse note limiting the plaintiff's remedy, in the event of default, to foreclosure
against property only, did not mean that the principal debtor did not incur indebtedness
for which the guarantor was liable in the event of default, as the unconditional nature of a
guaranty, when considered with the guaranty's language providing that it would be
enforceable despite any exculpation from liability granted to the borrower, clearly
demonstrated that the parties expressly contemplated greater liability on the part of the
guarantor in circumstances under which the principal debtor could not be held liable for a
deficiency judgment.
Notes 41:115.
GuarantyPayment of promissory noteShort form. 3B Am Jur Legal Forms 2d, Bills

and Notes 41:116.
GuarantyPayment of promissory noteBy corporation. 3B Am Jur Legal Forms 2d,

Guaranty agreements; General Forms. 9A Am Jur Legal Forms 2d, Guaranty

132:31-132:95.
Guaranty of payment of instrument. 19 Am Jur Legal Forms 2d, Uniform Commercial

Guaranty of payment of instrumentLong form. 19 Am Jur Legal Forms 2d, Uniform

Guaranty of payment and indorsement of instrument. 19 Am Jur Legal Forms 2d,

Uniform Commercial Code: Article 3 Negotiable Instruments 253:2475.
Footnote 63. Johnson v Schaub (Alaska) 867 P2d 812.
As to 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, see
477, discussing UCC , see 3-419(c) [, see 1990 Rev].
Annotation: Construction and effect of UCC 3-416 governing guaranty contracts,

10 ALR4th 897.

Footnote 64. Pitrolo v Community Bank & Trust, N.A., 171 W Va 317, 298 SE2d 853,
35 UCCRS 192.
Footnote 65. Gunter v True, 203 Ga App 330, 416 SE2d 768, 103-45 Fulton County D R
19, 18 UCCRS2d 247, cert den (Ga) 1992 Ga LEXIS 449 (where the guaranty was
identified as page four of a four-page promissory note, the obligation of the guarantors
was governed by the Uniform Commercial Code and they were not released from liability
by the creditor's failure to bring suit pursuant to a local exoneration statute applicable to
guarantors generally).
Where guarantors of a corporate note signed a separate guaranty agreement, but did not
sign the note itself as guarantors, the guarantors' liability was controlled by general
principles of contract and guaranty law. Simpson v Milne (Colo App) 677 P2d 365, 36
UCCRS 1262.
Footnote 66. Green Acres Enters. v Freeman (Mo App) 876 SW2d 636.
Footnote 67. Bank of Ravenswood v Polan (1st Dist) 256 Ill App 3d 470, 194 Ill Dec
697, 628 NE2d 194, reh den (Dec 7, 1993) and app den 155 Ill 2d 561, 198 Ill Dec 539,
633 NE2d 1.
Footnote 68. Fidelity Nat'l Bank v Reid, 180 Ga App 428, 348 SE2d 913, 2 UCCRS2d
553; Cortez v National Bank of Commerce (Tex Civ App Corpus Christi) 578 SW2d 476,
writ ref n r e (Jun 27, 1979).
Footnote 69. Gebrueder Heidemann, K.G. v A.M.R. Corp., 107 Idaho 275, 688 P2d 1180,
38 UCCRS 259; Dominion Bank of Middle Tenn. v Crane (Tenn App) 843 SW2d 14, 20
UCCRS2d 210.
Footnote 70. Fiatallis N. Am. v Hill (Me) 650 A2d 222, 27 UCCRS2d 663 (decided
under pre-1990 version).
Where the accommodation party is a guarantor he or she is liable in that capacity.

National Bank of North America v Around The Clock Truck Service (NY Sup) 5 UCCRS
866.
Footnote 71. Fiatallis N. Am. v Hill (Me) 650 A2d 222, 27 UCCRS2d 663 (holding that
the trial court did not err in determining that the present guarantor was a debtor to whom
notice of the sale of collateral was required as a precedent to the creditor's recovering
from him for the deficiency remaining due on the promissory note).
488 Guaranty agreements
View Entire Section

The terms of a guaranty agreement must be strictly construed. 72

Illustration: Summary judgment was properly granted to the bank in a suit against
the guarantor of a note where the guaranty agreement specifically stated that the
guarantor guaranteed the payment of the initial loan and "all renewals or extensions
thereof," and that a change in the status of the debtor by "merger, consolidation or
otherwise" did not alter the guarantor's liability. The loan secured by the note was
originally made to a partnership, but the partnership was later incorporated. The
guarantor signed the original note as a partner, and signed the renewal as a corporate
officer. The guarantor was liable on the original loan because partners are personally
liable for partnership debts; this liability existed even without the guaranty agreement.
The only alteration of the agreement was made by the guarantor himself, who signed
the renewal note in his corporate capacity. It was undisputed that the renewal of the
loan in the name of the corporation rather than the partnership was merely a
replacement of the original note for which the guarantor was responsible. The
guaranty agreement was clear and unambiguous: a strict construction of the guaranty
agreement established the guarantor's liability as a matter of law. 73
A guaranty that is a separate document is not considered a negotiable instrument and

does not fall within the scope of the Uniform Commercial Code. 74 Therefore, general
contract law applies, rather than the terms of the Code. 75
Illustration: Where a guaranty was not incorporated within the body of a negotiable
promissory note and reached beyond the scope of the underlying note, the guaranty
was a separate agreement which did not fall within the scope of former Chapter 3 of
the Code. 76
Footnotes
Footnote 72. Vastine v Bank of Dallas (Tex) 808 SW2d 463, rehg of writ of error Rule 90
filed (May 7, 1991); Chambers v NCNB Texas Nat'l Bank (Tex App Houston (14th
Dist)) 841 SW2d 132 (decided under pre-1990 UCC); First Interstate Bank, N.A. v
Turner (Tex App Texarkana) 791 SW2d 179, writ den (Nov 7, 1990) (decided under
pre-1990 UCC).
Where the guarantee signed by the guarantors includes the following language: "This
guarantee shall be a continuing guarantee, and the liability of the guarantors hereunder
shall in no way be affected, modified or diminished . . . by reason of any substitution or
release of security, whether or not notice thereof is given to the guarantors," the language
of the guarantee is clear and unequivocal. Lawyers Title Ins. Corp. v Northeast Texas
Dev. Co. (Tex App Tyler) 635 SW2d 897, 34 UCCRS 604, writ ref n r e (Feb 9, 1983)
and reh overr (Mar 30, 1983) (holding that the liability of the guarantors on the note was
not affected, modified, or diminished when the deed of trust was released).
Annotation: Creditor's duty of disclosure to surety or guarantor after inception of

suretyship or guaranty, 63 ALR4th 678.
Construction and effect of UCC 3-416 governing guaranty contracts, 10 ALR4th

897.
Footnote 73. Chambers v NCNB Texas Nat'l Bank (Tex App Houston (14th Dist)) 841
SW2d 132.
Footnote 74. Federal Deposit Ins. Corp. v Nobles (CA5 Tex) 901 F2d 477, 11 UCCRS2d
893; Transamerica Commercial Fin. Corp. v Naef (Wyo) 842 P2d 539, 21 UCCRS2d
704.
Footnote 75. Federal Deposit Ins. Corp. v Nobles (CA5 Tex) 901 F2d 477, 11 UCCRS2d
893.
Footnote 76. Uniwest Mortg. Co. v Dadecor Condominiums, Inc. (CA5 Tex) 877 F2d
431, 9 UCCRS2d 577, reh den (CA5) 1989 US App LEXIS 13178.
489 Liability of guarantor
View Entire Section

A guarantor is as primarily liable as a surety 77 to the holder. 78 It is immaterial that

as between the maker and the guarantor the latter is merely an accommodation party. 79
Practice guide: In the usual case, the primary party will make payment of the paper,
but payment is not essential and does not preclude the possibility of an accommodation
indorser guaranteeing payment. 80
Observation: Under former UCC 3-416(1), the payee of a guaranteed note was not
required to proceed against the maker of the note before bringing action against the
guarantor. 81 The holder could sue the surety without first making a demand for
payment against the principal obligor. 82
The liability of a person who signs as a guarantor of a promissory note in existence on

the date of such person's notice to the payee of termination of his contract of guarantee is
not affected by that termination where the clear and unambiguous terms of the guarantee
agreement relieved the guarantor only of liabilities incurred after such a termination. 83
Extensions of time for repayment given the payor by the payee, also expressly
contemplated by the agreement, are similarly ineffectual to absolve the guarantors of
liability. 84 Thus, in an action brought by a bank, as holder of a promissory note,
against the corporate borrower and its guarantors, the liability of the corporation's
president as guarantor of the note in existence on the date of his notice to the payee of
termination of his contract of guarantee was not affected by that termination. 85
Particular jurisdictions may impose special requirements for guaranteeing a debt

obligation 86
Footnotes
Footnote 77. Commerce Union Bank v Burger-In-A-Pouch, Inc. (Tenn) 657 SW2d 88, 37
UCCRS 192.

Footnote 78. Whitney Nat'l Bank v Derbes (La App 4th Cir) 436 So 2d 1185, cert den
(La) 441 So 2d 1220 and cert den 466 US 938, 80 L Ed 2d 460, 104 S Ct 1912 and
(criticized on other grounds by First Acadiana Bank v Bieber (La App 3d Cir) 562 So 2d
1025).
Footnote 79. Whitney Nat'l Bank v Derbes (La App 4th Cir) 436 So 2d 1185, cert den
(La) 441 So 2d 1220 and cert den 466 US 938, 80 L Ed 2d 460, 104 S Ct 1912 and
(criticized by on other grounds First Acadiana Bank v Bieber (La App 3d Cir) 562 So 2d
1025).
Footnote 80. Jamaica Tobacco & Sales Corp. v Ortner, 70 Misc 2d 388, 333 NYS2d 669,
11 UCCRS 100.
Footnote 81. Yarbrough v Magbee Bros. Lumber & Supply Co., 189 Ga App 299, 375
SE2d 471; Sadler v Kay, 120 Ga App 758, 172 SE2d 202, 7 UCCRS 322; First Nat'l
Bank v Barengo, 91 Nev 396, 536 P2d 487, 17 UCCRS 178; Brown Univ. v Laudati, 113
RI 299, 320 A2d 609, 14 UCCRS 1397.
Footnote 82. Gemmer v Anthony Wayne Bank (Ind App) 391 NE2d 1185, 27 UCCRS
168, reh den 181 Ind App 379, 393 NE2d 784, 27 UCCRS 171.
Footnote 83. Broward Bank v Southeastern X-Ray Corp. (Fla App D4) 463 So 2d 440, 10
FLW 326.
FLW 326.
FLW 326 (holding further that utilizing the device of a renewal promissory note simply
to evidence such an extension of time does not change the result).
Forms: Effect of extension of due date of note without approval. 9A Am Jur Legal
Forms 2d, Guaranty 132:264.
Footnote 86. Yeomans v Coleman, Meadows, Pate Drug Co., 167 Ga App 646, 307 SE2d
121, 37 UCCRS 496 (under Georgia law, one does not guarantee a debt obligation
merely by executing a note, but rather gives such a guarantee by signing, along with
words of guaranty, an instrument executed by or for the principal maker of the
instrument).
490 Guarantor of collection distinguished
View Entire Section

The Uniform Commercial Code contemplates two kinds of guarantors, namely, a

guarantor of payment and a guarantor of collectibility. A guarantor of payment engages
that if instrument is not paid when due, he will pay it according to its tenor without resort
by holder to any other party, with the result that a guarantor of payment, like a maker, is
primarily liable on the instrument. 87 A guarantor of collectibility is secondarily liable
on the instrument, because, before he can be sued by holder, the holder must first take
action against the maker or show that such action would be useless. 88 The distinction
between a guaranty of collection and a guaranty of payment is that a guaranty of
collection is an undertaking of the guarantor to pay if the debt cannot be collected by the
exercise of reasonable diligence, whereas a guaranty of payment is an obligation to pay
the debt when due if the debtor fails to pay it. 89 A guarantor of collection is not an
accommodation party. 90
If the signature of a party to an instrument is accompanied by words indicating

unambiguously that the party is guaranteeing collection rather than payment of the
obligation of another party to the instrument, the signer is obliged to pay the amount due
on the instrument to a person entitled to enforce the instrument only if:
Execution of judgment against the other party has been returned unsatisfied 91
The other party is insolvent or in insolvency proceedings 92
The other party cannot be served with process 93
It is otherwise apparent that payment cannot be obtained from the other party 94
In case of doubt, a signer will be held to have signed a guarantee of payment and not
collection. 95
Illustration: An individual who signed a promissory note providing that "We, the
undersigned, do hereby personally guaranteed [sic] the due payment of the within
indebtedness," guaranteed payment rather than collection on the note. The note's use
of the words "guarantee" and "payment" brought the guaranty provision squarely
within the provisions of the Code defining payment guaranteed, and the use of the
word "due" itself implied that the bank could look to the guarantors when payment was
overdue rather than seek a deficiency judgment after foreclosure. The language used
was precisely the sort of language that the Code indicates should be used to create a
guaranty of payment. 96
Under some state codes, the term "surety" includes "guarantor." 97 Thus, where
guarantors of a note, by signing "guarantee of payment" on the reverse side of note,
consent to being sued without the holder's joining the maker and without the holder's first
suing the maker, guarantors guaranteed payment of the note, rather than its collection. 98
Footnotes
Footnote 87. Ligran, Inc. v Medlawtel, Inc., 86 NJ 583, 432 A2d 502, 32 UCCRS 166;
Ferguson v McCarrell (Tex) 588 SW2d 895, 27 UCCRS 758, rehg of writ of error overr
(Nov 21, 1979); Martin v First Republic Bank, N.S. (Tex App Fort Worth) 799 SW2d
482, writ den (Feb 27, 1991) (decided under pre-1990 UCC).
Footnote 88. Ligran, Inc. v Medlawtel, Inc., 86 NJ 583, 432 A2d 502, 32 UCCRS 166.

Footnote 89. Wolfe v Schuster (Tex Civ App Dallas) 591 SW2d 926, 10 ALR4th 888.
Footnote 91. UCC 3-419(d)(i) [1990 Rev].
Annotation: Construction and effect of UCC 3-416 governing guaranty contracts,

10 ALR4th 897.
Forms: Complaint, petition, or declarationBy obligeeAgainst accommodation

partyGuaranty of paymentAccommodated party unable to pay. 6A Am Jur Pl & Pr
AnswerDefenseDenial of accommodated party status. 6A Am Jur Pl & Pr Forms

AnswerDefenseNote executed for accommodation guaranteed collection, not

payment. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:242.
GuarantyPayment of promissory note. 3B Am Jur Legal Forms 2d, Bills and Notes
41:115, 41:116.
Effect of extension of due date of note without approval. 9A Am Jur Legal Forms 2d,
Guaranty 132:264.
Guaranty of payment of instrument. 19 Am Jur Legal Forms 2d, Uniform Commercial

Code: Article 3Negotiable Instruments 253:2473-253:2475.
Observation: A judgment must be first obtained against the primary party and when
execution upon the judgment issues, the execution is returned unsatisfied. 6A
Anderson, Uniform Commercial Code 3d [Rev] 3-419:9(a).
Footnote 92. UCC 3-419(d)(ii) [1990 Rev].
Observation: In this case, the party owing the debt the collection of which has been
guaranteed is insolvent or in insolvency proceedings. 6A Anderson, Uniform
Commercial Code 3d [Rev] 3-419:9(b).
Footnote 93. UCC 3-419(d)(iii) [1990 Rev].
Observation: The debtor is not amenable to the service of process as when his
whereabouts are unknown. In such case, it is impossible to bring suit against the
primary party and the obtaining of a judgment is therefore excused. 6A Anderson,
Uniform Commercial Code 3d [Rev] 3-419:9(c).
Footnote 94. UCC 3-419(d)(iv) [1990 Rev].

Observation: In this case, the circumstances do not come within the above
categories of (a),(b), or (c), but they do indicate that it would be futile to attempt to
collect the debt from the primary party. 6A Anderson, Uniform Commercial Code 3d
[Rev] 3-419:9(d).
Footnote 96. Cusimano v First Md. Sav. & Loan (Dist Col App) 639 A2d 553, 23
UCCRS2d 14 (decided under pre-1990 version).
Footnote 97. Broun v Bank of Early, 243 Ga 319, 253 SE2d 755; Moore v White (Okla)
603 P2d 1119, 28 UCCRS 426.
Footnote 98. Broun v Bank of Early, 243 Ga 319, 253 SE2d 755.
D. Agents And Representatives or Their Principals [491-510]
Research References
UCC 1-201; UCC 3-401 through 3-403, 3-405 [1990 Rev]
ALR Digest: Bills and Notes 26, 84, 108, 156 et seq.; Corporations 114 et seq.;
Forgery 1 et seq.; Partnership 34, 36; Principal and Agent 36, 59, 108; Signature
1 et seq.
ALR Index: Agents and Agency; Bills and Notes; Checks and Drafts; Corporate
Officers, Directors, and Agents; Forgery; Good Faith; Holder in Due Course; Partners
and Partnerships; Signatures; Uniform Commercial Code
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms 9, 63; 6A Am Jur Pl & Pr Forms
(Rev), Commercial Code : Article 3Negotiable Instruments 3:77, 3:113, 3:116,
3:147, 3:149, 3:155 through 3:158, 3:160 through 3:168, 3:170, 3:178, 3:179
Uniform Commercial Code: Article 3Negotiable Instruments 253:2431-253:2438
UCC Pleading and Practice Forms 3d, Article 3Negotiable Instruments 3:79, 3:111,
3:114, 3:153 through 3:156, 3:158 through 3:166, 3:168, 3:176, 3:190
UCC Legal Forms 3d, Article 3Negotiable Instruments 3:39, 3:114
7 Am Jur POF2d 675, Ratification of Forged or Unauthorized Signature 6 et seq.; 8
Am Jur POF2d 193, Personal Liability of Corporate Officer on Promissory Note 6,
8-15
3-405:10
1. General Principles [491-503]
491 Generally
View Entire Section


A person is not liable on an instrument, unless the person has signed the instrument or the
person is represented by an agent or representative who signed the instrument and the
signature is binding on the represented person. 99 A "representative" includes an
agent, an officer of a corporation or association, and a trustee, executor, or administrator
of any estate, or any other person empowered to act for another. 1
Footnotes

492 Signature by agent
View Entire Section

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 contract. 2 If the represented person is bound,
the signature of the representative is the "authorized signature of the represented person"
and the represented person is liable on the instrument, whether or not identified in the
instrument. 3 This section of the Uniform Commercial Code does not expressly
authorize deceptive agency arrangements whereby the signatory fails to reveal his true
identity. 4
If under the law of agency the represented person would be bound by the act of the
representative in signing either the name of the represented person or that of the
representative, the signature is the authorized signature of the represented person. 5
The indorsement of a check may be made by an agent, whose authority may be actual,
implied, or apparent. 6 Where an authorized agent of a corporation indorses an
instrument, the corporation is bound by the indorsement. 7
Illustration: In an action to recover on a promissory note, two officers did not sign
the note in their personal capacities thereby subjecting themselves to personal liability,
where the officers signed as authorized agents in a representative capacity, so that only

the principal was liable. The language in the body of the note, which claimed to
subject the two company representatives to personal liability if more than one person
executed the instrument as maker, by its explicit terms came into play only where more
than one person executed the instrument as maker. It did not come into where, as here,
there were simply two signers, both representing the same maker. 8
Distinction: Under former 3-401, which states that "no person is liable on an
instrument unless his signature appears thereon," an undisclosed principle is not liable
on an instrument. This interpretation provides an exception to ordinary agency law
that binds an undisclosed principal on a simple contract. This exception is rejected by
the current version of UCC 3-402(a), which returns to ordinary rules of agency. 9
Comment: If P, the principal, authorized A, the agent, to borrow money on P's

behalf and signed A's name to a note without disclosing that the signature was on
behalf of P, A is liable on the instrument. But if the person entitled to enforce the note
can also prove that P authorized A to sign on P's behalf, why shouldn't P also be liable
on the instrument? To recognize the liability of P takes nothing away from the utility
of negotiable instruments. Furthermore, imposing liability on P has the merit of
making it impossible to have an instrument on which nobody is liable, even though it
was authorized by P. That result could occur under former 3-401(1) if an authorized
agent signed "as agent" by the note did not identify the principal. If the dispute was
between the agent and the payee of the note, the agent could escape liability on the
note by proving that the agent and the payee did not intend that the agent be liable on
the note when the note was issued. Under the prevailing interpretation of former
3-401(1), the principal was not liable on the note because the principal's name did not
appear on the note. Thus, nobody was liable on the note, even though all parties knew
that the note was signed by the agent on behalf of the principal. Under present
3-402(a) the principal would be liable on the note. 10
Footnotes
Forms: Instruction to juryAuthority of agent or representative to sign for principal.

Instruments 3:157.
Instruction to juryPresumption of authenticity of and authorization for signature. 6A

Am Jur Pl & Pr Forms (Rev), Commercial Code (Rev), Commercial Code: Article
Signature by authorized representative. 19 Am Jur Legal Forms 2d, Uniform

Footnote 4. United States v Carr (CA2 NY) 582 F2d 242 (wherein the government
prosecuted the defendant under 18 USCA 1014 for making materially false statements
in bank-loan application).

Footnote 6. Senate Motors, Inc. v Industrial Bank of Washington (Dist Col) 9 UCCRS
387; Keane v Pan American Bank (Fla App D2) 309 So 2d 579, 16 UCCRS 1054; Bank
South, N.A. v Midstates Group, Inc., 185 Ga App 342, 364 SE2d 58, 5 UCCRS2d 634;
Taylor v Equitable Trust Co., 269 Md 149, 304 A2d 838, 12 UCCRS 922.
Footnote 7. East Coast Lumber & Supply Co. v Maxwell, 77 Fla 62, 80 So 741.
Footnote 8. E & C Computers v Livingston (Fla App D3) 621 So 2d 509, 18 FLW
D1560, 21 UCCRS2d 325 (decided under former law).
493 Unauthorized signature
View Entire Section

Unless otherwise provided, an unauthorized signature is ineffective, except as the

signature of the unauthorized signer in favor of a person who, in good faith, pays the
instrument or takes it for value. 11 An "unauthorized" signature is one made
without actual, implied, or apparent authority and includes a forgery. 12
Observation: Because the Uniform Commercial Code defines a forged indorsement

as a form of "unauthorized signature," a signature that is authorized is not a forgery
under the Code. 13
The question of whether a party has actual, apparent, or implied authority is one of fact.
14
Illustration: Where a company's owner was of advanced years and in poor health,
the company was in financial trouble, the owner's son had become more visible in the
operation of the business, the son's wife kept the company's books, the business had the
appearance of a family business, the son had authority to pick up checks from
customers, to solicit jobs and make bids on contracts, to sign his own name to business
letters on company stationery, and to make deposits for the company in its account at
defendant bank, and the owner knew that a subcontract had been entered into between
the company and plaintiff corporation, but the contract had been signed in the owner's
name by the son, the evidence was sufficient to raise a question of fact as to whether
the son had actual, apparent, or implied authority to indorse checks which were issued
by plaintiff corporation to the company and paid by defendant drawee bank on
allegedly unauthorized indorsements. 15
The except clause of the first sentence states the generally accepted rule that the

unauthorized signature, while it is wholly inoperative as that of the person whose name is
signed, is effective to impose liability upon the signer or to transfer any rights that the
signer may have in the instrument. 16 The signer's liability is not in damages for breach
of warranty of authority, but is full liability on the instrument in the capacity in which the
signer signed. 17 It is, however, limited to parties who take or pay the instrument in
good faith so that one who knows that the signature is unauthorized cannot recover from
the signer on the instrument. 18
Where the issue is whether the defendant knew that a signature was unauthorized,
extrinsic evidence may be admissible to allow the defendant to show a meritorious
defense. 19 Thus, where a note was signed with the hand-printed name of a company,
immediately below which appeared the signatures of individual defendants without
disclosing a representative or agency relationship with the company, and only the
immediate parties to the note were involved, the signatures in question were sufficiently
ambiguous to allow extrinsic evidence showing the capacity in which the parties intended
the defendants to sign. 20
Distinction: Former 3-404(1) stated that an unauthorized signature was inoperative

as the signature of the person whose name was signed unless that person was precluded
from denying it. Under former 3-406 if negligence by the person whose name was
signed contributed to an unauthorized signature, that person was precluded from
asserting the lack of authority. Both of these sections were applied to cases in which a
forged signature appeared on an instrument and the person asserting the rights on the
instrument alleged that the negligence of the purported signer contributed to the
forgery. Since the standards for liability between the two sections were different, the
overlap between the sections caused confusion. Revised 3-403(a) deals with the
problem by removing the preclusion language that appears in former 3-404. 21
An indorsement by an agent is either authorized or it is not; whether or not the agent

properly applies the funds has no bearing on whether or not the indorsement was
authorized. Thus, where a traveling businessman had his customers send payment checks
to a woman authorized to sign his name to the checks so they could be deposited in his
account while he was away, but the woman cashed four checks and deposited them in her
own account, her indorsement of the checks was authorized, even though her use of the
funds was not. 22
Footnotes
In an action by a hospital against a bank and several insurers for conversion of checks
and drafts issued by the insurers to the hospital and cashed by a hospital employee on
forged indorsements, the trial court erred in dismissing the action on the drafts against the
insurance companies and on the checks against the bank but correctly dismissed the
action on the checks against the insurance company and on the drafts against the bank.
Larkin General Hospital, Ltd. v Bank of Florida (Fla App D3) 464 So 2d 635, 10 FLW
614, 40 UCCRS 985 (decided under former law).
Forms: Complaint, petition, or declarationTo recover from agent who signed note
without authority. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article

Complaint, petition, or declarationAllegationAccount of purported drawer

improperly charged by drawee of forged draft. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationAgainst collecting bankTo recover amount of

forged checks negligently paid. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Article 3Negotiable Instruments 3:170; UCC Pleading and Practice Forms 3d,
Complaint, petition, or declarationAllegationPlaintiff holder in due courseNo

notice of unauthorized signature. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code
: Article 3Negotiable Instruments 3:113; UCC Pleading and Practice Forms 3d,
Complaint, petition, or declarationAllegationPlaintiff holder in due courseCheck

purchased without notice of lack of authority of agent to complete. 6A Am Jur Pl & Pr
AnswerDefenseSignature was unauthorized. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefenseNegligence contributed to unauthorized signature. 6A Am Jur Pl &

Pr Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:164; UCC
AnswerDefenseAdditional signature of maker inserted. 6A Am Jur Pl & Pr Forms

AnswerDefenseDenial of signature or authorization. 6A Am Jur Pl & Pr Forms

AffidavitUnauthorized signature or indorsement. 6A Am Jur Pl & Pr Forms (Rev),

Commercial Code : Article 3Negotiable Instruments 3:77; UCC Legal Forms 3d,

Footnote 13. In re Flight Transp. Corp. Sec. (CA8 Minn) 825 F2d 1249, 4 UCCRS2d
1107, cert den 485 US 936, 99 L Ed 2d 273, 108 S Ct 1113, complaint dismd (SD NY)
797 F Supp 259, 19 UCCRS2d 151.
Footnote 14. W. R. Grimshaw Co. v First Nat'l Bank & Trust Co. (Okla) 563 P2d 117, 21
UCCRS 169.
Footnote 15. W. R. Grimshaw Co. v First Nat'l Bank & Trust Co. (Okla) 563 P2d 117, 21
UCCRS 169.
Footnote 19. First Nat'l Bank v Achilli (2d Dist) 14 Ill App 3d 1, 301 NE2d 739, 13
UCCRS 505.
UCCRS 505, holding that if defendants were able to establish that as between them and
plaintiff it was agreed that defendants were signing only in a representative capacity, and
that at the time the note was executed plaintiff knew defendants were unauthorized to
sign in such capacity (the company being an individual proprietorship, and the
defendants not having been appointed representatives of decedent's estate), then
defendants would prevail.
As to the use of parol evidence, see 503.
Footnote 22. Jones v Van Norman, 513 Pa 572, 522 A2d 503, 3 UCCRS2d 1442 (holding
that since her indorsement was authorized and the bank had no knowledge of the limiting
instructions given her, the bank is not liable for conversion to the principal).
494 Liability of unauthorized signer
View Entire Section

The civil or criminal liability of a person who makes an unauthorized signature is not
affected by any provision of Article 3, which makes the unauthorized signature effective
for purposes of the chapter. 23 The unauthorized signature is treated as the signing of
the name of the unauthorized signer with respect to a person who has paid the instrument
in good faith or who has taken the instrument for value. As against any other kind of
holder or transferee, there is no personal liability of the unauthorized signer on the
instrument. The liability of the unauthorized signer is a liability for payment of the face
of the instrument as distinguished from liability for breach of a warranty. 24
Observation: If one signs an instrument on behalf of a nonexistent principal or a

principal without capacity to give authority, his action is equivalent to signing without
authority for a principal who is capable of acting for himself, and he is personally
bound. Thus, one who signs a note as officer, trustee, or agent of an unincorporated
religious association is personally liable, because the association has no legal capacity
to authorize a note. 25
If the unauthorized signing constitutes a forgery, the criminal liability of the signer is not
affected by the Uniform Commercial Code, even if the represented person ratifies the
unauthorized signing. 26 Likewise, the present version of this statute does not affect
any civil liability to which the unauthorized signer is subject apart from the instrument.
27
Footnotes
Annotation: Discharge of debtor who makes payment by delivering check payable to

creditor to latter's agent, where agent forges creditor's signature and absconds with
proceeds, 49 ALR3d 843.
Forms: Complaint, petition, or declarationAllegationDefendant signed instrument.

Instruments 3:147.

Footnote 25. I. W. Phillips & Co. v Hall, 99 Fla 1206, 128 So 635.
As to ratification on an unauthorized signature, see 495.
495 Ratification
View Entire Section

An unauthorized signature may be ratified for all purposes of Article 3. 28 Although

the forger is not an agent, ratification is governed by the rules and principles applicable
to ratification of unauthorized acts of an agent. 29

Practice guide: If the indorsement was without authority but the payee subsequently
ratified the indorsement or accepted some benefit from the money paid for the check he
could not use forgery as a defense to plaintiff bank's suit against him. 30
Ratification is a retroactive adoption of the unauthorized signature by the person whose

name is signed and may be found from conduct as well as from express statements. 31
Such conduct includes paying on the drafts, 32 a history of previous indorsements, 33
and the retention of benefits in the transaction with knowledge of the unauthorized
signature. 34
Illustration: A floor plan financing agreement granting a security interest in the

inventory of a corporation was deemed to have been signed by the corporation by its
authorized agent although the place for the name of the corporation was left blank and
the name of the president, who had authority to sign on behalf of the corporation, was
written on the line below after the word "by," without any indication of his official
capacity, by an employee of the corporation who had been authorized by the president
to sign all the forms connected with the transaction for the corporation. There was no
evidence to show that the security agreement was not a corporate agreement. On the
contrary, the actions of the corporation's officers and the secured party constituted a
ratification of the transaction by the sale and acceptance of merchandise, the proper
filing of a financing statement containing the name of the corporation signed by the
same employee in the name of the president and another financing statement signed by
the president himself, recognizing the corporate grant of the security interest on all
inventory and proceeds thereof. 35
Ratification may preclude a finding of liability against the depositary bank for
mishandling the check. 36 Although the ratification may relieve the signer of liability on
the instrument, it does not of itself relieve the signer of liability to the person whose
name is signed. 37
Observation: Ratification does not in any way affect the criminal law. 38 While
ratification may be taken into account with other relevant facts in determining
punishment, it does not relieve the signer of criminal liability. 39
Footnotes
Annotation: What constitutes ratification of unauthorized signature under UCC

3-404, 93 ALR3d 967.
Practice References Proof of ratification of forged signature. 7 Am Jur POF2d 675,

Ratification of Forged or Unauthorized Signature 6 et seq.

signature. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3
Negotiable Instruments 3:161; UCC Pleading and Practice Forms 3d, Article 3,

Instruction to juryRatification of alteration of note. 5 Am Jur Pl & Pr Forms (Rev),
Instruction to juryRatification of unauthorized signature. 6A Am Jur Pl & Pr Forms

and Practice Forms 3d, Article 3, Negotiable Instruments 3:165.
Footnote 30. North Carolina Nat'l Bank v Hammond, 298 NC 703, 260 SE2d 617, 28
UCCRS 129.
Footnote 32. Universal Premium Acceptance Corp. v York Bank & Trust Co. (ED Pa)
866 F Supp 182, 25 UCCRS2d 17, revd on other grounds, remanded (CA3 Pa) 69 F3d
695, 28 UCCRS2d 1, motion den (ED Pa) 1996 US Dist LEXIS 10899.
Even though only the first of a trust's two trustees signed a promissory note for a bank
loan, the note was valid, because under Massachusetts law one trustee can act on behalf
of the trust if his actions are ratified by the other trustee where the second trustee clearly
knew about the note, permitted it to remain outstanding, and did not object to the first
trustee's making payments on it; while the second trustee did not sign the note as a
maker, he did sign it in the capacity of a guarantor, execute a real estate mortgage to
secure the note, and sign a separate guaranty, thus, ratifying the note. Sterling Bank v
Bingham (Mass Super Ct) 24 UCCRS2d 147.
Footnote 33. Grand Western Currency Exchange, Inc. v A:M Sunrise Constr. Co. (1st
Dist) 163 Ill App 3d 51, 114 Ill Dec 331, 516 NE2d 486, 5 UCCRS2d 628 (holding that
the five prior occasions constituted ratification under of X's apparent authority to indorse
the company's checks).
Footnote 35. In re Bro Cliff, Inc. (BC WD Mich) 8 UCCRS 1144.
Footnote 36. Citibanc of Alabama/Fultondale v Tricor Energies, Inc. (Ala) 493 So 2d

1344, 1 UCCRS2d 1571.
Where the president of Bank A signed two promissory notes, payable to Bank B, as
guarantor on the first, signing his name followed by the designation "Pres." and on the
second, signing only his name but upon the debtor's default, the guarantor testified it was
his intention to sign the notes in his official capacity as bank president, with regard to the
first note, since Bank A was not aware of the president's actions, he could not have had
even apparent authority to bind the bank; therefore, his actions would be governed by the
Uniform Commercial Code which provides that the president's unauthorized signature is
inoperative unless ratified by the bank. Because Bank A did not ratify his actions as its
own, the guarantor was personally liable on the guaranty. Enzweiler v Peoples Deposit
Bank (Ky App) 742 SW2d 569, 6 UCCRS2d 159.

Footnote 38. Official Comment 3 to UCC 3-403 [1990 Rev], (providing further that no
policy of the criminal law prevents a person whose name is forged to assume liability to
others on the instrument by ratifying the forgery, but the ratification cannot affect the
rights of the state.
496 Required multiple signing
View Entire Section

If the signature of more than one person is required to constitute the authorized signature
of an organization, the signature of the organization is unauthorized if one of the required
signatures is lacking. 40 An organization includes a corporation, government or
governmental subdivision or agency, business trust, estate, trust, partnership or
association, two or more persons having a joint or common interest, or any other legal or
commercial entity. 41 Because the definition of "organization" is so broad, it applies
when a husband and wife are both required to sign an instrument. 42
Comment: This section clarifies the meaning of "unauthorized" in cases in which an

instrument contains less than all of the signatures that are required as authority to pay a
check. 43 Judicial authority was split on the issue of whether the one-year notice
period, under former 4-406(4) (now 4-406(f)), barred a customer's suit against a
payor bank that paid a check containing less than all of the signatures required by the
customer to authorize payment of the check. 44 Some cases took the view that if a
customer required that a check contain the signatures of both A and B to authorize
payment and only A signed, there was no unauthorized signature within the meaning of
that term in former 4-406(4) because A's signature was neither unauthorized nor
forged. 45 The other cases correctly pointed out that it was the customer's signature at
issue and not that of A; hence, the customer's signature was unauthorized if all
signatures required to authorize payment of the check were not on the check. 46 The
current provision follows the latter line of cases. 47
Observation: The same analysis applies if A forged the signature of B. Because the
forgery is not effective as a signature of B, the required signature of B is lacking. 48
It is a common business practice for corporations to require the signature of two of its
officers or employees on checks as a condition precedent to their validity, and where
checks are required to be countersigned by the comptroller, a check in the name of the
corporation is not a valid instrument until so countersigned. 49
Footnotes

Footnote 49. Block v Howard Sober, Inc. (Fla) 60 So 2d 538.
497 Named representative; identified principal
View Entire Section

If a representative signs the name of the representative to an instrument and the signature
is an authorized signature of the represented person, then if the form of the signature
shows unambiguously that the signature is made on behalf of the represented person who
is identified in the instrument, the representative is not liable on the instrument. 50
This section provides that if the form of the signature unambiguously shows that it is
made on behalf of an identified represented person (for example, "P, by A, Treasurer"),
the agent is not liable. 51 It creates a workable standard for a court to apply. 52
Caution: The rule that if a signer both identifies the principal on whose behalf he is
signing and discloses the representative capacity in which he is signing, the signature
creates no personal liability in the signer does not apply when representatives sign
instruments stating that they "personally guarantee payment" thereunder, because the
statute does not contemplate or provide for such an intervening factor. 53
Accordingly, where a corporate secretary-treasurer signed, in his corporate capacity, a
note bearing the notation "the undersigned do hereby personally guarantee the payment
of this note," he assumed personal liability therefor. 54 To hold otherwise would
anomalously make the corporation that is principally liable on the note the
"undersigned" for purposes of the guarantee. 55
Footnotes

Forms: Complaint, petition, or declarationAgainst makerInstrument signed by

agent. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:153.


3:155.
Instruction to juryLiability of authorized representative on incomplete signature. 6A

3:158; UCC Pleading and Practice Forms 3d, Article 3, Negotiable Instruments
3:156.
Footnote 53. Threlkel v Shenanigan's, 110 Nev 1088, 881 P2d 674, 27 UCCRS2d 176
(decided under pre-1990 version, but stating that the revision of Art. 3 does not change
this result).
Footnote 54. Threlkel v Shenanigan's, 110 Nev 1088, 881 P2d 674, 27 UCCRS2d 176.
Footnote 55. Threlkel v Shenanigan's, 110 Nev 1088, 881 P2d 674, 27 UCCRS2d 176.
498 Absence of representative capacity or identification of principal
View Entire Section

Except as otherwise provided, if the form of the signature does not show unambiguously
that the signature is made in a representative capacity, or if the represented person is not
identified in the instrument, the representative is liable on the instrument to a holder in
due course that took the instrument without notice that the representative was not
intended to be liable on the instrument. 56
Illustration: A corporate officer was properly held liable to a check-cashing service

for a fraudulent check-cashing scheme where he issued worthless checks in the
defendant corporation's name and forged endorsements on the checks. The corporate
officer was individually liable for false representations or fraudulent acts of his own, or
in which he participated, even if his actions were in furtherance of corporate business.
57
With respect to any other person, the representative is liable on the instrument, unless the
representative proves that the original parties did not intend the representative to be liable
Comment: A number of cases under former Article 3 of the Uniform Commercial

Code involved situations in which an agent signed the agent's name to a note, without
qualification and without naming the person represented, intending to bind the
principal but not the agent and the agent attempted to prove that the other party had the
same intention. 59 Some of these cases involved mistake, and in some there was
evidence that the agent may have been deceived into signing in that manner. 60 In
some of the cases, the court refused to allow proof of the intention of the parties and
imposed liability on the agent based on former 3-403(2)(a), even though both parties
to the instrument may have intended that the agent not be liable. 61 The new
provision is consistent with another Code section which allows oral or written
agreements to modify or nullify apparent obligations on the instrument. 62
Illustration: Where the defendant executed each note in the name of the corporation
followed by her name and her official corporate position, which execution was clearly
in her representative capacity, but which was followed by the defendant's individual
signature, standing alone, the defendant was not personally liable on the notes and had
signed in a representative capacity, inasmuch as negotiations leading to execution of
the notes concerned only the corporation with there having been no mention of
personal liability of the defendant, the purpose of the loan was solely for business
purposes and only the security sought and obtained were corporate assets, and the
defendant signed her name on each note the second time at the request of the officer of
the plaintiff; defendant's signing which appeared to bind her personally amounted to
mistake, and the plaintiff knew or should have known that its loans were made solely
on the credit of the corporation and not on the defendant's personal liability. 63
Caution: Where a promissory note is not a negotiable instrument under the Uniform
Commercial Code (UCC), the liability of the signer of such a note is not controlled by
Code provisions governing personal liability of an agent who signs on behalf of a
principal or corporation. 64 Thus, the UCC did not govern the court's determination
of whether the defendant, who did not sign the contract as an agent or as a corporate
officer, executed the contract in an individual capacity, since the contract wherein the
defendant agreed to return the plaintiff/joint venture's capital contribution was not a
negotiable instrument as it was not payable to order or to bearer. 65
Practice guide: Any finding of liability under revised 3-402(b)(2) is subject to

subdivision (c)'s additional exception that the representative is not liable if he signed
his name on a personalized check identifying the account of the represented person. 66
The section expands, rather than contracts, the representative's defenses. 67

Footnotes

97 ALR3d 798.
Footnote 57. A-1 Check Cashing Service, Inc. v Goodman (2d Dept) 148 App Div 2d
482, 538 NYS2d 830.
Two individuals were personally liable on a promissory note for the purchase of certain
stock, even though the note was signed by the individuals and a corporation, where it did
not show that the individuals had signed in a representative capacity, and where the
record contained ample testimony supporting the trial court's conclusion that the parties
had understood and agreed that defendants each would be individually liable. Placet, Inc.
v Ashton (Fla App D3) 368 So 2d 404, cert den (Fla) 378 So 2d 343 and cert den (Fla)
378 So 2d 347 (construing former law).
Comment: If the original parties to the note did not intend that the representative
also be liable, imposing liability on the representative is a windfall to the person
enforcing the note. Although the representative is prima facie liable because his
signature appears on the note and the form of the signature does not unambiguously
refute personal liability, the representative can escape liability by proving that the
original parties did not intend that he be liable on the note. This provision is a change
from former 3-403(2)(a). Official Comment 2 to UCC 3-402 [1990 Rev].
Annotation: Personal liability of one who signs or indorses without qualification

commercial paper of corporation, 82 ALR2d 424.
Footnote 62. Official Comment 2 to UCC 3-402 [1990 Rev] (referring to UCC 3-117
[1990 Rev]).
The Code section dealing with the liability of authorized representatives does not
eliminate the equitable remedy of reformation of the instrument for mutual mistake and
does not prohibit the admission of parol evidence to prove such mistake. St. Regis Paper
Co. v Wicklund, 93 Wash 2d 497, 610 P2d 903, 28 UCCRS 1065.
Footnote 63. First Safety Fund Nat'l Bank v Friel, 1986 Mass App Div 45.
Footnote 64. Central States, Southeast & Southwest Areas, Health & Welfare Fund v
Pitman (3d Dist) 66 Ill App 3d 300, 23 Ill Dec 26, 383 NE2d 793; First Nat'l Bank v Fulk
(Hancock Co) 57 Ohio App 3d 44, 566 NE2d 1270.

Footnote 65. Stroll v Epstein (SD NY) 818 F Supp 640, affd without op (CA2 NY) 9 F3d
1537.
Footnote 66. Cohen v Disner (2nd Dist) 36 Cal App 4th 855, 42 Cal Rptr 2d 782, 95
CDOS 5505, 95 Daily Journal DAR 9350, 27 UCCRS2d 540.
As to the exception that the representative is not liable if he signed his name on a
personalized check identifying the account of the represented person, see 500.
499 --Ambiguous signatures; construction
View Entire Section

There are many ways in which there can be ambiguity about a signature. 68
Illustrations: In each case John Doe is the authorized agent of Richard Roe and John
Doe signs a note on behalf of Richard Roe. In each case the intention of the original
parties to the instrument is that Roe is to be liable on the instrument but Doe is not to
be liable. Case No. 1. Doe signs "John Doe" without indicating in the note that Doe is
signing as agent. The note does not identify Richard Roe as the represented person.
Case No. 2. Doe signs "John Doe, Agent" but the note does not identify Richard Roe
as the represented person. Case No. 3. The name "Richard Roe" is written on the note
and immediately below that name Doe signs "John Doe" without indicating that Doe
signed as agent. In each case Doe is liable on the instrument to a holder in due course
without notice that Doe was not intended to be liable. In none of the cases does Doe's
signature unambiguously show that Doe was signing as agent for an identified
principal. A holder in due course should be able to resolve any ambiguity against Doe.
69
Distinction: Former 3-403 spoke of the represented person being "named" in the
instrument. 3-402 speaks of the represented person being "identified" in the
instrument. This change in terminology is intended to reject decisions under former
3-403(2) requiring that the instrument state the legal name of the represented person.
70
In determining whether the instrument indicates the capacity of the signer, the instrument
must be considered in its entirety. 71 Thus, where the name of the corporation appears
on the note side of the instrument, but not on the guarantee side, the president of the
corporation is considered to have signed the guarantee in a personal capacity. 72
Likewise, where the representative signs the notes personally and only the
representative's name appears on the notes as obligor, the representative is the sole
obligor on the notes. 73

Footnotes
Footnote 71. FDIC v Trans Pac. Indus. (CA5 Tex) 14 F3d 10, 22 UCCRS2d 1074, reh, en
banc, den (CA5 Tex) 20 F3d 1172; Federal Deposit Ins. Corp. v Tennessee Wildcat
Services, Inc. (CA6 Tenn) 839 F2d 251, 6 UCCRS2d 488; FDIC v Woodside Constr.,
Inc. (CA9 Alaska) 979 F2d 172, 92 CDOS 9079, 92 Daily Journal DAR 15043, 21
UCCRS2d 64; Pollin v Mindy Mfg. Co., 211 Pa Super 87, 236 A2d 542, 4 UCCRS 827;
Gant Oil Co. v Ace Oil Co. (Tenn App) 884 SW2d 131, 25 UCCRS2d 442.
Individual defendants were liable on promissory notes, notwithstanding their contention

that they signed notes as representatives of a corporation, where (1) the notes contained
three signature lines, first signed by first defendant, followed by the word "secretary,"
second signed by the first defendant without any accompanying words, and third signed
by the second defendant without any accompanying words, and (2) the notes, although
stating that the payor was a domestic corporation, also stated that the obligation was
binding on the "undersigned's . . . heirs." Klapper v Integrated Agricultural Management
Co. (3d Dept) 149 App Div 2d 765, 539 NYS2d 812, 10 UCCRS2d 424.
Footnote 72. First State Bank v Eisdorfer (Fla App D3) 399 So 2d 414; Homer Nat'l Bank
v Springlake Farms, Inc. (La App 2d Cir) 616 So 2d 255; NCL Studs, Inc. v Jandl (Tex
App Houston (1st Dist)) 792 SW2d 182, 13 UCCRS2d 433, writ den (Dec 19, 1990) and
(criticized on other grounds by Rogers v Stell (Tex App Dallas) 828 SW2d 115) and
(disapproved on other grounds as stated in Guerrero v Sanders (Tex App Fort Worth) 846
SW2d 354) (decided under pre-1990 UCC).
Footnote 73. Bluffestone v Abrahams (App) 125 Ariz 42, 607 P2d 25, 27 UCCRS 1349;
Simmons v Compania Financiera Libano, S.A. (Tex App Houston (1st Dist)) 830 SW2d
789, writ den (Oct 14, 1992) and rehg of writ of error overr (Dec 2, 1992) (decided under
pre-1990 UCC).
500 Check payable from account of represented person
View Entire Section

If a representative signs the name of the represented person as the drawer of a check
without indication of the representative status and the check is payable from an account
of the represented person who is identified on the check, the signer is not liable on the
check if the signature is an authorized signature of the represented person. 74 This
statute is directed at the check cases 75 and it expands rather than contracts the
representative's defenses. 76 It states that if the check identifies the represented person,
the agent who signs on the signature line does not have to indicate agency status. 77
Virtually all checks used today are in personalized form, which identify the person on
whose account the check is drawn; thus, nobody is deceived into thinking that the person
signing the check is meant to be liable. 78 This subsection is meant to overrule cases
decided under former Article 3 of the Uniform Commercial Code. 79
A corporate principal and its representative may both be held liable on a worthless check
claim. 80 However, in order for a representative to be held liable, his personal obligation
under the checks must be established. 81
Illustration: An office manager was personally liable on a company check which she
signed without any indication that she was acting on behalf of her corporate employer.
That the check was large in physical size and had the company name imprinted in the
upper-left hand corner was insufficient to indicate that the corporation was the
represented party. Nothing appeared near the employee's signature or elsewhere on the
check to limit the signer's liability or establish her lack of capacity. 82
Footnotes
As to the liability of corporate officials for issuing checks with insufficient funds, see
18B Am Jur 2d, Corporations 1883.
Footnote 80. Newport Seafood, Inc. v Neptune Trading Corp. (Fla App D3) 555 So 2d
376, 14 FLW 2503, 11 UCCRS2d 584; Provecasa v Gemini Associated Corp. (Fla App
D3) 532 So 2d 1106, 13 FLW 2317, 8 UCCRS2d 404.
Footnote 81. Newport Seafood, Inc. v Neptune Trading Corp. (Fla App D3) 555 So 2d
376, 14 FLW 2503, 11 UCCRS2d 584 (holding that a genuine issue of material fact
existed as to whether the president had signed the checks in his personal capacity or as a
representative of the corporation).
Footnote 82. Cooper v Emery & Sons (Mo App) 829 SW2d 642, 19 UCCRS2d 512.
501 Officer of organization

View Entire Section
Generally, the signature of a corporate officer on a check drawn on a corporate account

indicates that the obligation on the checks will be borne by the corporation, rather than
by the officer in his individual capacity. 83 The usual business practice is to bind a
corporation with the signature of an officer authorized by the corporation to sign on its
behalf. 84
Illustration: The secretary-treasurer of the defendant corporation could not be held

personally liable on two corporate checks that she signed, even though her signature on
the checks did not specifically indicate that she was signing in her representative
capacity where the checks in question were printed with the name of the corporation in
the place where the owner of an account is usually designated, the person represented,
that is, the corporation, was named on the instruments, there was no expectation by the
parties that the secretary-treasurer was personally assuming liability on the checks
when she signed them, as demonstrated by the testimony of the payee's president who
asserted that there was no understanding between himself and the secretary-treasurer
that she would be personally liable on the checks, nor that she, rather than the
corporation, would be billed. 85
Moreover, an instrument may disclose on its face that the signature was executed only in
a representative capacity, even though the particular office or position of the signer is not
disclosed thereon. 86 In the absence of a contrary manifestation in the document, the
following signatures and descriptions, among others, create an inference that the
principal and not the agent is a party: the principal's name, followed by the agent's name,
preceded by a preposition, such as "by" or "per." 87
Illustrations: Promissory notes listing the name of the organization followed or

proceeded by the treasurer's name and his office, designated as Secretary or
Secty-Treas were signed in a representative capacity. 88 However, the signer of a
promissory note was, as a matter of law, liable in an individual capacity for the balance
due on the note where: (1) the note was signed by the individual, below the
typewritten name and address of the company, but the individual's office was not
disclosed on the face of the note; (2) the wording of the note, "we promise to pay,"
affirmatively showed that payment was promised from more than one source; and (3)
the individual offered no evidence to rebut his apparent status of individual signer as
shown by the face of the note and the obligee presented evidence that the individual
had represented that he would stand by the note. 89
Footnotes
Footnote 83. Gant Oil Co. v Ace Oil Co. (Tenn App) 884 SW2d 131, 25 UCCRS2d 442.


Footnote 84. FDIC v Trans Pac. Indus. (CA5 Tex) 14 F3d 10, 22 UCCRS2d 1074, reh, en
banc, den (CA5 Tex) 20 F3d 1172; Valley Nat'l Bank v Cook (App) 136 Ariz 232, 665
P2d 576, 36 UCCRS 578; Central Illinois Public Service Corp. v Molinarolo (5th Dist)
223 Ill App 3d 471, 165 Ill Dec 803, 585 NE2d 199; Harris v Reitz (Mo App) 649 SW2d
228, 37 UCCRS 179; Wise v Duker (Summit Co) 57 Ohio App 3d 62, 566 NE2d 1248;
Seale v Nichols (Tex) 505 SW2d 251, 14 UCCRS 457; Barclay v Epic Associates XXIV
(Tex App El Paso) 631 SW2d 544, 33 UCCRS 1015; Wolf v Little John Corp. (Tex Civ
App Houston (1st Dist)) 585 SW2d 774, 27 UCCRS 740, writ ref n r e (Oct 3, 1979) and
rehg of writ of error overr (Oct 31, 1979).
A corporate treasurer and his wife were not personally liable on a note showing the
borrower to be a corporation and containing, below the corporate name in the signature
portion thereof, signature lines for individuals, where the witnesses offered conflicting
versions of events which occurred prior to execution of note, but there was testimony that
the treasurer and wife had no intention of guaranteeing the renewal note, that the
treasurer specifically told another corporate representative that they would not personally
guarantee the obligation, and that the treasurer signed his name and his wife's name on
the instrument after being assured that signatures were needed merely because they were
stockholders and that the bank did not require their personal guarantees. Parish Nat'l
Bank v Leath (La App 1st Cir) 633 So 2d 290.
Annotation: Personal liability of one who signs or indorses without qualification

commercial paper of corporation, 82 ALR2d 424.
Practice References Proof that corporate officer signed promissory note with intent to
be individually liable. 8 Am Jur POF2d 193, Personal Liability of Corporate Officer
on Promissory Note 8 et seq.
Footnote 85. Gant Oil Co. v Ace Oil Co. (Tenn App) 884 SW2d 131, 25 UCCRS2d 442.
Footnote 86. Dollar Dry Dock Bank v Alexander (2d Dept) 197 App Div 2d 662, 602
NYS2d 885 (holding that where a promissory note bore the name of the corporation
under the designation of "Address of Debtor," and the defendant's signature was preceded
by the term "by" which commonly denotes agency, there was a material question of fact,
precluding summary judgment, as to whether the defendant, who was employed as a
corporate officer at the time he signed the note, assumed the obligation for the note in his
individual status or signed it in his capacity as an agent for a principal).
Footnote 87. Southeastern Financial Corp. v Smith (ND Ala) 397 F Supp 649, 17
UCCRS 1043, revd on other grounds (CA5 Ala) 542 F2d 278; Chidakel v Blonder (Dist
Col App) 431 A2d 594, 31 UCCRS 1642; Donaghey v Executive Funding Corp. (1st
Dist) 45 Ill App 3d 951, 4 Ill Dec 536, 360 NE2d 472; Donald M. Clement Contractor,
Inc. v Demon, Inc. (La App 4th Cir) 364 So 2d 204; Federal Deposit Ins. Corp. v K-D
Leasing Co. (Tex App El Paso) 743 SW2d 774, 6 UCCRS2d 156; Priest v First Mortg.
Co. (Tex App San Antonio) 659 SW2d 869, writ ref n r e (Apr 4, 1984).
Forms: Promissory noteBy corporation. 3B Am Jur Legal Forms 2d, Bills and Notes
41:26.
Footnote 88. Mestco Distributors, Inc. v Stamps (Tex App Houston (14th Dist)) 824
SW2d 678, 17 UCCRS2d 174.

Footnote 89. A. Duda & Sons, Inc. v Madera (Tex App Houston (1st Dist)) 687 SW2d
83.
See also FDIC v Trans Pac. Indus. (CA5 Tex) 14 F3d 10, 22 UCCRS2d 1074, reh, en
banc, den (CA5 Tex) 20 F3d 1172 (The signature "TPI, W.K. Robbins, Jr.," without
more, would normally bind the individual; however, the face of the entire instrument
must be considered, and, in the context of business expectations, it was abundantly clear
that TPI was the sole borrower and maker of the subject notes and that the individual
signed in a representative capacity only, where the individual was TPI's board chairman,
TPI was the only entity listed in the upper left-hand identification block of the subject
notes, the individual's name was typed and signed below the typewritten name of the
corporation in the bottom right corner, and the holder secured a judgment against the
corporation on the notes. Moreover, lenders commonly require a personal guarantee
from an individual corporate officer of a closely held corporation before lending to his
corporation; in that event, the practice is for the corporate officer to sign twice as maker,
once for the corporation and once for himself, or to execute a guaranty of the loan;
neither was done in the case at bar.)
502 Partners and partnership
View Entire Section

As a general rule, where only one of the members of a partnership signs his or her name
to a promissory note, neither the firm nor any of the other partners is liable on the note,
unless the firm has no name or is doing business under the name of the partner who signs
the note; this rule is applicable regardless of whether the note is or is not, in fact, made
for a firm debt or for the benefit of the partnership. 90 However, a non-signing partner
would be liable on the subject notes if they were signed by another partner in a
representative capacity and as partnership obligations. 91 Thus, for example, where the
partners guaranteed payment of partnership debts, and a lender, relying on a guarantee,
made a loan to the partnership which was not repaid, and where the debt was evidenced
by a note which was signed by only one partner and did not include the name of the
partnership, the creditor could recover on the guarantee agreement, notwithstanding the
signature of the partnership did not appear on note, if the lender could prove that the loan
was made to the partnership, that the signing partner was acting on behalf of the
partnership in procuring the loan and was authorized to do so or that the partners, with
knowledge of the transaction, thereafter ratified the acts of the partner. 92
Caution: Having privately agreed that his partner Y would not be personally liable
on the debt, X alone signed a real estate note as "X, Partner." While the note contained
no other reference to the partnership, all other documents executed at the closing did.
When the partnership defaulted, the seller sued. Y claimed he was not liable because
of his agreement with X. Since the seller did not know about X's agreement, Y would
be liable if the note was signed "in the partnership name." The "X, Partner" signature
was ambiguous enough to allow consideration of the other closing documents, and
since they referenced the partnership, Y was liable for half of the debt represented by
the note. 93
Practice guide: Extrinsic evidence may be admissible among immediate parties to

show that the instrument was signed in a representative capacity. 94
Footnotes
Footnote 90. Anderson v Badger (Tex App Dallas) 693 SW2d 645, 42 UCCRS 231, writ
ref n r e (Jan 29, 1986).
Forms: AnswerDefenseNote, given by partner in firm name, was to pay individual

debt. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 63.
AnswerDefenseSignature of partner not authorized to bind firm. 6A Am Jur Pl & Pr

Instruction to juryAbsence of power of partner to give partnership obligation in

payment of his own indebtedness. 6A Am Jur Pl & Pr Forms (Rev), Commercial
Negotiable instrument provisionLimited liability of trustees or partners. UCC Legal

Forms 3d, Article 3Negotiable Instruments 3:39.
Footnote 91. Womack v First Nat'l Bank (Tex Civ App Tyler) 613 SW2d 548, 31
UCCRS 1029 (holding that since the partnership agreement was silent as to the authority
of a partner to issue negotiable paper in the partnership name, he had actual or express
authority to do so if such act was for the purpose of "apparently carrying on" business of
the partnership in the way other firms engaged in the same business in the locality
usually transact business, or in the way in which the particular partnership usually
transacts its business; where the partnership business contemplates periodical or
continuous or frequent purchasing, not as incidental to an occupation, but for the purpose
of selling again the thing purchased, it is usual and customary to purchase on credit and
to execute paper evidencing the existence of the partnership debt).
Footnote 92. North Carolina Nat'l Bank v Wallens, 31 NC App 721, 230 SE2d 690, 21
UCCRS 165.
As to ratification on an unauthorized signature, see 495.
Footnote 93. Edward A. Kemmler Memorial Foundation v 691/733 East

Dublin-Granville Rd. Co., 62 Ohio St 3d 494, 584 NE2d 695, 17 UCCRS2d 489.
Footnote 94. Womack v First Nat'l Bank (Tex Civ App Tyler) 613 SW2d 548, 31
UCCRS 1029 (stating that partnership liability was established, inter alia, by the fact that
the bank had a copy of the partnership agreement in its files, carried liability in both
partners' names, and had relied on their financial reputation in making loans to the
partnership and by the fact that the promissory notes in question reflected on their face
that they were intended as partnership obligations and were renewal notes whose

originals had been signed in a representative capacity).
503 Parol evidence
View Entire Section

Parol evidence is admissible in those cases in which an ambiguity is found on the face of
the instruments regarding the capacity in which the person had signed. 95 Thus, if the
name of a person represented appears on a note, but the signature does not show that the
agent signed in a representative capacity, parol evidence will be allowed to establish that
the agent signed in a representative capacity. 96 Where an ambiguity exists whether a
person signed a promissory note in his individual or in a representative capacity, parol
evidence may be introduced only if the action is between the immediate parties to the
note and there is some indication of a principal-agent relationship or that the signer
signed in a representative capacity. 97 Parol evidence is not allowed to show the intent
of signing for the purposes of relieving the agent from personal liability when litigation
does not involve the immediate parties, 98 such as in an action by an assignee of a note
against its maker 99 or in an action where the plaintiff is not the original lender but is a
subsequent holder of the note. 1
Where the instrument itself contains nothing to indicate that it was signed in a
representative capacity, parol evidence cannot be introduced to show that such was, in
fact, the intent of the signer. 2
Illustration: Parol evidence was inadmissible to establish the intent of the parties
where the language in the note which stated that "[f]or value received, the undersigned
jointly and severally promise to pay" established that more than one person or entity
was to be liable on the note. This language taken together with the fact that the
signature block did not contain any reference to the corporation made it clear that the
individuals who signed the note were to be personally obligated. 3
In certainircumstances, the facts may indicate a course of dealing between two parties
inferring that the representative capacity of the signer was mutually understood. 4 In
such cases, extrinsic evidence of the course of dealing may be used to determine the
capacity of the signer. 5 Thus, the president of a jewelry company who signed
promissory notes without identification of his representative capacity demonstrated a
course of dealing with the payee that raised issues of fact concerning whether the
president should be deemed to have signed the notes in his representative capacity where
the jewelry company and payee (another jewelry company) had conducted business over
seven years in a similar manner with the president failing to indicate his representative
capacity on the notes, and the president's sworn affidavit stated that it was clearly
understood by the parties that he was signing only in his representative capacity. 6 In
seeking to determine the capacity in which a party signs a document, it does not matter
whether the ambiguity is "patent" or "latent." 7

Illustration: A signature on the corporate check without any official designation as
to the signer's office or authority created an ambiguity as to liability which could be
resolved only by extrinsic proof. If the evidence shows that the signer had the
authority to and did sign for the purpose of binding the corporation, such evidence
would implicate the corporation but would exculpate the signer. On the other hand, if
the signer's status is left unexplained he could be held liable, which would indirectly
exculpate the corporation since there would be no proof of due execution by a
corporate officer. 8
Practice guide: Where conflicting parol evidence has been admitted at trial to help
determine the status of a promissory note's signer, a court is authorized in finding the
signer personally liable on the promissory note. 9
Footnotes
Footnote 95. Tampa Bay Economic Dev. Corp. v Edman (Fla App D2) 598 So 2d 172, 17
FLW D1122, 19 UCCRS2d 198; A-1 Racing Specialties, Inc. v K & S Imports, Inc. (Fla
App D4) 576 So 2d 421, 16 FLW D763, 14 UCCRS2d 506; Newport Seafood, Inc. v
Neptune Trading Corp. (Fla App D3) 555 So 2d 376, 14 FLW 2503, 11 UCCRS2d 584;
Oppenheim v Jules Jergensen Corp. (Fla App D4) 385 So 2d 1078; Dynamic Homes, Inc.
v Rogers (Fla App D4) 331 So 2d 326, 19 UCCRS 560; Maine Gas & Appliances, Inc. v
Siegel (Me) 438 A2d 888, 32 UCCRS 1534; Kroll v Crest Plastics, Inc., 142 Mich App
284, 369 NW2d 487, 41 UCCRS 1339; WeatherRite, Inc. v Southdale ProBowl, Inc.,
301 Minn 346, 222 NW2d 789, 15 UCCRS 664; Canton Provision Co. v Chaney (App,
Ashtabula Co) 46 Ohio L Abs 513, 70 NE2d 687; Hinz v Freeman (Mun Ct) 14 Ohio Ops
217, 28 Ohio L Abs 546; Acme Metals, Inc. v Weddington (Tenn App) 575 SW2d 15, 25
UCCRS 1389.
In an action by the endorser of a promissory note against its maker where the plaintiff
alleged that he was the manager of the branch office of a life insurance company, that the
defendant purchased an insurance contract for which he executed and delivered a note
payable to bank, and that the plaintiff endorsed the note as accommodation party, where
the note was endorsed without recourse and was signed "Duane S. Wolfram (Manager),"
and where the plaintiff alleged that he paid the note when the defendant defaulted at the
due date, parole evidence was admissible to show whether the plaintiff signed the note as
a representative of the insurance company or whether he signed the note in his capacity
of sole proprietor making him individually liable, and thus, whether the plaintiff had the
capacity to sue on the note. Wolfram v Halloway (1st Dist) 46 Ill App 3d 1045, 5 Ill Dec
264, 361 NE2d 587, 21 UCCRS 591.

97 ALR3d 798.
Prctice References Admissibility of parol evidence. 8 Am Jur POF2d 193, Personal

Liability of Corporate Officer on Promissory Note 6.
Proof that corporate officer signed promissory note with intent to be individually
liable. 8 Am Jur POF2d 193, Personal Liability of Corporate Officer on Promissory
Note 8-15.
Footnote 96. Citibank Eastern, N. A. v Minbiole (3d Dept) 50 App Div 2d 1052, 377
NYS2d 727, 18 UCCRS 1008.
17 UCCRS2d 1191; Nuttall v Jesonis (Fla App D2) 666 So 2d 243, 21 FLW D109;
Highfield v Lang, 182 Ind App 77, 394 NE2d 204, 27 UCCRS 467; Solar Supply, Inc. v
Camp's Heating & Air Conditioning, Inc. (La App 2d Cir) 408 So 2d 968, 33 UCCRS
314; Maine Gas & Appliances, Inc. v Siegel (Me) 438 A2d 888, 32 UCCRS 1534; St.
Croix Engineering Corp. v McLay (Minn) 304 NW2d 912, 31 UCCRS 619; Wise v
Duker (Summit Co) 57 Ohio App 3d 62, 566 NE2d 1248; Gant Oil Co. v Ace Oil Co.
(Tenn App) 884 SW2d 131, 25 UCCRS2d 442.
In a suit by a payee of a promissory note allegedly signed by an individual defendant as a

representative of a corporate defendant, even though there was no indication on the
instrument that the individual defendant's signature was signed in a representative
capacity, parol evidence was admissible to show that the individual defendant had signed
in a representative capacity because the action was between the immediate parties to the
instrument, and the name of the individual defendant's alleged principal, namely the
corporate defendant, appeared on the face of the instrument.Sullivan County
Wholesalers, Inc. v Sullivan County Dorms (3d Dept) 59 App Div 2d 628, 398 NYS2d
180, 22 UCCRS 994.
Footnote 98. First Nat'l Bank v Ford Motor Credit Co. (DC Colo) 748 F Supp 1464, 13
UCCRS2d 810; Golden Dawn Foods, Inc. v Cekuta (Trumbull Co) 1 Ohio App 2d 464,
30 Ohio Ops 2d 452, 205 NE2d 121.
17 UCCRS2d 1191 (holding that parol evidence was not admissible to relieve personal
liability because the litigation was not between immediate parties to the note).
Footnote 1. Mountain Am. Credit Union v McClellan (Utah App) 854 P2d 590, 215 Utah
Adv Rep 32, 22 UCCRS2d 810, cert den (Utah) 862 P2d 1356 (holding that in an action
to collect on a promissory note, the corporate officer who executed the note twice, once
in his capacity as the corporate secretary and once without any indication as to his
capacity, was precluded as a matter of law from presenting evidence that the second
execution was at the lender's request and was not intended to make him personally
liable).
Footnote 2. Lerman Container Corp. v Letourneau (DC Mass) 35 UCCRS 547; In re

Turner (BC DC Mass) 49 BR 231, 41 UCCRS 141, later proceeding (DC Mass) 81 BR
738; Attkisson v Cavanagh, 201 Ga App 633, 411 SE2d 786, 102-214 Fulton County D R
19, 16 UCCRS2d 1111; S & S Cash Register & Computer Co. v Caldarera (La App 5th
Cir) 627 So 2d 255, reh den (La App 5th Cir) 1993 La App LEXIS 3877; First Safety
Fund Nat'l Bank v Friel, 23 Mass App 583, 504 NE2d 664, 3 UCCRS2d 1021; Norfolk
County Trust Co. v Vichinsky, 5 Mass App 768, 359 NE2d 59, 20 UCCRS 1226;
Bankers Trust Co. v Stahl (1st Dept) 145 App Div 2d 311, 534 NYS2d 979, app dismd
without op 73 NY2d 872, 537 NYS2d 498, 534 NE2d 336.
Where a note involved no ambiguity because the signer signed the note "L. Featherston,"
the name of the signer's alleged principal appeared nowhere on the instrument, and the
signer's alleged agency status was not indicated on the note in any way, parol evidence
was not admissible to show that the signer signed in a representative capacity. Gainok v
Featherson (App) 131 Ariz 421, 641 P2d 909, 33 UCCRS 1012.
Footnote 3. Tampa Bay Economic Dev. Corp. v Edman (Fla App D2) 598 So 2d 172, 17
FLW D1122, 19 UCCRS2d 198.
Footnote 4. Golden Distributors, Ltd. v Save All Tobacco, Inc. (BC SD NY) 134 BR 770,
17 UCCRS2d 168; Combine Int'l v Berkley (1st Dept) 141 App Div 2d 465, 529 NYS2d
790, 8 UCCRS2d 64; Mestco Distributors, Inc. v Stamps (Tex App Houston (14th Dist))
824 SW2d 678, 17 UCCRS2d 174.
Footnote 5. Combine Int'l v Berkley (1st Dept) 141 App Div 2d 465, 529 NYS2d 790, 8
UCCRS2d 64.
Footnote 6. Combine Int'l v Berkley (1st Dept) 141 App Div 2d 465, 529 NYS2d 790, 8
UCCRS2d 64.
Footnote 7. Puckett v Codisco, Inc. (Fla App D2) 440 So 2d 596.
Footnote 8. Fischer v Rodriguez-Capriles (Fla App D3) 472 So 2d 1315, 10 FLW 1743.
Footnote 9. Cooley v Dickerson & Swift Entertainment, Inc., 177 Ga App 855, 341 SE2d
504, 1 UCCRS2d 127.
2. Employers [504-510]
504 Employer's responsibility for fraudulent indorsement by employee
View Entire Section

For the purpose of determining the rights and liabilities of a person who, in good faith,
pays an instrument or takes it for value or for collection, if an employer entrusted an
employee with responsibility with respect to the instrument and the employee or a person
acting in concert with the employee makes a fraudulent indorsement of the instrument,
the indorsement is effective as the indorsement of the person to whom the instrument is
payable if it is made in the name of the person. 10
Definitions: The term "employee" includes an independent contractor retained by

the employer and also an employee of an independent contractor retained by the
employer. 11 The phrase "fraudulent indorsement," as used in this statute, means:
(1) In the case of an instrument payable to the employer, a forged indorsement purporting
to be that of the employer; 12 or

(2) In the case of an instrument with respect to which the employer is the issuer, a forged
indorsement purporting to be that of the person identified as the payee. 13
The statute is inapplicable where there is no forged indorsement. 14
Illustration: X is Treasurer of Corporation and is authorized to write checks on

behalf of Corporation by signing X's name as Treasurer. X draws a check in the name
of Corporation and signs X's name as Treasurer. The check is made payable to X. X
then indorses the check and obtains payment. Assume that Corporation did not owe
any money to X and did not authorize X to write the check. Although the writing of
the check was not authorized, Corporation is bound as drawer of the check, because X
had authority to sign checks on behalf of Corporation. This result follows from agency
law and 3-402(a). Section 3-405 does not apply in this case because there is no
forged indorsement. X was payee of the check so the indorsement is valid. 3-110(a).
15
An indorsement is made in the name of a payee if: it is made in a name substantially

similar to that of the payee; 16 or the instrument is deposited in a depository bank to an
account in a name substantially similar to that of the payee. 17
Comment: This statute is addressed to fraudulent indorsements made by an

employee with respect to instruments with respect to which the employer has given
responsibility to the employee. It covers two categories of fraudulent indorsements:
indorsements made in the name of the employer to instruments payable to the employer
and indorsements made in the name of payees of instruments issued by the employer.
This section applies to instruments generally but normally the instrument will be a
check. 18 This section adopts the principle that the risk of loss for fraudulent
indorsements by employees who are entrusted with responsibility with respect to
checks should fall on the employer rather than the bank that takes the check or pays it,
if the bank was not negligent in the transaction. It is based on the belief that the
employer is in a far better position to avoid the loss by care in choosing employees, in
supervising them, and in adopting other measures to prevent forged indorsements on
instruments payable to the employer or fraud in the issuance of instruments in the name
of the employer. 19
If the bank fails to exercise ordinary care, the statute allows the employer to shift loss to
the bank to the extent that, the bank's failure to exercise ordinary care contributed to the
loss. 20 The provision applies regardless of whether the employer is negligent. 21
Distinction: With respect to cases governed by former 3-405(1)(c), 3-405 is more

favorable to employers in one respect. The bank was entitled to the preclusion
provided by former 3-405(1)(c) if it took the check in good faith. The fact that the
bank acted negligently did not shift the loss to the bank so long as the bank acted in
good faith. Under revised 3-405 the loss may be recovered from the bank to the
extent the failure of the bank to exercise ordinary care contributed to the loss. 22
Footnotes

Footnote 12. UCC 3-405(a)(2)(i) [1990 Rev].
Footnote 13. UCC 3-405(a)(2)(ii) [1990 Rev].
Where the evidence showed that an embezzler, an employed as the administrator of the
plaintiff corporation's employee benefit plan, indorsed checks payable to the plan for
over four years with the knowledge of and without objection from the plaintiff, the
plaintiff was deemed to have authorized the embezzler to indorse and deposit the checks;
accordingly, the embezzler's indorsements did not constitute "forged indorsements," and
the plaintiff could not maintain a conversion action against the payor banks. Candlewood
Obstetric-Gynecologic Assoc., P.C. v Signet Bank/Maryland (DC Md) 805 F Supp 328,
18 UCCRS2d 1189.
Footnote 15. Official Comment 3, Case No. 2 to UCC 3-405 [1990 Rev].
Footnote 16. UCC 3-405(c)(i) [1990 Rev].
Footnote 17. UCC 3-405(c)(ii) [1990 Rev].
Footnote 20. Official Comment 1 to UCC 3-405 [1990 Rev], providing further that
"ordinary care" is defined in 3-103(a)(7).
505 What constitutes employee with "responsibility"
View Entire Section

The term "responsibility" with respect to instruments means authority:
To sign or indorse instruments on behalf of the employer 23
To process instruments received by the employer for bookkeeping purposes, for deposit
to an account, or for other disposition 24
To prepare or process instruments for issue in the name of the employer 25

To supply information determining the names or addresses of payees of instruments to
be issued in the name of the employer 26
To control the disposition of instruments to be issued in the name of the employer 27
To act otherwise with respect to instruments in a responsible capacity 28
Illustration: The duties of Employee, a bookkeeper, include posting the amounts of

checks payable to Employer to the accounts of the drawers of the checks. Employee
steals a check payable to Employer which was entrusted to Employee and forges
Employer's indorsement. The check is deposited by Employee to an account in
Depositary Bank which Employee opened in the same name as Employer, and the
check is honored by the drawee bank. The indorsement is effective as Employer's
indorsement, because Employee's duties include processing checks for bookkeeping
purposes. Thus, Employee is entrusted with "responsibility" with respect to the check.
Neither Depositary Bank nor the drawee bank is liable to Employer for conversion of
the check. The same result follows if Employee deposited the check in the account in
Depositary Bank without indorsement. 29
The term "responsibility" does not include authority that merely allows an employee to
have access to instruments or blank or incomplete instrument forms that are being stored
or transported or are part of the incoming or outgoing mail, or similar access. 30
Observation: Employee's duties include stamping Employer's unrestricted blank

indorsement on checks received by Employer and depositing them in Employer's bank
account. After stamping Employer's unrestricted blank indorsement on a check,
Employee steals the check and deposits it in Employee's personal bank account.
Section 3-405 does not apply, because there is no forged indorsement. Employee is
authorized by Employer to indorse Employer's checks. The fraud by Employee is not
the indorsement but rather the theft of the indorsed check. 31
Footnotes
Footnote 25. UCC 3-405(a)(3)(iii) [1990 Rev].
Footnote 26. UCC 3-405(a)(3)(iv) [1990 Rev].
Observation The computer that controls Employer's check-writing machine was

programmed to cause a check to be issued to Supplier Co. to which money was owed
by Employer. The address of Supplier Co. was included in the information in the
computer. Employee is an accounts payable clerk whose duties include entering
information into the computer. Employee fraudulently changed the address of Supplier
Co. in the computer data bank to an address of Employee. The check was subsequently
produced by the check-writing machine and mailed to the address that Employee had
entered into the computer. Employee obtained possession of the check, indorsed it in
the name of Supplier Co., and deposited it to an account in Depositary Bank which
Employee opened in the name "Supplier Co." The check was honored by the drawee
bank. The indorsement is effective under UCC 3-405(b), because Employee's duties
allowed Employee to supply information determining the address of the payee of the
check. An Employee that is entrusted with duties that enable the Employee to
determine the address to which a check is to be sent controls the disposition of the
check and facilitates forgery of the indorsement. The Employer is held responsible.
The drawee may debit the account of Employer for the amount of the check. Official
Comment 3, Case No. 5 to UCC 3-405 [1990 Rev].
Footnote 27. UCC 3-405(a)(3)(v) [1990 Rev].
Observation: Checks of Corporation are signed by Treasurer in behalf of

Corporation as drawer. Clerk's duties include the preparation of checks for issue by
Corporation. Clerk prepares a check payable to the order of Supplier Co. for
Treasurer's signature. Clerk fraudulently informs Treasurer that the check is needed to
pay a debt owed to Supplier Co., a company that does business with Corporation. No
money is owed to Supplier Co. and Clerk intends to steal the check. Treasurer signs it
and returns it to Clerk for mailing. Clerk does not indorse the check but deposits it to
an account in Depositary Bank which Clerk opened in the name "Supplier Co." The
check is honored by the drawee bank. Section 3-405 applies and it treats the deposit by
Clerk as an effective indorsement by Clerk, because Clerk was entrusted with
responsibility with respect to the check.
Footnote 28. UCC 3-405(a)(3)(vi) [1990 Rev].
Footnote 29. Official Comment 3, Case No. 1 to UCC 3-405 [1990 Rev], stating further
that under UCC 3-405(c) deposit in a depositary bank in an account in a name
substantially similar to that of Employer is the equivalent of an indorsement in the name
of Employer.
Footnote 31. Official Comment 3, Case No. 4 to UCC 3-405 [1990 Rev], providing
further that whether Employer has a cause of action against the bank in which the check
was deposited is determined by whether the bank had notice of the breach of fiduciary
duty by Employee; the issue is determined under UCC 3-307.
506 --Physical access distinguished from responsibility
View Entire Section

The concept of responsibility for instruments is distinguishable from merely having

physical access to the instruments, even though such access is within the scope of the
employment of the employee. Thus, the fact that any employee has access to
instruments, or to blank or incomplete instruments, whether they are transported or for
any purpose that does not go beyond merely having physical possession of the
instruments, does not bring the action of the employee within the scope of the statute. 32
Illustration: Janitor, an employee of Employer, steals a check for a very large
amount payable to Employer after finding it on a desk in one of Employer's offices.
Janitor forges Employer's indorsement on the check and obtains payment. Since
Janitor was not entrusted with "responsibility" with respect to the check 3-405 does
not apply. 33
Footnotes
Thus, giving an employee authority to collect checks made payable to the employer and
furnishing him with a rubber stamp to mark in the payee's name on the checks did not
indicate an intent on the employer's part to clothe the employee with the authority to
indorse and cash those checks. Aetna Casualty & Surety Co. v Hepler State Bank, 6 Kan
App 2d 543, 630 P2d 721, 32 UCCRS 187, 23 ALR4th 841.
that 3-406 might apply to this case; the issue would be whether Employer was
negligent in safeguarding the check; if not, Employer could assert that the indorsement
was forged and bring an action for conversion against the depositary or payor bank under
3-420.
507 --Hybrid authority of employee
View Entire Section

In order to be an employee charged with responsibility as to instruments, there is no

requirement that the employee's scope of employment be exclusively limited to
"responsibility" for instruments. If some of the employee's duties bring him within the
scope of "responsibility" for instruments, the statute is applicable and it is immaterial that
at other times the employee may be acting or performing duties as to matters unrelated to
"responsibility" for instruments. There is no basis for imposing a quantitative limitation,
as by requiring that the greater part or dominant part of the duties of an employee be
within the definition of "responsibility" for instruments. 34
Footnotes
508 Indorsements made in name of payees of instruments issued by employer

View Entire Section
The first category of cases governed by UCC 3-405 are those involving indorsements
made in the name of payees of instruments issued by the employer. In this category,
3-405 includes cases that were covered by former 3-405(1)(c). The scope of 3-405 in
revised Article 3 is, however, somewhat wider. It covers some cases not covered by
former 3-405(1)(c), in which the entrusted employee makes a forged indorsement to a
check drawn by the employer. 35
Observation: Treasurer is authorized to draw checks in behalf of Corporation.

Treasurer draws a check of Corporation payable to Supplier Co., a company that sold
goods to Corporation. The check was issued to pay the price of these goods. At the
time the check was signed, Treasurer had no intention of stealing the check. Later,
Treasurer stole the check, indorsed it in the name "Supplier Co." and obtained payment
by depositing it to an account in Depositary Bank which Treasurer opened in the name
"Supplier Co." The indorsement is effective under 3-405(b). 36
Moreover, a larger group of employees is included in revised 3-405. The key provision
is the definition of "responsibility," which identifies the kind of responsibility delegated
to an employee which will cause the employer to take responsibility for the fraudulent
acts of that employee. An employer can insure this risk by employee fidelity bonds. 37
Footnotes
that UCC 3-404(b) does not apply to this case.
509 Fraudulent indorsements of name of employer to instruments payable to

employer
View Entire Section

The second category of cases governed by 3-405fraudulent indorsements of the name

of the employer to instruments payable to the employer were covered in former Article
3 by 3-406. Under former 3-406, the employer took the loss only if negligence of the
employer could be proved. Under revised Article 3 3-406 need not be used with
respect to forgeries of the employer's indorsement. 3-405 imposes the loss on the
employer without proof of negligence. 38

Footnotes
510 Indemnification for loss through negligence
View Entire Section

If the person paying the instrument, or taking it for value or for collection fails to
exercise ordinary care in paying or taking the instrument, and that failure substantially
contributes to loss resulting from the fraud, the person bearing the loss may recover from
the person failing to exercise ordinary care to the extent the failure to exercise ordinarily
care contributed to the loss. 39 Thus, to a limited extent, the employer of the wrongdoing
employee, who fraudulently indorses an instrument, may obtain indemnity from other
entities involved in the negotiation of the instrument. 40
Failure to exercise ordinary care by the depositary bank is determined in the context of
all the facts relating to the bank's conduct with respect to the bank's collection of the
check. If the trier of fact finds that there was such a failure and that the failure
substantially contributed to loss, it could find the depositary bank liable to the extent the
failure contributed to the loss. 41
Observation: Suppose that the computer that controls Employer's check-writing

machine was programmed to cause a check to be issued to Supplier Co., to a
well-known national corporation. In addition, the check is for a very large amount of
money. Before depositing the check, Employee opens an account in Depositary Bank
in the name of the corporation and states to the person conducting the transaction for
the bank that Employee is manager of a new office being opened by the corporation.
Depositary Bank opens the account without requiring Employee to produce any
resolutions of the corporation's board of directors or other evidence of authorization of
Employee to act for the corporation. A few days later, the check is deposited, the
account is credited, and the check is presented for payment. After Depositary Bank
receives payment, it allows Employee to withdraw the credit by a wire transfer to an
account in a bank in a foreign country. The trier of fact could find that Depositary
Bank did not exercise ordinary care and that the failure to exercise ordinary care
contributed to the loss suffered by Employer. The trier of fact could allow recovery by
Employer from Depositary Bank for all or part of the loss suffered by Employer. 42
Footnotes

Footnote 42. Official Comment 4 to UCC 405 [1990 Rev].
E. Warranties [511-532]
Research References
UCC 3-405, 3-407, 3-415 [1952]; UCC 3-301, 3-404, 3-407, 3-416, 3-417, 4-207
[1990 Rev]
ALR Digest: Alteration of Instruments 1 et seq.; Bills and Notes 89, 129;
Signature 1 et seq.
ALR Index: Annotations, Acceptance; Alteration of Instruments; Bills and Notes;
Checks and Drafts; Collecting Bank; Consideration; Discharge or Release; Disclaimers;
Dishonor; Good Faith; Indorsement; Presentation or Presentment; Signatures; Uniform
Commercial Code; Warranties
3:247, 3:248, 3:249
UCC Pleading and Practice Forms 3d, Article 3Negotiable Instruments 3:245, 3:246,
3:247 13 Am Jur POF2d 347, Bank's Failure to Use Ordinary Care in Detecting Forged
or Altered Checks; 14 Am Jur POF2d 693, Negligence Contributing to Alteration or
Unauthorized Signature Under UCC 3-406
3-416:7 through 3-416:13, 3-416:16, 3-417:6, 3-417:15, 3-417:16
1. Presentment Warranties [511-520]
511 Generally
View Entire Section

The Uniform Commercial Code provides for presentment warranties with respect to
negotiable instruments which are given by any prior transferor and by any person who
obtains payment or acceptance. 43 The other class of warranties arising under the Code,
the "transfer" warranties, 44 are given by any person who transfers an instrument and
receives consideration, and run to the transferee. 45
Observation: 4-207 fixes the same warranties for the collection of items through
the banking system that 3-417 establishes for the transfer of commercial paper not
collected through the banking system. 46
Revised Article 3 does not apply retroactively; thus, the former version of Article 3
ordinarily governs a claim of breach of presentment warranty as to an item that was
drawn, negotiated, and honored prior to the effective date of a state's adoption of the
revision. 47 However, if the parties voluntarily choose to base their presentment
warranty claims on Revised Article 3, the revision may be applied. 48
Caution: One state, New Jersey, has adopted a contrary view of the prospective
application of Revised Article 3. 49 Where a note was executed in 1989, the trial held
in 1990, and the New Jersey UCC amended in 1992, the New Jersey court determined
that the amendment was curative, embracing the expectations of the parties and the
commercial marketplace. 50
Footnotes
Footnote 44. 521 et seq., discussing UCC 3-417(2) [ 1952]; UCC 3-416
[ 1990 Rev].
Footnote 46. Sun'n Sand, Inc. v United California Bank, 21 Cal 3d 671, 148 Cal Rptr
329, 582 P2d 920, 24 UCCRS 667, 21 UCCRS2d 1003 (criticized on other grounds in
Roy Supply, Inc. v Wells Fargo Bank (3rd Dist) 39 Cal App 4th 1051, 46 Cal Rptr 2d
309, 95 CDOS 8401, 95 Daily Journal DAR 14450, 27 UCCRS2d 1363) (stating that
UCC 4-207 [1952] and 3-417 [1952] are parallel provisions).
Annotation: What constitutes change of position by payee so as to preclude recovery

of payment made under mistake, 40 ALR2d 997.
Footnote 47. Barber v First Nat'l Bank (In re Ostrom-Martin, Inc.) (BC CD Ill) 192 BR
937, 29 UCCRS2d 530, summary judgment gr (BC CD Ill) 202 BR 267.
Footnote 50. Carnegie Bank v Shalleck, 256 NJ Super 23, 606 A2d 389, 17 UCCRS2d
799.
512 Right to enforce instrument
View Entire Section

If an unaccepted draft is presented to the drawee for payment or acceptance, and the
drawee accepts the draft, the person obtaining payment or acceptance, at the time of
presentment, and a previous transferor of the draft, at the time of transfer, warrant to the
drawee making payment or accepting the draft in good faith that the warrantor is, or was,

at the time the warrantor transferred the draft, a person entitled to enforce the draft,or
authorized to obtain payment or acceptance of the draft on behalf of a person entitled to
enforce the draft. 51 In other words, all prior parties who transfer an instrument, or
present it for payment or acceptance warrant the genuineness of prior indorsements. 52
Definition: The term "person entitled to enforce" an instrument means either the
holder of the instrument, a nonholder in possession of the instrument who has the
rights of a holder, or a person not in possession of the instrument who is entitled to
enforce the instrument. A person may be a person entitled to enforce the instrument,
even though the person is not the owner of the instrument or is in wrongful possession
of the instrument. 53
Comment: This section replaces former 3-301 that stated the rights of a holder.
The rights stated in former 3-301 to transfer, negotiate, enforce, or discharge an
instrument are stated in other sections of Revised Article 3. 54
As a result of this Uniform Commercial Code subsection, payment of a check missing a

necessary indorsement of a copayee breaches the presentment warranty of good title. 55
However, the revision retains the rule that the drawee does not admit the authenticity of
indorsements. 56
Illustration: The presentment warranty providing that any person who obtains
payment or acceptance and any prior transferor warrants to a person who in good faith
pays or accepts that he or she has good title to the instrument or is authorized to obtain
payment or acceptance on behalf of one who has good title, applied to a money
exchange which was a holder as defined in UCC 1-201(20), as well as a holder in due
course as defined by UCC 3-302, of checks payable to a deceased retiree (below
whose name appeared the name of an individual appointed her attorney-in-fact) and
endorsed to it by the signature of that individual, who was at one time authorized to act
on behalf of the retiree pursuant to a properly executed power of attorney; the money
exchanged breached the presentment warranty where neither the individual nor the
money exchange was authorized to act on behalf of the retiree subsequent to her death,
and in presenting the checks for payment, the money exchange warranted that it was
authorized to act on behalf of the person who had good title when, in fact, it was not.
57
A drawer who has suffered a loss on a forged check lacks standing to bring suit for
breach of presentment warranty of good title directly against the "depositary bank." 58
The drawer's proper recourse is a suit against the "payor bank" for recrediting of its
account. 59 The Official Comments to Revised Article 3 make this clear, and the same
rule may be applied to cases involving pre-revised 3-417 and 4-207. 60
Observation: According to the express language of former UCC 3-417(1)(a) and

4-207(1)(a), a party had standing to enforce the Code's presentment warranties only if
it could be deemed either the "payor bank" or an "other payor" who paid or accepted
the item presented. Where an investment company sued a bank for having breached
the warranty of good title by having cashed, over forged indorsements, a check drawn
by the company, the bank, not the company, was the "payor bank." As to whether a
drawer, such as the company, could be an "other payor," the courts were split, with a
minority view giving drawers that status. 61 Inasmuch as the Official Comment to

Revised 3-417 specifically rejected the minority view, however, the court also
rejected it and ordered judgment in the bank's favor. 62 Thus, the phrase "other payor"
does not include the drawer of a check or the customer under a letter of credit. 63
Footnotes
Footnote 52. Perini Corp. v First Nat'l Bank (CA5 Ga) 553 F2d 398, 21 UCCRS 929, reh
den (CA5 Ga) 557 F2d 823.
Footnote 55. Longview Bank & Trust Co. v First Nat'l Bank (Tex App Fort Worth) 750
SW2d 297, 6 UCCRS2d 447 (decided under prior law).
Footnote 57. ABC Money Exchange v Public Employees Retirement System (Cuyahoga
Co) 70 Ohio App 3d 732, 591 NE2d 1359, 18 UCCRS2d 202.
245, claim dismissed (BC CD Ill) 192 BR 937, 29 UCCRS2d 530, summary judgment gr
(BC CD Ill) 202 BR 267.
(BC CD Ill) 202 BR 267 (referring to UCC 4-401).
(BC CD Ill) 202 BR 267.
Footnote 61. Steinroe Income Trust v Continental Bank N.A., 238 Ill App 3d 660, 179 Ill
Dec 671, 606 NE2d 503, 20 UCCRS2d 216.
Footnote 62. Steinroe Income Trust v Continental Bank N.A., 238 Ill App 3d 660, 179 Ill
Dec 671, 606 NE2d 503, 20 UCCRS2d 216.
Footnote 63. Cenlin Taiwan, Ltd. v Centon, Ltd. (CA9 Wash) 5 F3d 354, 93 CDOS 6625,
93 Daily Journal DAR 11363, 21 UCCRS2d 1091 (stating that Official Comment 2 to
Revised 3-417 explicitly rejects the contrary position).
513 No alteration
View Entire Section

If an unaccepted draft is presented to the drawee for payment or acceptance and the
drawee making payment or accepting the draft in good faith that the draft has not been
altered. 64
Definition: The term "alteration" means either an unauthorized change in an

instrument, which change purports to modify in any respect the obligation of a party, or
an unauthorized addition of words or numbers or other change to an incomplete
instrument which addition or change relates to the obligation of a party. 65 The
change must be made to an instrument and does not include a release or other collateral
agreement entered into with a party to the paper. 66
Practice guide: Any change that comes within the above definition is an alteration
and it is unnecessary to determine whether the change is material. 67
The use of the past tense in the warranty that "the draft has not been altered" indicates
that transferor warrants that there has been no alteration prior to the time of his transfer.
68 Thus, the transferor is not liable for an alteration made after his transfer had been
made. 69
Footnotes
514 Signatures
View Entire Section

If an unaccepted draft is presented to the drawee for payment or acceptance and the

drawee making payment or accepting the draft in good faith that the warrantor has no
knowledge that the signature of the drawer of the draft is unauthorized. 70
Comment: This subsection retains the rule that the drawee takes the risk that the
drawer's signature is unauthorized, unless the person presenting the draft has
knowledge that the drawer's signature is unauthorized. 71 Under this subsection, the
warranty of no knowledge that the drawer's signature is unauthorized is also given by
prior transferors of the draft. 72
The person presenting an unaccepted draft for acceptance or payment makes a warranty
that he has no knowledge that the drawer's signature is unauthorized. 73 This warranty
is not one that the signature is genuine or authorized, but merely a warranty that the
warrantor does not know that it is not. 74 The mere fact that the presenter may have
notice, reason to know, or be suspicious does not constitute a breach of the warranty as to
signatures. 75
Observation: In addition to this presentment warranty, an indorser transferring any

kind of instrument for a consideration makes a warranty that all signatures on the
instrument are authentic and authorized and that this warranty runs to subsequent
parties. 76 A warranty that all signatures in the chain of title of the presenter are
genuine or authorized is implicit in the presentment warranty that the presenter is the
person entitled to enforce the instrument for himself or on behalf of another. 77
Distinction: The presentment warranties provide that the person warrants that he has
no knowledge that the maker's or drawer's signature is unauthorized, while the transfer
warranties provide that the transferor warrants that all signatures are authorized. 78
"Good title" means the draft bears no forged indorsements or signatures. 79 When a
party presents a draft for acceptance, and knows the draft is forged, the presenting party
breaches the warranty of good title. 80
Footnotes
Annotation: Right and remedy of drawer of check against collecting bank which
receives it on forged indorsement and collects it from drawee bank, 99 ALR2d 637.

Footnote 78. Dozier v First Ala. Bank, N.A. (Ala Civ App) 363 So 2d 781, 25 UCCRS
802.
Footnote 79. White v Independence Bank, N.A. (Tex App Houston (1st Dist)) 794 SW2d
895, writ den (Jan 23, 1991) (decided under prior law).
Footnote 80. White v Independence Bank, N.A. (Tex App Houston (1st Dist)) 794 SW2d
895, writ den (Jan 23, 1991) (decided under prior law).
515 Measure of damages
View Entire Section

The 1990 Revision of the Uniform Commercial Code expands the damages rule of the
previous version of the Code. 81 A drawee making payment may recover from any
warrantor damages, for breach of warranty, equal to the amount paid by the drawee, less
the amount the drawee received or is entitled to receive from the drawer, because of the
payment. 82 In addition, the drawee is entitled to compensation for expenses and loss
of interest resulting from the breach. 83 The right of the drawee to recover damages
under this section is not affected by any failure of the drawee to exercise ordinary care in
making payment. 84
If the drawee accepts the draft, breach of warranty is a defense to the obligation of the
acceptor. 85 If the acceptor makes payment with respect to the draft, the acceptor is
entitled to recover from any warrantor, for breach of warranty, the amounts stated in this
subsection. 86
There is no express provision for attorney's fees, but attorney's fees are not meant to be
necessarily excluded. 87 They could be granted, because they fit within the language
"expenses resulting from the breach." 88
Illustration: A plaintiff who seeks indemnity for suits brought against him, because
of a breach of the warranties of a customer and a collecting bank on the transfer or
presentment of items, is entitled to receive, as an element of damages, the attorney's
fees expended in defense of the claim. Thus, where a drawee bank failed to pay a
purchaser of a cashier's check on his claim that had arisen out of the payment of the
check on a forged signature and instead accepted an assignment of the claim as
collateral security for a loan to the purchaser, the drawee bank did not act in bad faith,
and the drawee bank was entitled to recover from the depositor bank that had
warranted the forged endorsement attorney's fees expended in defense of the
purchaser's claim. 89
Footnotes

Forms: Instruction to juryDamages recoverable for breach of presentment warranties.

Instruments 3:249; UCC Pleading and Practice Forms 3d, Article 3 Negotiable
Instruments 3:247.
Footnote 89. Perkins State Bank v Connolly (CA5 Fla) 632 F2d 1306, 30 UCCRS 604
(criticized on other grounds by McAdam v Dean Witter Reynolds, Inc. (CA3 NJ) 896
F2d 750, 10 UCCRS2d 1085).
516 Presentment warranties as to checks and other unaccepted drafts
View Entire Section

If the drawee asserts a claim for breach of warranty based on an unauthorized

indorsement of the draft or an alteration of the draft, the warrantor may defend by
proving that the indorsement is effective under the statute governing imposters and
fictitious payees 90 or the statute governing an employer's liability for fraudulent
endorsement by an employee, 91 or the drawer is precluded from asserting against the
drawee the unauthorized indorsement or alteration. 92
Comment: If the drawer's conduct contributed to a loss from forgery or alteration,

the drawee should not be allowed to shift the loss from the drawer to the warrantor. 93
A defendant who acts negligently in taking checks does not take the checks in good faith.
94 Thus, the defendant breached its warranty of good title when it obtained payment
from the plaintiff on 79 of the plaintiff's payroll checks which had forged endorsements.
95

Footnotes

Bills and notes: nominal payee rule of UCC 3-405(1)(b), 92 ALR3d 268.
Footnote 91. 509, discussing UCC 3-405 [ 1990 Rev].
Footnote 94. Drexel Burnham Lambert, Inc. v 11 Stone Street Corp. (1st Dept) 156 App
Div 2d 121, 548 NYS2d 881.
Practice References 14 Am Jur POF2d 693, Negligence Contributing to Alteration or

Unauthorized Signature Under UCC 3-406.
13 Am Jur POF2d 347, Bank's Failure to Use Ordinary Care in Detecting Forged or
Altered Checks.
Footnote 95. Drexel Burnham Lambert, Inc. v 11 Stone Street Corp. (1st Dept) 156 App
Div 2d 121, 548 NYS2d 881.
517 Present warranties as to accepted drafts, dishonored drafts and notes
View Entire Section

If a dishonored draft is presented for payment to the drawer or an indorser, or any other
instrument is presented for payment to a party obliged to pay the instrument, and
payment is received, then:
The person obtaining payment and a prior transferor of the instrument warrant to the
person making payment in good faith that the warrantor is, or was, at the time the
warrantor transferred the instrument, a person entitled to enforce the instrument or
authorized to obtain payment on behalf of a person entitled to enforce the instrument 96
The person making payment may recover from any warrantor, for breach of warranty,
an amount equal to the amount paid plus expenses and loss of interest resulting from the
breach. 97
This subsection applies to presentment of notes and accepted drafts to any party obliged
to pay the instrument, including an indorser, and to presentment of dishonored drafts if
made to the drawer or an indorser. 98
Observation: There are no warranties comparable to those regarding alterations or
unauthorized signatures on unaccepted drafts, because they are appropriate only in the
case of presentment to the drawee of an unaccepted draft. 99 With respect to
presentment of an accepted draft to the acceptor, there is no warranty with respect to
alteration or knowledge that the signature of the drawer is unauthorized. 1 Those
warranties were made to the drawee when the draft was presented for acceptance and
breach of that warranty is a defense to the obligation of the drawee as acceptor to pay
the draft. 2 If the drawee pays the accepted draft, the drawee may recover the payment
from any warrantor who was in breach of warranty when the draft was accepted. 3
Thus, there is no necessity for these warranties to be repeated when the accepted draft
is presented for payment. 4 If presentment is made to the drawer or maker, there is no
necessity for a warranty concerning the signature of that person or with respect to
alteration. If presentment is made to an indorser, the indorser had itself warranted
authenticity of signatures and that the instrument was not altered. 5
Caution: There is no warranty made to the drawer under this subsection when
presentment is made to the drawee. 6
Footnotes
Observation: This warranty was not made under prior law. Barber v First Nat'l
Bank (In re Ostrom-Martin, Inc.) (BC CD Ill) 188 BR 245, claim dismissed (BC CD
Ill) 192 BR 937, 29 UCCRS2d 530, summary judgment gr (BC CD Ill) 202 BR 267.
Footnote 97. UCC 3-417 [1952]; UCC 3-417(d)(2) [1990 Rev].
Footnote 3. Official Comment 4 to UCC 3-417 [1990 Rev], referring to UCC 3-417(b)
[1990 Rev].
518 Disclaimer of warranties of presentment

View Entire Section
The warranties of presentment made to the drawer and drawee cannot be disclaimed with
respect to checks. 7 This provision recognizes that checks are normally paid by
automated means and that payor banks rely on warranties in making payment. 8 Thus, it
is not appropriate to allow disclaimer of warranties appearing on checks that normally
will not be examined by the payor bank. 9 No further regulation of the disclaimer of
presentment warranties is made and the subject of their disclaimer as to nonchecks is to
be treated in the same manner as in the case of the disclaimer of transfer warranties as to
nonchecks. 10
Footnotes
Footnote 7. UCC 3-417 [1952]; UCC 3-417(e) [1990 Rev].
519 Notice of breach of warranties
View Entire Section

Unless notice of a claim for breach of warranty is given to the warrantor within 30 days
after the claimant has reason to know of the breach and the identity of the warrantor, the
liability of the warrantor is discharged to the extent of any loss caused by the delay in
giving notice of the claim. 11 The 1990 revision substitutes this 30-day period in place
of the reasonable time of the former version of the Uniform Commercial Code. 12
Comment: This sentence requires a breach of warranty claim to be asserted within

30 days after the drawee learns of the breach and the identity of the warrantor. 13
Observation: According to Official Comment 2 of Revised 4-202, a bank that

"forwards" an item for presentment is required only to use "ordinary care" in the
selection of the transferee bank. Where depositary bank X immediately forwarded to
drawee bank for payment 224 checks (that happened to lack the indorsements of their
respective payees), X displayed reasonable care in selecting the transferee bank.
Therefore, Revised 4-202 was inapplicable to action by the drawer against X to the
extent it alleged negligent presentment. Any claim that the drawer had against X for
having accepted the checks could be brought under a breach of warranty theory and

Revised 3-417. 14
Footnotes
Footnote 11. UCC 3-417 [1952]; UCC 3-417(e) [1990 Rev].
Footnote 14. Great Lakes Higher Educ. Corp. v Austin Bank (ND Ill) 837 F Supp 892, 22
UCCRS2d 858.
520 Accrual of cause of action
View Entire Section

A cause of action for breach of warranty accrues when the claimant has reason to know
of the breach. 15 No such rule was in the former version of the Uniform Commercial
Code (UCC), and it is not clear when a cause of action would accrue under that law. 16
Comment: Because the traditional term "cause of action" may have been replaced in
some states by "claim for relief" or some equivalent term, the words "cause of action"
have been bracketed in the UCC to indicate that the words may be replaced by an
appropriate substitute to conform to local practice. 17
Footnotes
2. Transfer Warranties [521-532]
521 Generally

View Entire Section
The transferor of an instrument makes certain warranties and it is immaterial how the
transfer is effected, whether as a transfer or a negotiation and whether a negotiation is
with or without indorsement. 18 In all cases, the warranties made by the transferor are
the same. 19 The only distinction is in terms of who may enforce the warranties. 20
The transfer warranties in favor of the immediate transferee apply to all persons who
transfer an instrument for consideration, whether or not the transfer is accompanied by
indorsement. 21 Any consideration sufficient to support a simple contract will support
those warranties. 22 If there is an indorsement, the warranty runs with the instrument,
and the remote holder may sue the indorser-warrantor directly, and thus, avoid a
multiplicity of suits. 23 These warranties do not run to payor banks. 24
Footnotes
Footnote 24. Florida Frozen Foods, Inc. v National Commercial Bank & Trust Co. (3d
Dept) 81 App Div 2d 978, 439 NYS2d 771, 31 UCCRS 643.
522 Right to enforce instrument
View Entire Section

A person who transfers an instrument for consideration warrants to the transferee and, if
the transfer is by indorsement, to any subsequent transferee that the warrantor is a person
entitled to enforce the instrument. 25 This warranty is one that there are no unauthorized
or missing indorsements that prevent the transferor from making the transferee a person
entitled to enforce the instrument. 26
The warranty does not relate to whether the transferor is the beneficial owner of the
instrument. 27 Thus, proof that the transferor was acting as agent for another does not,

by itself, establish that there was a breach of the warranty of the right to enforce the
instrument. 28
Footnotes
523 Signatures
View Entire Section

the transfer is by indorsement, to any subsequent transferee, that all signatures are
authentic and authorized. 29 This warranty is broken when a signature is, in fact, forged
or, for any reason, is classified as unauthorized. 30
Illustration: Where the depositor of six checks indorsed the payees' names thereon
without the payees' authorization, the depositor's breach of transfer warranty entitled
the depositary bank to apply money in the depositor's account to satisfy the obligation
(recrediting of drawer's account) incurred by the bank as a result of the depositor's
warranty breach. 31
Footnotes
Footnote 29. UCC 417(2) [1952]; UCC 3-416(a)(2) [1990 Rev].
As to the distinction between the transfer warranty regarding signatures and the
presentment warranty regarding signatures, see 514.
Footnote 31. Iseghohi v Chase Manhattan Bank (2d Dept) 106 App Div 2d 491, 483
NYS2d 30, 39 UCCRS 1738.
524 No alteration

View Entire Section
the transfer is by indorsement, to any subsequent transferee that the instrument has not
been altered. 32
Definition: The term "alteration" means either an unauthorized change in an

instrument which change purports to modify in any respect the obligation of a party; or
an unauthorized addition of words or numbers or other change to an incomplete
instrument which addition or change relates to the obligation of a party. 33
Illustration: A form check which had the name and address of the supported
corporate drawer imprinted on its face and the defendant's name fraudulently placed
thereon as the intended payee, which was personally endorsed by the defendant, which
was falsely represented as a company payroll check genuine in every respect except
that it was not signed on the line for the drawer's signature, and which was presented
by the defendant for payment, was of sufficient apparent legal efficacy to support a
finding that the defendant was guilty of forgery and uttering; by endorsing the check,
the defendant accorded the instrument legal efficacy as between himself and a
transferee, though the check lacked a drawer's signature and was irregular on its face,
because the defendant warranted, that he had good title to the instrument and that it had
not been materially altered. 34
Footnotes
Footnote 34. Muhammad v Commonwealth, 13 Va App 194, 409 SE2d 818.
525 Absence of defense or recoupment claim against transferor
View Entire Section

the transfer is by indorsement, to any subsequent transferee, that the instrument is not
subject to a defense or claim in recoupment of any party that can be asserted against the
warrantor. 35 The rationale of this subsection is that the transferee does not undertake to
buy an instrument that is not enforceable in whole or in part, unless there is a contrary
agreement. 36 Even if the transferee takes as a holder in due course who takes free of
the defense or claim in recoupment, the warranty gives the transferee the option of

proceeding against the transferor rather than litigating with the obligor on the instrument
the issue of the holder-in-due-course status of the transferee. 37
Distinction: Subsection (3) of former 3-417 of the Uniform Commercial Code,

which limits this warranty, is deleted. The rationale is that while the purpose of a "no
recourse" indorsement is to avoid a guaranty of payment, the indorsement does not
clearly indicate an intent to disclaim warranties. 38
Practice guide: Summary judgment would be granted to a bank in its action against a
payee who cashed a check at the bank branch with knowledge that payment had been
stopped, because the payee/transferor breached the warranty of good title and
rightfulness of the transfer. 39
Footnotes
Footnote 39. Poughkeepsie Sav. Bank, FSB v Wagner (Sup) 146 Misc 2d 737, 552
NYS2d 545, 11 UCCRS2d 901.
526 Insolvency proceedings
View Entire Section

the transfer is by indorsement, to any subsequent transferee, that the warrantor has no
knowledge of any insolvency proceedings commenced with respect to the maker or
acceptor or, in the case of an unaccepted draft, the drawer. 40 There is no breach of this
warranty, unless the transferor had actual knowledge of the insolvency proceedings. 41
It is irrelevant that the transferor had notice of facts that would put a reasonable person
on inquiry that would have led to learning that such proceedings had been commenced.
42
Under this subsection, the transferor does not warrant against difficulties of collection,
impairment of the credit of the obligor or even insolvency. 43 The transferee is expected
to determine such questions before taking the obligation. 44 If insolvency proceedings
have been instituted against the party who is expected to pay and the transferor knows it,
the concealment of that fact amounts to a fraud upon the transferee, and the warranty
against knowledge of such proceedings is provided accordingly. 45

Footnotes
Forms: Complaint, petition, or declarationAgainst transferor of note of known

bankruptBreach of warranty. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
527 Who makes transfer warranties
View Entire Section

The transfer warranties are made by one who transfers the instrument by indorsement and
does so for consideration, 46 which may be any consideration sufficient to support a
simple contract. 47 In this connection, the Uniform Commercial Code speaks of
"consideration" rather than "value," the term "consideration" being broader than "value."
48
As the transfer warranties are made by a consideration-receiving transferor, it necessarily

follows that the warranties are not made by a transferor who does not receive any
consideration, such as a holder who transfers the instrument as a gift. 49
Footnotes

528 Who may enforce transfer warranties
View Entire Section

If the transfer of an instrument is made by indorsement and the indorsee receives

consideration, the transfer warranties run to the immediate transferee and to any
subsequent transferee of the instrument. 50 It is immaterial whether any of such
transferees is a holder or has the rights of a holder in due course. 51 If the transferor
does not indorse the instrument, the warranties run only to the immediate transferee. 52
Where the transfer is by indorsement, it is immaterial whether the indorsement is blank or

special, or whether it is qualified or unqualified. 53 It is also immaterial whether it is a
restrictive indorsement or it is not restrictive. 54 In all cases, the person seeking to
enforce a transfer warranty must show that he took the instrument in good faith. 55
If the ultimate holder of the instrument has the rights of a holder in due course, against
whom, the claim that breaches the warranty could not be asserted, that holder has the
option of proceeding for breach of warranty in order to avoid litigating his status as a
holder in due course or a person having such rights. 56
Footnotes
529 Measure of damages
View Entire Section

A person to whom the transfer warranties are made and who took the instrument in good
faith may recover from the warrantor as damages, for breach of warranty, an amount

equal to the loss suffered as a result of the breach, but not more than the amount of the
instrument plus expenses and loss of interest incurred as a result of the breach. 57
Observation: By limiting the plaintiff's recovery by this maximum, it is unnecessary

to consider whether a loss of the plaintiff is direct or consequential. 58 In most cases,
consequential damages will bring the plaintiff's claim in excess of the permitted
maximum recovery, so that the imposition of the maximum will necessarily exclude
the consequential damages. 59
Practice guide: There is no express provision for attorney's fees, but attorney's fees
are not meant to be necessarily excluded. 60 They could be granted, because they fit
within the phrase "expenses incurred as a result of the breach." The intention is to
leave to other state law the issue as to when attorney's fees are recoverable. 61
Footnotes
530 Disclaimer of transfer warranties
View Entire Section

The transfer warranties cannot be disclaimed with respect to checks. 62
Observation: This provision of the Uniform Commercial Code will undoubtedly be

construed to invalidate the disclaimer of warranties with respect to checks when a third
person is involved. 63 With respect to the immediate parties to the transfer of a check,
there would appear to be no reason why they cannot agree that the transferee could not
assert any transfer warranty liability claim against the transferor. 64 This right would
be based on general principles of pre-Code contract law that continue in force, because
these principles are not displaced. 65
Footnotes

Forms: AnswerDefenseDisclaimer of transfer warranties. 6A Am Jur Pl & Pr

531 Notice of breach of transfer warranties
View Entire Section

Unless notice of a claim for breach of warranty is given to the warrantor within 30 days
after the claimant has reason to know of the breach and the identity of the warrantor, the
liability of the warrantor is discharged to the extent of any loss caused by the delay in
giving notice of the claim. 66 The Uniform Commercial Code makes no provision as to
whether the notice to the warrantor must be written nor does it specify the manner in
which it is to be "given." 67
Between the immediate parties disclaimer may be made by agreement. 68 In the case of
an indorser, disclaimer of the transferor's liability, to be effective, must appear in the
indorsement with words, such as "without warranties" or some other specific reference to
warranties. 69 But in the case of a check, transfer warranties cannot be disclaimed at all.
70 In the check collection process, the banking system relies on these warranties. 71
Practice guide: The requirement of knowledge of the "identity of the warrantor," in

the provision for computing time in which notice must be given, should be construed to
include an address at which notice may be given. 72 In the case of the indorsing
warrantor, the name of the warrantor can obviously be determined by examining the
instrument. 73 However, this may be of little value, because the circumstances will
typically be that the claimant does not have any address or other means of
communicating with the warrantor. 74
Footnotes

532 Accrual of cause of action
View Entire Section

A cause of action for breach of a transfer warranty accrues when the claimant has reason
to know of the breach. 75 An action for breach of a transfer warranty must be brought
within three years after the cause of action accrues. 76
Comment: Since the traditional term "cause of action" may have been replaced in
some states by "claim for relief" or some equivalent term, the words "cause of action"
have been bracketed in the Uniform Commercial Code to indicate that the words may
be replaced by an appropriate substitute to conform to local practice. 77
Footnotes
F. Payment or Acceptance By Mistake [533-535]
Research References
UCC 3-418 [1952]; UCC 3-428 [1990 Rev]
ALR Index: Annotations; Bills and Notes; Checks and Drafts; Uniform Commercial
Code
6A Anderson, Uniform Commercial Code 3d [Rev] 3-418:7, 3-418:
533 Generally

View Entire Section
Under former Article 3 of the Uniform Commercial Code, the remedy of a drawee that
paid or accepted a draft by mistake was based on the law of mistake and restitution, but
that remedy was not specifically stated; rather, it was provided by another section of the
Code. 78 The former provision was simply a limitation on the unstated remedy under
the law of mistake and restitution. 79 The former provision states that, except as
otherwise provided, payment or acceptance of any instrument is final in favor of a holder
in due course, or a person who has, in good faith,changed his position in reliance on the
payment. 80 By contrast, the corresponding provision of the revised Code specifically
states the right of restitution. 81
Except as otherwise provided, if the drawee of a draft pays or accepts the draft and the
drawee acted on the mistaken belief that payment of the draft had not been stopped or
that the signature of the drawer of the draft was authorized, the drawee may recover the
amount of the draft from the person to whom or for whose benefit payment was made or,
in the case of acceptance, may revoke the acceptance. 82 Rights of the drawee under
this provision are not affected by failure of the drawee to exercise ordinary care in paying
or accepting the draft. 83
This statute allows restitution in the two most common cases in which the problem is
presented: payment or acceptance of forged checks, and checks on which the drawer has
stopped payment. 84 If the drawee acted under a mistaken belief that the check was not
forged or had not been stopped, the drawee is entitled to recover the funds paid or to
revoke the acceptance whether or not the drawee acted negligently. 85 But in each case,
the drawee loses the remedy if the person receiving payment or acceptance was a person
who took the check in good faith and for value or who, in good faith, changed position in
reliance on the payment or acceptance. 86 The result in the two cases covered by this
provision is that the drawee, in most cases, will not have a remedy against the person
paid, because there is usually a person who took the check in good faith and for value or
who in good faith changed position in reliance on the payment or acceptance. 87
Illustration: Seller contracted to sell goods to Buyer. The contract provided for
immediate payment by Buyer and delivery of the goods 20 days after payment. Buyer
paid by mailing a check for $10,000 drawn on Bank payable to Seller. The next day
Buyer gave a stop payment order to Bank with respect to the check Buyer had mailed
to Seller. A few days later Seller presented Buyer's check to Bank for payment over
the counter and requested a cashier's check as payment. Bank issued and delivered a
cashier's check for $10,000 payable to Seller. The teller failed to discover Buyer's stop
order. The next day Bank discovered the mistake and immediately advised Seller of
the facts. Seller refused to return the cashier's check and did not deliver any goods to
Buyer. Under 4-215, Buyer's check was paid by Bank at the time it delivered its
cashier's check to Seller. Bank is obliged to pay the cashier's check and has no defense
to that obligation. The cashier's check was issued for consideration, because it was
issued in payment of Buyer's check. Although Bank has no defense on its cashier's
check it may have a right to recover $10,000, the amount of Buyer's check, from Seller
under 3-418(a). Bank paid Buyer's check by mistake. Seller did not give value for
Buyer's check, because the promise to deliver goods to Buyer was never performed.
Section 3-303(a)(1). And, on these facts, Seller did not change position in reliance on
the payment of Buyer's check. Thus, the first sentence of 3-418(c) does not apply
and Seller is obliged to return $10,000 to Bank. Bank is obliged to pay the cashier's
check but it has a counterclaim against Seller based on its rights under 3-418(a).
This claim can be asserted against Seller, but it cannot be asserted against some other
person with rights of a holder in due course of the cashier's check. A person without
rights of a holder in due course of the cashier's check would take subject to Bank's
claim against Seller, because it is a claim in recoupment. 88
Except as otherwise provided, if an instrument has been paid or accepted by mistake and
there is not recovery of payment or revocation of acceptance, the person paying or
accepting may, to the extent permitted by the law governing mistake and restitution,
recover the payment from the person to whom or for whose benefit payment was made
or, in the case of acceptance, may revoke the acceptance. 89 Perhaps the most
important class of cases that falls under this subsection is that of payment by the drawee
bank of a check with respect to which the bank has no duty to the drawer to pay either
because the drawer has no account with the bank or because available funds in the
drawer's account are not sufficient to cover the amount of the check. 90
Comment: With respect to such a case, under 29 of the Restatement of Restitution,

if the bank paid because of a mistaken belief that there were available funds in the
drawer's account sufficient to cover the amount of the check, the bank is entitled to
restitution. 91 But 29 is subject to 33 of the Restatement of Restitution, which
denies restitution if the holder of the check receiving payment paid value in good faith
for the check and had no reason to know that the check was paid by mistake when
payment was received. 92
Illustration: Father gives Daughter a check for $10,000 as a birthday gift. The check
is drawn on Bank in which both Father and Daughter have accounts. Daughter
deposits the check in her account in Bank. An employee of Bank, acting under the
belief that there were available funds in Father's account to cover the check, caused
Daughter's account to be credited for $10,000. In fact, Father's account was overdrawn
and Father did not have overdraft privileges. Since Daughter received the check
gratuitously there is clear unjust enrichment if she is allowed to keep the $10,000 and
Bank is unable to obtain reimbursement from Father. Thus, Bank should be permitted
to reverse the credit to Daughter's account. 93
In most cases, the remedy of restitution will not be available, because the person
receiving payment of the check will have given value for it in good faith. 94 In some
cases, however, it may not be clear whether a drawee bank should have a right of
restitution. 95
Practice guide: A check-kiting scheme may involve a large number of checks drawn
on a number of different banks in which the drawer's credit balances are based on
uncollected funds represented by fraudulently drawn checks. 96 No attempt is made
in 3-418 to state rules for determining the conflicting claims of the various banks that
may be victimized by such a scheme. 97 Rather, such cases are better resolved on the
basis of general principles of law and the particular facts presented in the litigation. 98
Footnotes

Footnote 78. Official Comment 1 to UCC 3-418 [1990 Rev], referring to UCC 1-103.
Footnote 79. Official Comment 1 to UCC 3-418 [1990 Rev], referring to UCC 3-418
[1952].
Footnote 80. UCC 3-418 [1952].
Footnote 81. Official Comment Code 1 to UCC 3-418 [1990 Rev].
As to the exceptions to this provision, see UCC 3-418(c), covered in 534.
Footnote 84. Official Comment 1 to UCC 3-418 [1990 Rev], providing further that this
statute is consistent with former 3-418 and the rule of Price v Neal.
Footnote 89. UCC 3-418 [1952]; UCC 3-418(b) [1990 Rev].
As to the exceptions to this provision, see UCC 3-418(c), covered in 534.
534 Defenses to claim for relief

View Entire Section
The remedies of relief from mistake may not be asserted against a person who took the
instrument in good faith and for value or who, in good faith, changed position in reliance
on the payment or acceptance. 99 An acceptance obtained by such a person may not be
revoked and a payment made to him, of any nature, cannot be recovered by the payor. 1
The immunity conferred by this section is personal to the person who had taken the
instrument in good faith and for value or who had, in good faith, changed his position in
reliance on the payment or acceptance. 2 It does not immunize any warrantor from
liability for any breach of warranty that may exist. 3
The fact that the drawee failed to exercise ordinary care does not bar it from obtaining
relief for an acceptance or payment made by mistake. 4 It is no defense to an action to
recover a payment mistakenly made that the instrument was deemed paid within Article 4
of the Uniform Commercial Code. 5
Footnotes
535 Effect of relief on status of instrument
View Entire Section

If an instrument is paid or accepted by mistake and the payor or acceptor recovers

payment or revokes acceptance, the instrument is deemed not to have been paid or
accepted and is treated as dishonored, and the person from whom payment is recovered
has rights as a person entitled to enforce the dishonored instrument. 6
Observation: If Bank recovers from Seller under 3-418(a), the payment of Buyer's
check is treated as unpaid and dishonored. One consequence is that Seller may enforce
Buyer's obligation as drawer to pay the check ( 3-414). Another consequence is that
Seller's rights against Buyer on the contract of sale are also preserved. Buyer's
obligation to pay for the goods was suspended when Seller took Buyer's check and
remains suspended until the check is either dishonored or paid ( 3-310(b)). and the
obligation is discharged when the check is paid. Since 3-418(d) treats Buyer's check
as unpaid and dishonored, Buyer's obligation is not discharged and suspension of the
obligation terminates. 7
Footnotes
G. Conversion of Instrument [536-545]
Research References
UCC 1-201; UCC 3-206, 3-419 [1952]; UCC 3-206, 3-420 [1990 Rev]
ALR Digest: Banks 124 et seq.; Bills and Notes 231, 235; Conversion 18, 21 et
seq.; Principal and Agent 36, 59, 108
ALR Index: Agents and Agency; Banks and Banking; Bills and Notes; Checks and
Drafts; Collecting Bank; Conversion; Delivery; Good Faith; Presumptions and Burden of
Proof; Uniform Commercial Code
6A Am Jur Pl & Pr Forms (Rev), Commercial Code, Negotiable Instruments 3:19,
3:353-3:257
UCC Pleading and Practice Forms 3d Article 3Negotiable Instruments 3:251-3:254
6A Anderson, Uniform Commercial Code 3d [Rev] 3-206:14 through 3-206:17,
3-420:4, 3-420:8
536 Generally
View Entire Section

Under a provision of the prior version of Article 3, an instrument is considered to have

been converted when (a) a drawee to whom it is delivered for acceptance refuses to
return it on demand; or (b) any person to whom it is delivered for payment refuses on
demand either to pay or to return it; or (c) it is paid on a forged indorsement. 8
Under the revised Article 3, the law applicable to conversion of personal property applies
to instruments. 9 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 if a bank makes or
obtains payment with respect to the instrument for a person not entitled to enforce the
instrument or receive payment. 10 This provision covers cases in which a depositary
or payor bank takes an instrument bearing a forged indorsement, as well as cases in
which an instrument is payable to two persons and the two persons are not alternative
payees. 11
Observation: If a check is payable to John and Jane Doe, it can be negotiated or
enforced only by both persons acting jointly. Thus, neither payee acting without the
consent of the other is a person entitled to enforce the instrument. If John indorses the
check and Jane does not, the indorsement is not effective to allow negotiation of the
check. If Depositary Bank takes the check for deposit to John's account, Depositary
Bank is liable to Jane for conversion of the check if she did not consent to the
transaction. John, acting alone, is not the person entitled to enforce the check, because
John is not the holder of the check ( 3-110(d) and Comment 4 to 3-110). Depositary
Bank does not get any greater rights under 4-205(1). If it acted for John as its
customer, it did not become the holder of the check under that provision, because John,
its customer, was not a holder. 12
What constitutes conversion in cases not expressly covered by the Uniform Commercial
Code is governed by pre-Code law. 13
Practice guide: An action to recover for conversion of a cashier's check may not be
brought by its issuer, by its acceptor, or by any payee who did not receive delivery of
it. The issuing bank is not a transferee of the funds; it is merely a conduit of funds
from the purchaser to the ultimate recipient. 14
Footnotes
Forms: Complaint, petition, declarationFor return of instrument improperly

negotiated, injunction against further negotiation, and impoundment of instrument. 6A
3:19.
Complaint, petition, or declarationFor conversion by payee against drawee

bankPayment of check on forged indorsement. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationFor conversion by collecting bank in crediting

proceeds of checks on unauthorized indorsements. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationAllegationFor conversion of note by maker. 6A

3:253.
Complaint, petition, or declarationAllegationConversion by drawee bank. 6A Am

3:254.
Where after a building burned down, its insurer issued a check to several payees,
including the insured and the first and second mortgagees, only to have the insured
unilaterally surrender the check for a new check payable to the first mortgagee alone, the
second mortgagee having a right to possess the check had a common-law conversion
claim against the insurer for accepting the check after an invalid surrender. McNulty v
Great American Ins. Co. (DC Mass) 727 F Supp 45, 11 UCCRS2d 587.
CDOS 1591, 97 Daily Journal DAR 3065, 30 BCD 628, CCH Bankr L Rptr 77289
(noting that the purchaser of a cashier's check, analogous to the drawer of an ordinary
check, retains a property interest in the cashier's check before it is delivered to the
ultimate recipient).
537 Instrument is paid on forged endorsement
View Entire Section

An instrument is converted when it is paid on a forged indorsement, even if the payment

is made in good faith. 15 An endorsement of a check by an agent of the payee who
expressly lacks authority to endorse checks is a forged endorsement, and payment on the
endorsement is a conversion of the check. 16 A bank which pays a check on a forged
endorsement is liable for conversion regardless of whether the bank is a depositary bank
or the payor bank. 17
The general rule established by nearly all courts is that an individual who has obtained
possession of a draft on an unauthorized or forged indorsement of the payee's signature
and has collected the amount of the draft from the drawee is liable for the proceeds
thereof to the payee or other owner, notwithstanding they have been paid to the person
from whom the draft was obtained and notwithstanding that the payee's signature was
forged by his employee or agent. 18 The theory underlying this rule has been expressed
in a variety of ways, all of which may be summed up in the statement that, the possession
of the draft on the forged or unauthorized indorsement is wrongful, and when the money
has been collected on the draft, the bank, or other person or corporation, can be held as
for money had and received. 19
Possession by one joint payee is constructive possession by the other and the possessor
holds the draft for the benefit of himself and the other payee. 20 A bank which pays a
joint payee on the other's forged indorsement is liable thereon, notwithstanding the
other's nonpossession. 21
Footnotes
Footnote 15. Lakeland Pipe & Supply v First Nat'l Bank (Tex App Houston (14th Dist))
899 SW2d 230, writ den (Dec 1, 1994) and rehg of writ of error overr (Jan 12, 1995)
(decided under prior law).
Forms: Complaint, petition or declarationFor conversionBy payee against drawee

bankPayment of check on forged indorsement. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationFor conversion by collecting bank in crediting

proceeds of checks on unauthorized indorsements. 6A Am Jur Pl & Pr Forms (Rev),
Complaint, petition, or declarationAllegationConversion by drawee bank. 6A Am

3:254.
AnswerDefenseFailure of plaintiff to discover and report forgery of instrument

promptly. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:257.
Footnote 16. United Home Life Ins. Co. v Bellbrook Community Bank (Greene Co) 50
Ohio App 3d 53, 552 NE2d 954, 11 UCCRS2d 1193.
Footnote 17. United Home Life Ins. Co. v Bellbrook Community Bank (Greene Co) 50
Ohio App 3d 53, 552 NE2d 954, 11 UCCRS2d 1193.
Footnote 18. Bloempoort v Regency Bank of Florida (Fla App D2) 567 So 2d 923, 15
FLW D2234, 12 UCCRS2d 593; United Home Life Ins. Co. v Bellbrook Community
Bank (Greene Co) 50 Ohio App 3d 53, 552 NE2d 954, 11 UCCRS2d 1193; Stone v First
City Bank, N.A. (Tex App Dallas) 794 SW2d 537, writ den (Dec 19, 1990) and motion gr
(Dec 19, 1990) (decided under prior law).
Footnote 19. Stone v First City Bank, N.A. (Tex App Dallas) 794 SW2d 537, writ den
(Dec 19, 1990) and motion gr (Dec 19, 1990) (decided under prior law).

Annotation: Payee's right of recovery, in conversion under UCC 3-419(1)(c), for
money paid on unauthorized indorsement, 23 ALR4th 855.
Right of check owner to recover against one cashing it on forged or unauthorized

indorsement and procuring payment by drawee, 100 ALR2d 670.
538 Purchase of instrument by nonbank
View Entire Section

If an instrument bears an indorsement to "pay any bank," or in blank or to a particular

bank using the words "for deposit" or "for collection," or other words indicating a
purpose of having the instrument collected by a bank for the indorser or for a particular
account, then a person other than a bank, who purchases the instrument when so indorsed
converts the instrument, unless the amount paid for the instrument is received by the
indorser or applied consistently with the indorsement. 22 Thus, when a person other
than a bank purchases an instrument bearing a deposit or collection restrictive
indorsement, there is an effective negotiation and no penalty attaches if, in fact, the
proceeds of the instrument are remitted to the indorser or are deposited or applied in the
manner directed by the indorsement. If, however, the nonbank purchaser does not remit
or apply the proceeds in the manner directed, he is guilty of conversion of the instrument.
23
Observation: It would appear more logical to declare that the nonbank purchaser is
guilty of conversion of the proceeds for the reason that the dominion and control
exercised over the instrument is only wrongful if the proceeds are not properly applied.
24 However, the letter of the Uniform Commercial Code does make the subsequent
misapplication of the proceeds operate retroactively to condemn conduct that was
innocent, or at least neutral, at the time of its occurrence. 25
Footnotes
539 Action of depository bank
View Entire Section


account, then a depository bank that purchases the instrument or takes it for collection
when so indorsed converts the instrument, unless the amount paid by the bank with
respect to the instrument is received by the indorser or applied consistently with the
indorsement 26 The Uniform Commercial Code provision that a depositary bank that
fails to comply with a "for deposit" or similar indorsement will have "convert[ed] the
instrument," 27 did not change prior law, but merely clarified and continued prior law
pertaining to restrictive indorsements. 28
It is the instrument that is converted rather than the proceeds of the instrument. 29 Thus,
if the proceeds of the item are paid or credited in the manner directed by the restrictive
indorsement, there is no wrong committed. 30 If, however, the proceeds are not credited
or paid as directed by the indorsement, the depository bank is guilty of converting the
instrument. 31
Observation: A check is payable to X who indorses in blank but writes above the
signature the words "For deposit only." The check is stolen and cashed at a grocery
store by the thief. The grocery store indorses the check and deposits it in Depository
Bank. The account of the grocery store is credited and the check is forwarded to the
Payor Bank which pays the check. The grocery store and the Depositary Bank are
converters of the check, because X did not receive the amount paid for the check.
Payor Bank and any intermediary bank in the collection process are not liable to X. 32
Footnotes
Footnote 28. Society Nat'l Bank v Security Fed. Sav. & Loan, 71 Ohio St 3d 321, 643
NE2d 1090, 25 UCCRS2d 812, reconsideration den 71 Ohio St 3d 1459, 644 NE2d 1031
(citing Official Comments 1 and 3 to Revised 3-206 while applying prior law).
540 Action of payor bank

View Entire Section

account, then a payor bank that is also the depository bank or that takes the instrument
for immediate payment over the counter from a person other than a collecting bank
converts the instrument, unless the proceeds of the instrument are received by the
indorser or are applied consistently with the indorsement. 33
A payor bank may happen to be the depository bank, or the instrument may be presented
to the payor bank for immediate over-the-counter payment. 34 If the paper bears a
deposit or collection indorsement, and the instrument is received from a person who is
not a collecting bank, there is no violation of the Uniform Commercial Code if the
proceeds are, in fact, received by the indorser or applied consistently with his
indorsement. 35 If the proceeds are not so paid or applied, the payor bank is guilty of
converting the instrument. 36
Observation: Except to the extent above stated, a payor bank may ignore the bank
deposit or collection indorsement and is not liable if the proceeds of the instrument are
not received by the indorser or applied consistently with the indorsement. 37
Footnotes
541 Action of intermediary bank
View Entire Section


account then, except as otherwise provided, a payor bank or intermediary bank may
disregard the indorsement and is not liable if the proceeds of the instrument are not
received by the indorser or applied consistently with the indorsement. 38
Observation: An intermediary bank that receives an instrument in the collection

process is not subject to liability, inferring that it is not guilty of conversion, if the
proceeds of the instrument are not received by the indorser or paid or applied in the
manner directed by the indorsement. 39
Footnotes
542 Standing to bring conversion action
View Entire Section

An action for conversion of an instrument may be brought by:
The issuer or acceptor of the instrument 40
A payee or indorsee who did not receive delivery of the instrument either directly or
through delivery to an agent or copayee 41
Observation: Revised 3-420 was intended to explain and clarify the Uniform
Commercial Code's statutory scheme rather than change the meaning of the original
Code. 42 The revision changed established case law on the issue of delivery as a
prerequisite for a check payee to have standing to institute a conversion action. 43
The former version of that statute 44 did not contain a delivery requirement on its
face. 45
Illustration: Plaintiff bank stated a cause of action for conversion where it alleged
that it effected a wire transfer of a specific sum to the defendant bank, to be credited to
a specific account, thereby creating an obligation on the defendant's part to treat the
transfer in a specified manner or else return the funds, and that the defendant credited
the transfer to the account for which it was never intended, ultimately using the
transferred funds to reduce the overdraft in that account; the defendant had funds and
refused the plaintiff's demand for their return. 46
There is no reason why a drawer should have an action in conversion. 47 The check
represents an obligation of the drawer rather than property of the drawer. 48 The drawer
has an adequate remedy against the payor bank for recredit of the drawer's account for
unauthorized payment of the check. 49 Thus, a drawer lacks standing to bring a
conversion claim under this section against a bank that has paid the check over a forged
or unauthorized indorsement, because only the "true owner" of a check may bring a
conversion action, and the drawer is not the true owner. 50 A drawer can be held liable
in conversion only if the instrument is a draft payable by the drawer, and not a check
payable by a payor bank. 51
Footnotes
Footnote 40. UCC 3-419(1) [1952]; UCC 3-420(a)(i) [1990 Rev].
Footnote 41. UCC 3-419(1) [1952]; UCC 3-420(a)(ii) [1990 Rev].
Footnote 42. Bank Polska Kasa Opieki, S.A. v Pamrapo Sav. Bank, S.L.A. (DC NJ) 909
F Supp 948.
Footnote 43. Interchange State Bank v Veglia (App Div) 286 NJ Super 164, 668 A2d
465, certif den (NJ) 676 A2d 1092 (declining to retroactively apply New Jersey's
adoption of Revised UCC 3-420, effective June 1, 1995, to the 1987-1989 events that
gave rise to the action).
Footnote 44. UCC 3-419 [1952].
Footnote 45. Interchange State Bank v Veglia (App Div) 286 NJ Super 164, 668 A2d
465, certif den (NJ) 676 A2d 1092.
Footnote 46. Manufacturers Hanover Trust Co. v Chemical Bank (1st Dept) 160 App
Div 2d 113, 559 NYS2d 704, app den 77 NY2d 803, 568 NYS2d 15, 569 NE2d 874.
Footnote 50. Bank Polska Kasa Opieki, S.A. v Pamrapo Sav. Bank, S.L.A. (DC NJ) 909
F Supp 948; Great Lakes Higher Educ. Corp. v Austin Bank (ND Ill) 837 F Supp 892, 22
UCCRS2d 858; Barber v First Nat'l Bank (In re Ostrom-Martin, Inc.) (BC CD Ill) 188
BR 245, claim dismissed (BC CD Ill) 192 BR 937, 29 UCCRS2d 530, summary
judgment gr (BC CD Ill) 202 BR 267; Life Ins. Co. v Snyder, 141 NJ Super 539, 358
A2d 859, 19 UCCRS 642.
25 UCCRS2d 477, review den 419 Mass 1102, 646 NE2d 409 (holding that if a draft is
payable "through," but not at, a bank, then it is payable by the drawer and the drawer is
subject to liability for conversion).
543 --Requirement of delivery
View Entire Section

The payee receives delivery when the check comes into the payee's possession, as for
example when it is put into the payee's mailbox. 52 Delivery to an agent is delivery to
the payee. 53 If a check is payable to more than one payee, delivery to one of the payees
is deemed to be delivery to all of the payees. 54 Occasionally, the person asserting a
conversion cause of action is an indorsee rather than the original payee. If the check is
stolen before the check can be delivered to the indorsee and the indorsee's indorsement is
forged, the analysis is similar. 55
Observation: A check is payable to the order of A. A indorses it to B and puts it

into an envelope addressed to B. The envelope is never delivered to B. Rather, Thief
steals the envelope, forges B's indorsement to the check and obtains payment. Because
the check was never delivered to B, the indorsee, B has no cause of action for
conversion, but A does have such an action. A is the owner of the check. B never
obtained rights in the check. If A intended to negotiate the check to B in payment of
an obligation, that obligation was not affected by the conduct of Thief. B can enforce
that obligation. Thief stole A's property not B's. 56
If the check is delivered to the payee and if the check is taken for an obligation owed to
the payee, the obligation may not be enforced to the extent of the amount of the check.
The payee's rights are restricted to enforcement of the payee's rights in the instrument. 57
In this event, the payee is injured by the theft and has a cause of action for conversion. 58
If the check was not delivered to the payee, the payee has no conversion action, because
until delivery, the payee does not have any interest in the check. 59 The payee never
became the holder of the check or a person entitled to enforce the check, nor is the payee
injured by the fraud. 60 Normally the drawer of a check intends to pay an obligation
owed to the payee, but if the check is never delivered to the payee, the obligation owed to
the payee is not affected. If the check falls into the hands of a thief who obtains payment
after forging the signature of the payee as an indorsement, the obligation owed to the
payee continues to exist after the thief receives payment. 61 Since the payee's right to
enforce the underlying obligation is unaffected by the fraud of the thief, there is no
reason to give any additional remedy to the payee. 62 The drawer of the check has no
conversion remedy, but the drawee is not entitled to charge the drawer's account when
the drawee wrongfully honored the check. 63 The remedy of the drawee is against the
depositary bank for breach of warranty, and the loss will fall on the person who gave
value to the thief for the check. 64
Footnotes

544 --Damages for conversion
View Entire Section

In an action for conversion, the measure of liability is presumed to be the amount payable
on the instrument, but recovery may not exceed the amount of the plaintiff's interest in
the instrument. 65 The Uniform Commercial Code does not state whether this
presumption is rebuttable. 66 If it is not, the effect of the limitation is to exclude proof
of any additional or consequential damages. 67 Thus, in an action against a drawee bank
for conversion for paying an instrument on a forged indorsement, the purchaser is not
entitled to recover attorney's fees from the drawee. 68
Caution: Because the Uniform Commercial Code articulates a loss distributive

scheme applicable to the action, it displaces any other provision of law and, therefore,
cannot be supplemented by other statutes on damages for conversion. 69
The "but" clause addresses the problem of conversion actions in multiple payee checks.
70 Although under another section of the Code an instrument cannot be enforced, unless
all payees join in the action, 71 an action for conversion might be brought by a payee
having no interest or a limited interest in the proceeds of the check. 72 This clause
prevents such a plaintiff from receiving a windfall. 73
Observation: A check is payable to a building contractor and a supplier of building

material. The check is not payable to the payees alternatively. The check is delivered
to the contractor by the owner of the building. Suppose the contractor forges supplier's
signature as an indorsement of the check and receives the entire proceeds of the check.
The supplier should not, without qualification, be able to recover the entire amount of
the check from the bank that converted the check. Depending upon the contract

between the contractor and the supplier, the amount of the check may be due entirely to
the contractor, in which case there should be no recovery, entirely to the supplier, in
which case recovery should be for the entire amount, or part may be due to one and the
rest to the other, in which case recovery should be limited to the amount due to the
supplier. 74
By stating that the damages are presumed to be the amount payable on the face of the
instrument, it would appear that the plaintiff is entitled to recover not only the face
amount of the instrument but also any interest or other sums declared by the instrument to
be due. 75 The Code does not prohibit or limit awards of prejudgment interest. 76
Thus, a trial court may allow an award of prejudgment interest to a plaintiff on a verdict
liquidating damages as of the date of the conversion of the proceeds of the check. 77
Practice guide: Because a conversion action is tortious in character, the

recoverability of prejudgment interest may be governed by pre-Code law relating to the
recovering of such interest in tort actions. 78
Footnotes
Where an attorney forged his client's indorsements on drafts which had been issued by an
insurer to the attorney and his clients as copayees in settlement of the clients' three
personal injury claims, the proper measure of damages was the 60 percent of each draft's
amount to which the client, under his retainer contract with the attorney, had been
entitled. The Florida Bar v Allstate Ins. Co. (Fla App D3) 391 So 2d 238, 30 UCCRS
1054, petition den (Fla) 399 So 2d 1140.
Annotation: Measure of damages for conversion or loss of commercial paper, 85

ALR2d 1349.
Footnote 68. Perkins State Bank v Connolly (CA5 Fla) 632 F2d 1306, 30 UCCRS 604
(criticized on other grounds by McAdam v Dean Witter Reynolds, Inc. (CA3 NJ) 896
F2d 750, 10 UCCRS2d 1085).
Footnote 69. Stenseth v Wells Fargo Bank (6th Dist) 41 Cal App 4th 457, 48 Cal Rptr 2d
192, 95 CDOS 9902, 95 Daily Journal DAR 17127; True v Fleet Bank, 138 NH 679, 645
A2d 671, 24 UCCRS2d 598.
Footnote 71. Official Comment 2 to UCC 3-420 [1990 Rev], referring to UCC
3-110(d).

Footnote 76. In re Lou Levy & Sons Fashions, Inc. (CA2 NY) 988 F2d 311, 19
UCCRS2d 1107; Landmark Bank of Brevard v Hegeman-Harris Co. (Fla App D5) 522
So 2d 1051, 13 FLW 902, 5 UCCRS2d 1433.
Footnote 77. Landmark Bank of Brevard v Hegeman-Harris Co. (Fla App D5) 522 So 2d
1051, 13 FLW 902, 5 UCCRS2d 1433.
UCCRS2d 1107.
545 Liability of representative
View Entire Section

A representative, other than a depository bank, who has, in good faith,dealt with an
instrument or its proceeds on behalf of one who was not the person entitled to enforce the
instrument, is not liable in conversion to that person beyond the amount of any proceeds
that it has not paid out. 79 The representative, or bank has the burden of proving that it
acted in good faith. 80 The Uniform Commercial Code, in defining "good faith" as
"honesty in fact in the conduct or transaction concerned," 81 adopted a subjective
standard for the good-faith test in UCC Article 3. 82 In this context, the question of
whether a bank has acted in good faith is one of fact, to be determined by the trier of fact.
83
Definition: The term "representative" includes an agent, an officer of a corporation

or association, and a trustee, executor, or administrator of an estate, or any other person
empowered to act for another. 84
Comment: The depositary bank is ultimately liable in the case of a forged

indorsement check, because of its warranty to the payor bank and it is usually the most
convenient defendant in cases involving multiple checks drawn on different banks. 85
There is no basis for requiring the owner of the check to bring multiple actions against
the various payor banks and to require those banks to assert warranty rights against the
depositary bank. 86
In revised Article 3 of the Uniform Commercial Code, the defense provided by

3-420(c) is limited to collecting banks other than the depositary bank. 87 If suit is
brought against both the payor bank and the depositary bank, the owner, of course, is
entitled to but one recovery. 88 Revised 3-420 clears up the confusion created by
former 3-419, which did not specifically indicate to whom a depositary or collecting

bank might be liable if it failed to act in good faith or in accordance with reasonable
commercial standards. 89
Observation: Under the former statute 90 a payee that was issued a check that was
misappropriated by a third party could not directly sue the depositary or collecting
bank that paid the check upon improper or forged indorsements. The Code provided
defenses that absolved a collecting or depositary bank from liability to a payee for
conversion; therefore, the payee had to sue the payor bank, which in turn could sue the
collecting banks for breach of presentment warranties. However, the revised statute 91
limits the above defense to collecting banks other than the depositary bank and the
court must presume that the legislature intended the amendment to effect a statutory
change. 92
Commercial expediency and the Code place the burden on the first bank in the collection
chain to insure that indorsements are authentic, as it is this bank which is in the best
position to make this discovery. 93 A bank's payment of an instrument on an incorrect
94 or missing indorsement results in conversion of the instrument; and the bank's failure
to follow its own depository contract by obtaining the depositor's indorsement results in
such conversion by the bank of the depositor's certificates of deposit. 95
Illustration: A bank's action in depositing checks written to one company into an

account opened at the bank by another bank was commercially unreasonable conduct
as a matter of law, rendering the bank liable for the proceeds of the converted checks,
where: the bank relied on the fact that both companies had the same business address,
and nothing else; the chairman of the board of the bank testified that it was not the
responsibility of the bank to determine whether the check payee was the person who
made the deposit or the person making the indorsement; another bank official admitted
that the indorser and depositor was a bank customer, while the payee was not; a
director of the first company testified that there was no relationship between the two
companies; and the checks clearly were made payable to the first company and not the
second. 96
Observation: Under former law, there was authority to the effect that the collecting
bank was relieved from liability for conversion, 97 but other courts held that a
collecting bank was not relieved from liability absent a showing of having dealt with
an instrument or its proceeds in good faith and in accordance with reasonable
commercial standards applicable to the banking business. 98
Caution: There is authority to the effect that although a drawer could not assert a
direct cause of action against a depositary/collecting bank under former UCC 3-419,
a payor bank could implead the depositary/collecting bank as a third-party defendant.
99
Footnotes
Footnote 80. Landmark Bank of Brevard v Hegeman-Harris Co. (Fla App D5) 522 So 2d
1051, 13 FLW 902, 5 UCCRS2d 1433 (holding that in a conversion action arising from

the defendant collecting bank's failure to detect an improper endorsement and its
erroneous deposit of a check, payable to the plaintiff company, to the account of another
company with a name similar to plaintiff's, once the plaintiff at trial proved a conversion,
the defendant had the burden of establishing its affirmative defense).
Footnote 82. Corporacion Venezolana de Fomento v Vintero Sales Corp. (SD NY) 452 F
Supp 1108, 24 UCCRS 1199, remanded without op (CA2 NY) 607 F2d 994 and
remanded without op (CA2 NY) 607 F2d 994.
Footnote 83. Forys v McLaughlin (Fla App D5) 436 So 2d 280 (criticized on other
grounds by Landmark Bank of Brevard v Hegeman-Harris Co. (Fla App D5) 522 So 2d
1051, 13 FLW 902, 5 UCCRS2d 1433) (holding that in an action by a widow against her
deceased husband's stepson and a bank, alleging that the stepson had converted to his
own use certificates of deposit, bank deposits, and various negotiable instruments which
had been the property of the decedent and which had been placed in a safe deposit box in
the bank, to which the stepson had obtained access through allegedly forged instruments,
summary judgment in favor of the bank was improper, since the evidence raised a
reasonable inference that the indorsement on which the bank's payment to the stepson
had been made had been forged).
Footnote 89. Geldert v American Nat'l Bank (Minn App) 506 NW2d 22, 21 UCCRS2d
1036 (applying pre-1990 version).
Footnote 90. UCC 3-419 [1952].
Footnote 92. Geldert v American Nat'l Bank (Minn App) 506 NW2d 22, 21 UCCRS2d
1036 (applying earlier law).
Footnote 93. Ames v Great Southern Bank (Tex) 672 SW2d 447, 38 UCCRS 897, rehg of
cause overr (Jul 11, 1984).
Footnote 94. Olean Area Camp Fire Council, Inc. v Olean Dresser Clark Federal Credit
Union (Sup) 142 Misc 2d 1049, 538 NYS2d 905, 9 UCCRS2d 625 (holding that
acceptance of a check with an indorsement by a party other than the named payee did not
constitute dealing in good faith or in accordance with reasonable commercial standards).
Footnote 95. Ames v Great Southern Bank (Tex) 672 SW2d 447, 38 UCCRS 897, rehg of
cause overr (Jul 11, 1984).
Footnote 96. Lakeland Pipe & Supply v First Nat'l Bank (Tex App Houston (14th Dist))
899 SW2d 230, writ den (Dec 1, 1994) and rehg of writ of error overr (Jan 12, 1995).
Footnote 97. Messeroff v Kantor (Fla App D3) 261 So 2d 553, 10 UCCRS 826; Geldert v
American Nat'l Bank (Minn App) 506 NW2d 22, 21 UCCRS2d 1036 (decided under
pre-1990 UCC).
Footnote 98. Siegel Trading Co. v Coral Ridge Nat'l Bank (Fla App D4) 328 So 2d 476,
18 UCCRS 1257; Robert A. Sullivan Constr. Co. v Wilton Manors Nat'l Bank (Fla App
D4) 290 So 2d 561, 14 UCCRS 745; Phariss v Eddy (Iowa App) 478 NW2d 848, 17
UCCRS2d 181 (decided under pre-1990 UCC); Maryland Indus. Finishing Co. v Citizens
Bank, 100 Md App 671, 642 A2d 317, 23 UCCRS2d 1180, cert gr 336 Md 560, 649 A2d
602 and vacated on other grounds, remanded 338 Md 448, 659 A2d 313, 26 UCCRS2d
1009 (decided under pre-1990 UCC); Hydroflo Corp. v First Nat'l Bank, 217 Neb 20, 349
NW2d 615, 38 UCCRS 932, 49 ALR4th 873.
Annotation: Bank's "reasonable commercial standards" defense under UCC

3-419(3), 49 ALR4th 888.
Footnote 99. Acrometal Cos. v First American Bank (Minn App) 475 NW2d 487, 15
UCCRS2d 532.
XII. DEFENSES, CLAIMS IN RECOUPMENT, AND RELATED

CLAIMS OR GROUNDS FOR RELIEF [546-626]
Research References
UCC 1-103, 1-201; UCC 3-201, 3-304 through 3-306, 3-404 [1952]; UCC
3-105, 3-106, 3-117, 3-203, 3-206, 3-302, 3-303, 3-305, 3-403, 3-417, 3-419 [1990 Rev]
ALR Index: Bills and Notes; Checks and Drafts
Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:79, 3:97,
3:128, 3:135
6 Anderson, Uniform Commercial Code 3d 3-305:4, 3-305:6, 3-305:32; 6A Anderson,
Uniform Commercial Code 3d [Rev] 3-305:9, 3-305:18, 3-305:19,
Bailey & Hagedorn, Brady on Bank Checks (7th ed) paras 9.13, 9.15
546 Generally
View Entire Section


The question of whether a particular defense is available against a particular person in an
action on commercial paper depends, in the first instance, upon the nature of the
instrument as negotiable or nonnegotiable; if an instrument is negotiable and the obligee
is a holder in due course, the obligee's right to enforce the obligation of a party to pay the
instrument is subject only to certain enumerated "real" or "universal" defenses and to
claims in recoupment stated against the obligee. 1 If the instrument is negotiable
but the obligee does not have the rights of a holder in due course, the right to enforce the
obligation of a party to pay the instrument is also subject to all claims in recoupment and
to certain defenses which constitute the so-called "personal" or "limited" defenses. 2
Observation: Not every defense can thus be overcome by a holder in due course of a
check or other negotiable instrument. Most defenses are personal and are available
only against holders not in due course. On the other hand, real defenses are good
against all persons, even holders in due course. A real defense might be described as a
defense of such a nature that the signature of the party on whose behalf the defense is
asserted is a complete nullity. 3 To determine whether a particular defense is
available against a party seeking to recover on an instrument, it may thus be necessary
to first determine whether that party has the rights of a holder in due course. 4 An
ordinary holder of commercial paper is subject to any defense held by the defendant. 5
Illustration: When the payee of a teller's check is an ordinary holder, it is subject to

any defense held by the customer who has intervened as a defendant in the payee's
action against the drawer. 6
Footnotes
As to holders in due course, generally, see 240.
As to the requirements for a holder of an instrument to qualify as a holder in due course,

see 247 et seq.
As to the rights of a holder in due course, generally, see 260.
As to real or universal defenses, generally, see 548.
As to claims in recoupment, see 622 et seq.



Forms: Instruction to juryDefenses not available against holder in due course. 5 Am
Instruction to juryBreach of contract of original payee not available as defense against

holder in due course. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 66.
Footnote 2. UCC 3-306(c) [1952]; UCC 3-305(a) [1990 Rev].
As to personal or limited defenses, generally, see 549.
As to holders not in due course, generally, see 240.

AnswerDefenseHolder not holder in due course. 6A Am Jur Pl & Pr Forms (Rev),

As to the effect upon defenses by the holder-in-due-course status, see 547.
Footnote 4. Barnett Bank of Jacksonville, N.A. v Warren Finance, Inc. (Fla App D1) 532
So 2d 676, 13 FLW 897, 5 UCCRS2d 1253, reh den, ques certified (Fla App D1) 13
FLW 2408, 7 UCCRS2d 126 and ctfd ques ans, quashed on other grounds (Fla) 552 So
2d 194, 14 FLW 567, 9 UCCRS2d 1196, corrected (Fla) 14 FLW 574.
Footnote 5. Capital Investors Co. v Executors of Estate of Morrison (CA4 Va) 484 F2d
1157, 13 UCCRS 485; J.P. Morgan Del. v Onyx Arabians II, Ltd. (WD Ky) 825 F Supp
146; E. F. Corp. v Smith (CA10 Kan) 496 F2d 826, 15 UCCRS 120; Cole v Farner (Colo
App) 749 P2d 970, 4 UCCRS2d 502, cert gr (Colo) 12 Brief Times Rep 245 and revd on
other grounds (Colo) 778 P2d 688, 9 UCCRS2d 663; Bob's Radio Service, Inc. v F. P.
Plaza, Inc., 125 Ga App 133, 186 SE2d 552, 10 UCCRS 424; Comet Check Cashing
Service, Inc. v Hanover Ins. Group (NY Civ Ct) 5 UCCRS 852; Wyatt v Mt. Airy
Cemetery, 209 Pa Super 250, 224 A2d 787, 4 UCCRS 104; Cadle Co. v Bankston &
Lobingier (Tex App Fort Worth) 868 SW2d 918, writ den (Tex) 893 SW2d 949 and rehg
of writ of error overr (Feb 16, 1995) and cert den (US) 133 L Ed 2d 21, 116 S Ct 58;
Wesche v Martin, 64 Wash App 1, 822 P2d 812, 17 UCCRS2d 510.
Footnote 6. Guaranty Federal Sav. Bank v Horseshoe Operating Co. (Tex) 793 SW2d
652.
547 Effect of holder in due course status; cutting off defenses
View Entire Section

The matter of whether or not a person is a holder in due course, or holds through a holder
in due course, is vital in regard to what claims or defenses may be asserted against such
person, because the effect of transfer to a holder in due course is to cut off most claims or
defenses which exist at the time of transfer. 7 To this end, the 1952 version of Article 3
of the Uniform Commercial Code provides that a holder in due course takes an
instrument free from all claims to it on the part of any person 8 and from all defenses of
any party to the instrument with whom the holder has not dealt, except certain so-called
real or universal defenses. 9
Comment: "Takes" is substituted for "holds" in the prior Negotiable Instruments

Law because a holder in due course may still be subject to any claims or defenses
which arise against him or her after he or she has taken the instrument. 10 The
language "all claims to it on the part of any person" is substituted for "any defect of
title of prior parties" in the prior Negotiable Instruments Law to make it clear or
explicit that the holder in due course takes the instrument free not only from any claim
of legal title but also from all liens, equities, or claims of any other kind. 11 The term
"claim" includes equitable claims, such as a claim of a beneficial interest in a
constructive trust. 12 The term "dealt" 13 requires a direct face to face personal
interchange. 14
Illustration: The fact that the drawer delivers his or her check to the payee does not
constitute a "dealing" with the payee; 15 nor does cooperation with the government by
a supplier to a government contractor. 16 However, where the plaintiff finance
company's manager explained the terms of a loan being made to the defendants and
witnessed the execution of the promissory note in question, and the finance company
made a loan to the defendants, the plaintiff had "dealt" with the defendants. 17 The
restriction as to persons with whom the holder has "dealt" 18 is not meant to apply to
every person with whom the holder has dealt in a literal sense, but rather denies holder
in due course immunity only to a person who had such intimate involvement in the
underlying transaction as to warrant imputing to such person knowledge of its
irregularities. 19 The word "person," as used in this provision 20 is defined by
statute 21 to include a corporation. 22 Under the 1990 version of Article 3, the right
of a holder in due course to enforce the obligation of a party to pay the instrument is
subject to so-called real or universal defenses set forth by statute, 23 but is not subject
to the defense stated elsewhere in Article 3 or a defense of the obligor that would be
available if the person entitled to enforce the instrument were enforcing the right to
payment under a simple contract or claims in recoupment against a person other than
the holder. 24 A holder in due course takes free from defenses, regardless of the
status of his or her predecessor holders. 25 Where defenses are raised against a note,
the burden is on the plaintiff to show that he or she is a holder in due course, in order to
effectively cut off such defenses. 26 A holder through a holder in due course has all
the rights of that holder in due course. 27 The subsequent transferee has only the
rights of the particular holder in due course through whom he or she holds; thus, while
it is generally stated that the transferee has the rights of "a" holder in due course, such
statements are made in the context of situations in which the holder in due course had
all the rights of a holder in due course; the narrowing of the term to "that" holder in due
course becomes important only when the holder in due course is subject to certain
defenses. 28 Thus, when the holder in due course deals directly with the defendant,
the holder in due course is subject to every defense of the defendant, and a subsequent
holder through such a holder in due course is also subject to all defenses of the
defendant. 29

Caution: The holder through a holder in due course may be barred, by his or her
personal knowledge or conduct, from enjoying the immunities of a holder in due
course, if such holder was a party to any fraud or illegality affecting the instrument, or
if as a prior party, such holder had notice of a defense or a claim against the
instrument. 30
Observation: The protection of holders in due course of negotiable instruments is

frequently explained as a matter of estoppel, a person assuming liability on such
instrument being said to be estopped from making certain defenses to it as against such
a holder; however, protection as a holder in due course and protection by the doctrine
of estoppel are distinct doctrines of protection although they may be cumulative and, in
particular, estoppel may protect a holder in due course against real defenses to which
he would otherwise be subject. 31
Footnotes
Footnote 7. Artia Parliament Distributing Corp. v Kendricks (1st Dept) 19 App Div 2d
813, 243 NYS2d 493.
As to what constitutes a holder in due course, see 247 et seq.
Footnote 8. UCC 3-305(1) [1952].
Footnote 9. UCC 3-305(2) [1952].
As to real or universal defenses, generally, see 548.
Annotation: Transferee of commercial paper given by purchaser of chattel and secured

by conditional sale, retention of title, or chattel mortgage, as subject to defenses which
against seller, 39 ALR3d 518). 7 (where instrument is negotiable and transferee is a
holder in due course).
Forms: DefensePlaintiff not holder in due course. 5 Am Jur Pl & Pr Forms (Rev),
ChecklistMatters that should be alleged in action by holder for payment of negotiable

AnswerDefenseHolder not holder in due course. 6A Am Jur Pl & Pr Forms (Rev),

Complaint, petition, or declarationAllegationPlaintiff holder in due course. 6A Am

3:135.

Footnote 11. Official Comment 2 to UCC 3-305(1) [1952].
Footnote 12. Bowling Green, Inc. v State Street Bank & Trust Co. (DC Mass) 307 F
Supp 648, affd (CA1 Mass) 425 F2d 81, 7 UCCRS 635; Wohlrabe v Pownell (Minn) 307
NW2d 478, 31 UCCRS 1401.
Footnote 13. UCC 3-305(2) [1952].
UCCRS2d 461, 42 ALR5th 771; A. C. Davenport & Son Co. v United States (ND Ill)
538 F Supp 730, 30 CCF 70241, 34 UCCRS 198, affd (CA7 Ill) 703 F2d 266, 30 CCF
70981, 35 UCCRS 1195; New Bedford Inst. for Sav. v Gildroy, 36 Mass App 647, 634
NE2d 920, 25 UCCRS2d 450, review den 418 Mass 1106, 639 NE2d 1082; Village
Motors, Inc. v American Federal Sav. & Loan Asso., 231 Va 408, 345 SE2d 288, 1
UCCRS2d 802.
Footnote 15. Firth v Farmers-Citizens Bank (Ind App) 460 NE2d 191, 38 UCCRS 212.
Footnote 16. A. C. Davenport & Son Co. v United States (ND Ill) 538 F Supp 730, 30
CCF 70241, 34 UCCRS 198, affd (CA7 Ill) 703 F2d 266, 30 CCF 70981, 35 UCCRS
1195.
Footnote 17. Standard Fin. Co. v Ellis, 3 Hawaii App 614, 657 P2d 1056, 35 UCCRS
864.
Footnote 18. UCC 3-305(2) [1952].
UCCRS2d 461, 42 ALR5th 771 (affirming summary judgment granted sub nom. A.I.
Trade Finance, Inc. v Altos Hornos de Vizcaya, S.A. (1993, SD NY) 22 UCCRS2d 790).
Annotation: What constitutes "dealing" under UCC 3-305(2), providing that holder
in due course takes instrument free from all defenses of any party to instrument with
whom holder has not dealt, 42 ALR5th 137.
Footnote 22. Bowling Green, Inc. v State Street Bank & Trust Co. (DC Mass) 307 F
Supp 648, affd (CA1 Mass) 425 F2d 81, 7 UCCRS 635.
As to real or universal defenses, see 548.
As to personal or limited defenses, see 549.

Footnote 25. Godat v Mercantile Bank (Mo App) 884 SW2d 1, 24 UCCRS2d 385.
Footnote 26. Seamans v Miller, 142 Ga App 147, 235 SE2d 542, 21 UCCRS 1378.
Footnote 27. Brock v Adams, 79 NM 17, 439 P2d 234, 5 UCCRS 137; Federal Deposit
Ins. Corp. v Russo (2d Dept) 89 App Div 2d 575, 452 NYS2d 231, 34 UCCRS 599, affd
58 NY2d 929, 460 NYS2d 532, 447 NE2d 81; Miller v Diversified Loan Serv. Co., 181
W Va 320, 382 SE2d 514.
Footnote 29. Great W. Bank & Trust Co. v Pima Sav. & Loan Ass'n (App) 149 Ariz 364,
718 P2d 1017, 2 UCCRS2d 532; Manufacturers Hanover Trust Co. v Robinson (Sup)
157 Misc 2d 651, 597 NYS2d 986.
344 US 838, 97 L Ed 652, 73 S Ct 25, reh den 344 US 888, 97 L Ed 687, 73 S Ct 181.
548 Real or universal defenses
View Entire Section

The real or universal defenses available under Article 3 of the Uniform Commercial Code
may be asserted against anyone seeking to enforce an obligation on an instrument even
though such plaintiff has the rights of a holder in due course. 32
Observation: The possibility that a holder in due course of a check would face a real
defense is rather remote in most instances; most of the cases involve notes and are
either of rather ancient vintage or of later date involving consumer credit transactions.
Except with respect to consumer credit transactions, courts are reluctant to impair the
utility of negotiable instruments by giving extended sanctions to defenses of such
nature as to be good against holders in due course. 33 With respect to the real or
universal defenses, the 1990 version of Article 3 provides that the right to enforce the
obligation of a party to pay an instrument is subject to a defense of the obligor based
on the following:
Minority or infancy of the obligor, to the extent that minority or infancy is a defense to a
simple contract 34
Duress, lack of legal capacity, or illegality of the transaction which, under other law,
nullifies the obligation of the obligor 35
Fraud that induced the obligor to sign the instrument with neither knowledge nor
reasonable opportunity to learn of its character or its essential terms 36
Discharge of the obligor in insolvency proceedings 37
Observation: Duress, lack of legal capacity, or illegality of the transaction are

defenses that may be raised against any holder if they nullify the obligation of the
defendant. The Code speaks in terms of nullifying the obligation of the defendant.
This language requires the obligation be "void." If the obligation is rendered merely
"voidable" the defense of lack of capacity, duress, or illegality cannot be asserted
Illustration: A holder in due course of a cashier's check was not subject to the
defense of illegality of the transaction for which the check was given to its payee
because (1) such illegality consisted only of failure of the check's payee to disclose
information required by statute about the proposed franchise agreement between the
payee and the party who procured the check's issuance; and (2) the payee's failure to
disclose such information would merely have made the franchise agreement voidable
rather than void. 39 The 1952 version of Article 3 includes as a real defense any other
discharge of which the holder had notice when he or she took the instrument. 40 The
requirements for qualifying as a holder in due course under the 1990 version of Article
3 of the Uniform Commercial Code include taking the instrument without notice that
any party has a defense, claim in recoupment, or claim to the instrument. 41
Illustration: A bank was equitably estopped from collecting on a note, due to the
bank's concealment of material fact which induced the maker to sign. 42
Footnotes
Forms: AnswerDefenseHolder not holder in due course. 6A Am Jur Pl & Pr Forms

Instruction to juryDefenses not available against holder in due course. 5 Am Jur Pl &
Instruction to juryBreach of contract by original payee not available as defense

against holder in due course. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form
66.
Footnote 34. UCC 3-305(a)(1)(i) [1990 Rev], discussed in 566.
Footnote 35. UCC 3-305(a)(1)(ii) [1990 Rev], discussed in 612, 567, 569 et seq.
Footnote 36. UCC 3-305(a)(1)(iii) [1990 Rev], discussed in 578 et seq.
Footnote 37. UCC 3-305(a)(1)(iv) [1990 Rev], discussed in 615.

Footnote 39. Key Bank v Crawford (ED Pa) 600 F Supp 843, affd (CA3 Pa) 781 F2d 39,
42 UCCRS 801.
Footnote 40. UCC 3-305(2)(e) [1952].
Footnote 42. Alamo Bank of Texas v Palacios (Tex App Corpus Christi) 804 SW2d 291.
549 Personal or limited defenses
View Entire Section

The 1990 version of Article 3 of the Uniform Commercial Code continues the pattern of
personal or limited defenses that cannot be raised against a person with the rights of a
holder in due course. 43 Except as provided with respect to holders in due course, the
right to enforce the obligation to pay an instrument is subject to a defense of the obligor
stated elsewhere in Article 3 or 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. 44
Observation: In defining the immunity of the holder in due course, the 1990 version
of Article 3 omits the statement in the 1952 version that such a holder takes free of the
defenses "of any party to the instrument with whom the holder has not dealt." This
omission has been made on the premise that the provision is unnecessary. No change
in the law was intended. Consequently, the omission of the language that was
contained in the 1952 version of Article 3 does not indicate the abolition of the concept
of limited defenses. 45 Apart from the real or universal defenses, Article 3 states other
defenses that are cut off by a holder in due course. These defenses comprise those
specifically stated in Article 3 and those based on common-law contract principles.
These Article 3 defenses are:
Nonissuance of the instrument, conditional issuance, and issuance for a special purpose
46
Failure to countersign a traveler's check 47
Modification of the obligation by a separate agreement 48
Payment that violates a restrictive indorsement 49
Instruments issued without consideration or for which promised performance has not
been given 50
Breach of warranty when a draft is accepted 51

Comment: The most prevalent common-law defenses are fraud, misrepresentation,
or mistake in the issuance of the instrument. In most cases the holder in due course
will be an immediate or remote transferee of the payee of the instrument. In such
cases, the holder-in-due-course doctrine is irrelevant if defenses are being asserted
against the payee of the instrument, but in a small number of cases the payee of the
instrument may be a holder in due course. 52
Illustration: The maker of a negotiable instrument may assert a "prior-party setoff"

(an unrelated claim that would have been available as a setoff if the original holder had
sued the maker on the instrument) as a defense against a mere holder when the
instrument is assigned or negotiated after its maturity and a claim for such setoff arose
prior to notice of the instrument's assignment or negotiation. 53
Footnotes


Footnote 46. UCC 3-105(b) [1990 Rev], discussed in 563 et seq.
Footnote 47. UCC 3-106(c) [1990 Rev], discussed in 617.
Footnote 48. UCC 3-117 [1990 Rev], discussed in 619.
Footnote 49. UCC 3-206(f) [1990 Rev], discussed in 620.
Footnote 50. UCC 3-303(b) [1990 Rev], discussed in 557 et seq.
Footnote 51. UCC 3-417(b) [1990 Rev], discussed in 621.
As to payee of an instrument qualifying as a holder in due course, see 251.
As to fraud as defense, see 577 et seq.

As to mistake, see 614.
Footnote 53. Barrett v Odom, May & De Buys (Ala) 453 So 2d 729, 39 UCCRS 526.
550 Defenses of a person other than obligor; jus tertii
View Entire Section

Under the 1952 version of Article 3 of the Uniform Commercial Code, a defense of jus
tertii, which is a defense that there is a defect in the plaintiff's title to the instrument or
that the plaintiff has no title at all and that the instrument belongs to another, may not,
generally, be asserted; the contract of the obligor is to pay the holder of the instrument,
and the claims of other persons against the holder are usually not the obligor's concern.
54 However, the 1952 version of Article 3 recognizes exceptions to the unavailability of
the defense of jus tertii where (1) the instrument is stolen; or (2) it is transferred contrary
to the terms of a restrictive indorsement. 55 The 1990 version of Article 3 continues this
law by providing that, with the exception of the case of the accommodation party, a
defendant may not assert against any plaintiff a defense or claim in recoupment that a
third party could assert if that party were being sued. 56 The 1990 version of Article 3
provides that, except as provided with respect to accommodation parties, in an action to
enforce the obligation of a party to pay the instrument, the obligor may not assert, against
the person entitled to enforce the instrument, a defense, claim in recoupment, or a claim
to the instrument of another person. However, the other person's claim to the instrument
may be asserted by the obligor, if the other person is joined in the action and personally
asserts the claim against the person entitled to enforce the instrument. 57
Comment: The pertinent provision in the 1990 version of Article 3 applies

principally to cases in which an obligation is paid with the instrument of a third person.
58 The general rule in the 1990 version stated above has three exceptions. First, it is
subject to the provision permitting an accommodation party to assert against the person
entitled to enforce the instrument most of the defenses or claims in recoupment that
could be asserted by the accommodated party. 59 Second, the other person's claim to
the instrument may be asserted by the obligor, if the other person is joined in the action
and personally asserts the claim against the person entitled to enforce the instrument.
60
Comment: Nothing in UCC 3-306(d) [1952] (similar to UCC 3-305(c) [1990

Rev]) is intended to prevent the claimant from intervening in the holder's action against
the obligor, or defending the action for the latter, and asserting his or her claim in the
course of the intervention or defense, or to prevent any interpleader, deposit in court, or
other available procedure under which the defendant may bring the claimant into court
or be discharged without himself or herself litigating the claim as a defense. 61 Third,
an obligor is not obliged to pay the instrument, if the person seeking enforcement of
the instrument does not have rights of a holder in due course and the obligor proves
that the instrument is a lost or stolen instrument. 62

Comment: This provision allows the issuer of an instrument, such as a cashier's
check to refuse payment in the rare case in which the issuer can prove that the
instrument is a lost or stolen instrument and the person seeking enforcement does not
have rights of a holder in due course. 63
Observation: D draws and delivers a check to P. P indorses the check in blank. A

steals the check from P and delivers the check to C. D may claim that P has title to the
check, and the person through whom C holds the instrument acquired it by theft. This
defense would be allowed if C is not a holder in due course, but would fail if C is a
Illustration: The makers of a note could not assert that the assignee of the payee, the
trustee of a trust, had notice of a claim against the note since the claim of any third
person (the payee's trust) to an instrument is not available to a party liable on the note
unless the third person defends the action for such party. 65
Footnotes
Footnote 55. UCC 3-306(d) [1952].
As to the right of an accommodation party to assert a defense, see 551.
As to defenses generally, see 557 et seq.
Footnote 59. UCC 3-305(c) [1990 Rev] (referring to UCC 3-305(d) [1990 Rev],
discussed in 551).
As to the defense of theft or loss of instrument, see 610, 611.

Footnote 65. Duxbury v Roberts, 388 Mass 385, 446 NE2d 401, 36 UCCRS 214.
551 Defenses available to accommodation party
View Entire Section

In an action to enforce the obligation of an accommodation party to pay an instrument,

the accommodation party may assert, against the person entitled to enforce the
instrument, any defense or claim in recoupment that the accommodated party could assert
against the person entitled to enforce the instrument. 66 However, the accommodation
party may not assert the following defenses:
Discharge in insolvency proceedings
Minority or infancy
Lack of legal capacity 67 The accommodation party also may not raise the
following as a defense:
Any statute of frauds
Whether or not the accommodation party receives consideration for the accommodation
68
Comment: The Uniform Commercial Code equates the obligation of the

accommodation party to that of the accommodated party. The accommodation party
can assert whatever defense or claim the accommodated party had against the person
enforcing the instrument. The only exceptions are discharge in bankruptcy, minority or
infancy, and lack of capacity. The same rule does not apply to an indorsement by a
holder of the instrument in negotiating the instrument. The indorser, as transferor,
makes a warranty to the indorsee, as transferee, that no defense or claim in recoupment
is good against the indorser. Thus, if the indorsee sues the indorser because of
dishonor of the instrument, the indorser may not assert the defense or claim in
recoupment of the maker or drawer against the indorsee. 69 The provision governing
defenses that may be raised by an accommodation party must be read in conjunction
with the provision which establishes rules (usually referred to as suretyship defenses)
for determining when the obligation of an accommodation party is discharged, in
whole or in part, because of some act or omission of a person entitled to enforce the
instrument. To the extent a rule stated in the section on suretyship defenses is
inconsistent with a rule stated in the section on defenses that may be raised by an
accommodation party, the rule from the section on suretyship defenses governs. For
example, under the provision on suretyship defenses, discharge of the accommodated
party by cancellation or renunciation does not discharge an accommodation party
having a right of recourse against the discharged party. Discharge of the
accommodated party is normally part of a settlement under which the holder of a note
accepts partial payment from an accommodated party who is financially unable to pay
the entire amount of the note. If the holder then brings an action against the
accommodation party to recover the remaining unpaid amount of the note, the
accommodation party cannot use the provision on defenses generally available to
accommodation parties to nullify the provision expressly stating that a discharge by
cancellation or renunciation does not discharge an accommodation party having a right
of recourse against the discharged party. On the other hand, suppose the
accommodated party is a buyer of goods who issued the note to the seller who took the
note for the buyer's obligation to pay for the goods. Suppose the buyer has a claim for
breach of warranty with respect to the goods against the seller and the warranty claim
may be asserted against the holder of the note. The warranty claim is a claim in
recoupment. If the holder and the accommodated party reach a settlement under which
the holder accepts payment less than the amount of the note in full satisfaction of the
note and the warranty claim, the accommodation party could defend an action on the
note by the holder by asserting the accord and satisfaction as a defense generally
available to an accommodation party. There is no conflict with the section on
suretyship defenses because that provision is not intended to apply to settlement of
disputed claims. 70 An accommodation party may thus assert against the plaintiff any
simple contract defense, duress, or illegality of the contract that nullifies the obligation
of the accommodation party. Fraud that induced the accommodation party to sign the
instrument without reasonable opportunity to learn its character or essential terms, or
any other defense authorized by any section of Article 3, may also be so raised. The
accommodation party may not assert, against the plaintiff, the defenses of the
accommodated party's discharge by insolvency proceedings nor the accommodated
party's minority or infancy or lack of capacity. 71
Footnotes
As to the real or universal defenses that may be raised against a party seeking to recover
on an instrument, see 548.
As to the defense of discharge in insolvency proceedings, see 615.
As to the defense of minority or infancy, see 566.
As to the defense of lack of legal capacity, see 567.
As to accommodation parties generally, see 434 et seq.

As to the discharge of accommodation parties, generally, see 417 et seq.
As the defenses of duress, lack of legal capacity, or illegality of the transaction, see
612, 567, 569 et seq.
As to the defense of fraud that induced the obligor to sign the instrument with neither
knowledge nor reasonable opportunity to learn of its character or its essential terms, see
578 et seq.
552 Burden of proving defenses to action on instrument
View Entire Section

All attacks on a negotiable instrument must be made by way of affirmative defenses as to

which the burden of proof is on the defense. 72 The rule that the defendant has the
burden of proof as to the existence of defenses has been applied to the defense of accord
and satisfaction, 73 lack 74 or failure 75 of consideration, bankruptcy discharge, 76
discharge, 77 duress, 78 fraud, 79 illegality, 80 incapacity, 81 irregularity of the
paper, 82 mistake, 83 nonsatisfaction of a condition precedent, 84 payment, 85 and
usury. 86 When the defendant raises the defense of failure to satisfy conditions against
the holder of a note, the defendant must show to what extent the failure to satisfy the
conditions has caused him loss, and in the absence of such proof the holder may recover
the full amount of the note. 87 The Uniform Commercial Code provides that once
signatures are proved or admitted and the instrument is produced, the defendant has the
burden of establishing any defense. 88 The defendant has the burden of establishing his
or her defenses by a preponderance of the total evidence. 89
Illustration: In an action by assignee bank to enforce an equipment lease, the

defendants' claim that they had been "conned" into signing the agreement by the
assignor and that the bank should have known of the fraudulent nature of the assignor's
business, because it previously had taken assignment of other such leases and should
have been put on notice that there was fraud or illegality of some kind by the fact that
the contract was two years old when assigned, raised a question as to whether the bank
took the assignment in good faith and without notice which the bank failed to
overcome where it had not alleged, in either its complaint or moving papers, that it
took the assignment in good faith and without notice, nor had it submitted any proof in
that regard or denied the claim of fraud in the inducement of the original contract or its
past relationship with the assignor. Without such proof, the bank was not entitled to
assert the protection afforded to holders in due course and remained vulnerable to
defendants' claim of fraud in the inducement. 90
Observation: When the defense is equitable in nature or involves fraud or mistake,

some courts impose a higher degree of proof. A party raising the defense of fraud must

prove each of the elements of fraud by "clear, convincing, and satisfactory evidence."
91
Footnotes
Footnote 72. First Federal Sav. & Loan Ass'n v Chrysler Credit Corp. (CA4 SC) 981 F2d
127, 19 UCCRS2d 181; Textron, Inc. v Whitener, 249 Ark 57, 458 SW2d 367; Lane &
Pyron, Inc. v Gibbs (3rd Dist) 266 Cal App 2d 61, 71 Cal Rptr 817; Haycook v Ostman
(Fla App D5) 397 So 2d 743; Jay Gleason Advertising Service, Inc. v Gleason, 193 Ga
App 445, 388 SE2d 43; Bank of Hawaii v Allen, 2 Hawaii App 185, 628 P2d 211, 31
UCCRS 1645; Ventures, Inc. v Jones, 101 Idaho 837, 623 P2d 145, 30 UCCRS 1601;
Oak Trust & Sav. Bank v Annerino (1st Dist) 64 Ill App 3d 1030, 21 Ill Dec 704, 381
NE2d 1389; Homemakers Finance Service, Inc. v Ellsworth, 177 Ind App 640, 380 NE2d
1285, appeal after remand (Ind App) 424 NE2d 166, reh den (Ind App) 438 NE2d 6;
American Bank v Saxena (La) 553 So 2d 836; Demaio v Theriot (La App 3d Cir) 343 So
2d 1143, 21 UCCRS 799, cert den (La) 346 So 2d 218; Edmiston v J.C.G.-Medallion,
Inc. (Mo App) 570 SW2d 306; Kreutz v Wolff (Mo App) 560 SW2d 271; Dexter v
Lakeshore City Sanitation Dist., 82 NM 556, 484 P2d 1266 (pre-Code); Jamaica Tobacco
& Sales Corp. v Ortner, 70 Misc 2d 388, 333 NYS2d 669, 11 UCCRS 100; Roy & Co. v
Walker, 36 Ohio Misc 67, 65 Ohio Ops 2d 84, 302 NE2d 907; Rodriguez v Southwestern
Drug Corp. (Tex Civ App Houston (14th Dist)) 619 SW2d 469; Amaya v First State
Bank (Tex Civ App San Antonio) 570 SW2d 95.
Footnote 73. M. Walter & Co. v North Highland Assembly of God, Inc., 184 Ga App
270, 361 SE2d 256.
Footnote 74. Lakhaney v Anzelone (SD NY) 788 F Supp 160, 18 UCCRS2d 191; Fischer
v Rodriguez-Capriles (Fla App D3) 472 So 2d 1315, 10 FLW 1743; Chenault v C & H
Enterprises, Ltd. (La App 3d Cir) 514 So 2d 535; Kreutz v Wolff (Mo App) 560 SW2d
271; Mid-America Real Estate & Inv. Corp. v Lund (ND) 353 NW2d 286, 39 UCCRS
225, 39 UCCRS 1728; Warranty Underwriters Ins. Co. v Lara (Tex App Corpus Christi)
805 SW2d 894 (ovrld in part on other grounds by American Physicians Serv. Group, Inc.
v Port Lavaca Clinic Assoc. (Tex App Corpus Christi) 843 SW2d 675).
As to defense of lack of consideration, see 560.
Footnote 75. Oak Trust & Sav. Bank v Annerino (1st Dist) 64 Ill App 3d 1030, 21 Ill Dec
704, 381 NE2d 1389; Crider v State Exchange Bank (Ind App) 487 NE2d 1345;
Louisiana Business College v Crump (La App 2d Cir) 474 So 2d 1366; Commerce Bank
of Joplin v Shallenburger (Mo App) 766 SW2d 764; Amaya v First State Bank (Tex Civ
App San Antonio) 570 SW2d 95.
As to defense of failure of consideration, see 558.
As to defense of partial failure of consideration, see 559.
Footnote 76. Commercial & Exchange Bank v McDaniel, 147 Ga App 378, 249 SE2d 97.
As to defense of discharge in insolvency proceedings, see 615.

Footnote 77. Homemakers Finance Service, Inc. v Ellsworth, 177 Ind App 640, 380
NE2d 1285, appeal after remand (Ind App) 424 NE2d 166, reh den (Ind App) 438 NE2d
6.
As to discharge in other than insolvency proceedings, see 616.
Footnote 78. First Sec. Bank v Bawoll (2d Dist) 120 Ill App 3d 787, 76 Ill Dec 54, 458
NE2d 193; Jamaica Tobacco & Sales Corp. v Ortner, 70 Misc 2d 388, 333 NYS2d 669,
11 UCCRS 100.
As to the defense of duress, see 612, 613.
Footnote 79. First Federal Sav. & Loan Ass'n v Chrysler Credit Corp. (CA4 SC) 981 F2d
127, 19 UCCRS2d 181; Bank of Hawaii v Allen, 2 Hawaii App 185, 628 P2d 211, 31
UCCRS 1645; Braddock v Glosup (La App 2d Cir) 305 So 2d 678, cert den (La) 309 So
2d 352; Kreutz v Wolff (Mo App) 560 SW2d 271; Jamaica Tobacco & Sales Corp. v
Ortner, 70 Misc 2d 388, 333 NYS2d 669, 11 UCCRS 100; Roy & Co. v Walker, 36 Ohio
Misc 67, 65 Ohio Ops 2d 84, 302 NE2d 907.
As to the defense of fraud, see 577 et seq.
Footnote 80. Lane & Pyron, Inc. v Gibbs (3rd Dist) 266 Cal App 2d 61, 71 Cal Rptr 817;
Shanahan v Schindler (1st Dist) 63 Ill App 3d 82, 20 Ill Dec 239, 379 NE2d 1307 (Code
not cited); San Benito Bank & Trust Co. v Rio Grande Music Co. (Tex App Corpus
Christi) 686 SW2d 635, writ ref n r e (Jul 3, 1985) and rehg of writ of error overr (Sep
11, 1985).
As to the defense of illegality, see 569 et seq.
Footnote 81. First State Bank v Hyland (SD) 399 NW2d 894.
As to defense of incapacity or incompetency of party, see 565 et seq.
Footnote 82. Perez v Rivero (Fla App D3) 534 So 2d 914, 13 FLW 2697.
Footnote 83. Bank of Hawaii v Allen, 2 Hawaii App 185, 628 P2d 211, 31 UCCRS 1645;
Community Bank of Lafourche v Motel Management Corp. (La App 1st Cir) 558 So 2d
641.
As to defense of mistake, see 614.
Footnote 84. Demaio v Theriot (La App 3d Cir) 343 So 2d 1143, 21 UCCRS 799, cert
den (La) 346 So 2d 218.
As to conditional issuance, see 563.
Footnote 85. Peek v Brickey, 300 Ark 354, 779 SW2d 152; United Mo. Bank, N.A. v
Beard (Mo App) 877 SW2d 237; Inter Business Marketing, Inc. v Kronengold (1st Dept)
135 App Div 2d 474, 522 NYS2d 154; Cimarron Dev. Corp. v Daugherty (Tex App
Corpus Christi) 779 SW2d 952.
Footnote 86. Textron, Inc. v Whitener, 249 Ark 57, 458 SW2d 367; Jamaica Tobacco &
Sales Corp. v Ortner, 70 Misc 2d 388, 333 NYS2d 669, 11 UCCRS 100.
As to the defense of usury, see 573.
Footnote 87. Dube v Puente De La Vega (Fla App D5) 505 So 2d 697, 12 FLW 1089.
Footnote 88. Official Comment 2 to UCC 3-307 [1952]; UCC 3-308(b) [1990 Rev].
As to the burden of proving the validity of signatures, see 660, discussing UCC , see
3-308(a) [, see 1990 Rev].
Footnote 90. Chase Manhattan Bank, N. A. v Finger Lakes Motors, Inc., 102 Misc 2d
48, 423 NYS2d 128, 28 UCCRS 220.
Footnote 91. Madill Bank & Trust Co. v Herrmann (Okla App) 738 P2d 567, 3
UCCRS2d 1436, later proceeding (CA10 Okla) 817 F2d 81.
553 Negligence as precluding defense
View Entire Section

Under the common law, it was a maxim that when a loss is sustained that must be borne
by one of two innocent parties, it will fall on the party whose acts occasioned it, though
that party may be free from actual fault, especially where the loss occurs because of a
negligent reposing of undue confidence in another. 92 Where negligence is found on
both sides, the loss may be placed on the party with the greater fault; thus, as between
one who reasonably relied on an attorney and entrusted the attorney with negotiable
paper, only to have the attorney forge an indorsement and transfer the paper, and the
person who purchased the paper for a grossly inadequate sum and who knew of the
attorney's past trickery, equity favors the former. 93 This latter principle has been given
statutory recognition in the Uniform Commercial Code provision to the effect that an
unauthorized signature, including a forgery, is ineffective as that of the person whose
name is signed unless that person ratifies it. 94
Observation: As a general proposition, the Uniform Commercial Code represents an

attempt to adjust the risk of loss in commercial matters in a fair and equitable manner
not based on fault, but on allocating responsibility to the party best able to prevent the
loss by exercise of care, with the objective of promoting certainty and predictability in
commercial transactions. 95
Footnotes
Footnote 92. Nordin v First Trust & Sav. Bank, 118 Cal App 697, 6 P2d 92 (where

converted notes were innocently held by defendant bank as security for a loan made to
the converter, and where the innocent plaintiff, contemplating purchase of the notes, was
by the bank's representations induced to act to his injury, the loss to plaintiff ultimately
resulting from the converter's wrongful act fell on the bank); Bank of United States v
Foreman, 102 Cal App 756, 283 P 874 (holding an innocent accommodation indorser of a
promissory note liable to an innocent bank discounting the note).
Footnote 93. Berger v Steiner, 72 Cal App 2d 208, 164 P2d 559.
Footnote 94. UCC 3-404(1) [1952]; UCC 3-403(a) [1990 Rev], discussed in 586
et seq.
As to the principles regarding negligence that substantially contributes to an alteration or

an unauthorized signature, see 604 et seq.
Footnote 95. Putnam Rolling Ladder Co. v Manufacturers Hanover Trust Co., 74 NY2d
340, 547 NYS2d 611, 546 NE2d 904.
554 Estoppel as precluding defense
View Entire Section

Among the equitable doctrines preserved by the Uniform Commercial Code, except to
the extent displaced by particular Code provisions, is that of estoppel. 96 Thus, a party
may be precluded from raising a defense under the Code by the principles of estoppel. 97
Definition: Equitable estoppel, or estoppel in pais, is a term applied usually to a

situation where, because of something which a party has done or omitted to do, that
party is denied the right to plead or prove an otherwise important fact. 98 Broadly
speaking, the essential elements of an equitable estoppel, as related to the party to be
estopped are (1) conduct which amounts to a false representation or concealment of
material facts, (2) the intention, or at least the expectation, that such conduct will be
acted upon by, or influence, the other party or other persons, and (3) knowledge, actual
or constructive, of the real facts. 99 With respect to the party to which
representations have been made, the essential elements are (1) lack of knowledge and
of the means of knowledge of the truth as to the facts in question, (2) reliance in good
faith upon the conduct or statements of the party to be estopped, and (3) action or
inaction based thereon of such a character as to change the position or status of the
party claiming to estoppel to his detriment. 1 The purpose of equitable estoppel is to
prevent actual or constructive fraud, and the doctrine should always be so applied as to
promote the ends of justice; therefore, the doctrine is available only in defense of a
legal or equitable right or claim made in good faith, and can never be used to uphold
crime, fraud, injustice, or wrong of any kind. 2
Illustrations: In an action on a promissory note executed in connection with a

contract having a condition precedent, the defendants were estopped as a matter of law

from enforcing the condition precedent, where an individual, without informing the
plaintiffs, had participated in causing the failure of performance of the condition
precedent, on which the individual's own liability depended, since the defendants'
liability became measured by the individual's liability. 3 Similarly, the Federal
Deposit Insurance Corporation, as receiver of the bank, was entitled to summary
judgment in an action seeking to recover on a demand collateral note executed by a
corporate maker and an individual guarantor, notwithstanding the existence of personal
defenses of fraud in the inducement and failure of consideration which would have
been good as against the bank, since the defendants lent themselves to the scheme
which permitted the assets of the bank to appear inflated and were thus estopped to
assert such defenses. 4 An estoppel will operate in favor of a holder against an
obligor where the holder in reliance on an act or omission of the obligor acquires the
instrument or otherwise changes his or her position. 5 A borrower may be estopped
from interposing a usury defense when, through a special relationship with the lender,
the borrower induces reliance on the legality of the transaction; an indispensable
requisite of such estoppel is that the conduct or representation was intended to, and did,
in fact, influence the other party to that party's injury. 6 Likewise, the holder of an
instrument may be estopped from enforcing it against one whom he or she has misled
by his or her promise, misrepresentation, conduct, or negligence to change his or her
position, so that enforcement of the instrument against him or her would be a hardship
and against good conscience. 7 The general rules governing equitable estoppel, such
as representation, promise, negligence, or silence or inaction, govern estoppel arising
in favor of holders of negotiable or nonnegotiable instruments. 8
Comment: Estoppel based on negligence is expressly recognized in the Uniform

Commercial Code as precluding defenses based on the alteration of an instrument or an
unauthorized signature. 9 A party is barred from asserting that a transaction was
entered into because of fraud when the party has received and accepted benefit from
the transaction. 10
Footnotes
Footnote 97. Great W. Bank & Trust Co. v Pima Sav. & Loan Ass'n (App) 149 Ariz 364,
718 P2d 1017, 2 UCCRS2d 532 (estoppel from asserting defense of failure of
consideration); Alamo Bank of Texas v Palacios (Tex App Corpus Christi) 804 SW2d
291; Houston v Lyons Realty, Ltd. (Tex App Houston (1st Dist)) 710 SW2d 625, 1
UCCRS2d 1252 (estoppel from asserting absence of consideration).
As to estoppel generally, see 28 Am Jur 2d, Estoppel and Waiver 1 et seq.
Annotation: Estoppel of obligor to assert against transferee of conditional sales

contract, instalment improvement or repair contract, or related commercial paper,
defenses or equities available against transferor, 44 ALR2d 196.
Forms: Complaint, petition, declarationAllegationEstoppel to assert infancyAge

misrepresented. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article

Footnote 98. 28 Am Jur 2d, Estoppel and Waiver 27.
As to equitable estoppel generally, see 28 Am Jur 2d, Estoppel and Waiver 35-80.
Footnote 2. 28 Am Jur 2d Estoppel and Waiver 28.
Footnote 3. Hardeman v Parish (Tex App El Paso) 730 SW2d 813, writ ref n r e (Oct 21,
1987) and rehg of writ of error overr (Dec 2, 1987).
Footnote 4. Central Nat'l Bank v Chalet Food Corp. (Sup) 147 Misc 2d 237, 556 NYS2d
187.
Footnote 5. Cooper v Union Bank, 9 Cal 3d 371, 107 Cal Rptr 1, 507 P2d 609, 12
UCCRS 209; Chemical Corn Exchange Bank & Trust Co. v Frankel (Fla App D3) 111 So
2d 99, 72 ALR2d 1270.
Footnote 6. Seidel v 18 East 17th Street Owners, Inc., 79 NY2d 735, 586 NYS2d 240,
598 NE2d 7.
Footnote 7. Morgan v Neal, 7 Idaho 629, 65 P 66.
Footnote 8. Cotner College v Hester's Estate, 155 Neb 279, 51 NW2d 612.
Footnote 9. 596, 605, discussing UCC 3-406 [ 1952]; UCC 3-406 [

1990 Rev].
Footnote 10. Edison Stone Corp. v 42nd Street Dev. Corp. (1st Dept) 145 App Div 2d
249, 538 NYS2d 249.
555 Waiver as precluding defense
View Entire Section

Waiver was recognized as a defense against the enforcement of a negotiable instrument

under pre-Code law. 11
Definition: A waiver, according to the generally accepted definition, is the voluntary

and intentional relinquishment of a known right, claim, or privilege. 12 The Uniform
Commercial Code provides that, unless displaced by the particular provisions of the
Code, the principles of law and equity supplement its provisions. 13
A party may waive the right to assert a defense that would otherwise be available under
the Code. 14
Any fraud in inducing the execution of a note is waived when the victim knows of the
fraud, makes no objection, makes payment on the note, and executes a renewal note. 15
Thus, for example, fraud is waived where a party buys a business which is
misrepresented as to value, and subsequently, after taking over the business and operating
it for sometime, the party gives the note in suit for the balance of the purchase price with
full knowledge of the fraud. 16
A person having the ability and the opportunity to read a note that he or she signs cannot
claim that he or she had been fraudulently induced to sign the note. 17
Whether there has been a waiver is ordinarily a question of fact for the jury, 18 although
submission to the jury of the issue of waiver of a defense to an instrument is not proper
where there is no evidence of waiver. 19
Footnotes
Footnote 11. Southark Trading Co. v Pesses, 221 Ark 612, 254 SW2d 954; Smoot v
Judd, 161 Mo 673, 61 SW 854 (ovrld in part on other grounds by Smoot v Judd, 184 Mo
508, 83 SW 481).
A matter of defense which does not render an instrument void may be waived; thus, fraud
in a bill or note does not make the instrument void, but merely voidable at the option of
the wronged party, and thus it may be waived, expressly or by conduct. Storrs v Storrs,
130 Fla 711, 178 So 841 (decided under former law).
As to waiver generally, see 28 Am Jur 2d, Estoppel and Waiver 154-174.
Footnote 14. Resolution Trust Corp. v Palmetto Fort of Mount Pleasant Ltd. Partnership
(DC SC) 831 F Supp 510 (defense waived by execution of renewal note); Howland v
Scott, 117 Cal App 275, 4 P2d 200 (waiver by renewal of note with knowledge of
defense against original note); First State Bank & Trust Co. v Young, 202 Ga App 566,
415 SE2d 18, 103-12 Fulton County D R 21, cert den (Ga) 1992 Ga LEXIS 299 (waiver
by execution of renewal paper); Charter Medical Management Co. v Ware Manor, Inc.,
159 Ga App 378, 283 SE2d 330 (waiver of defense of duress premised on plaintiff's
refusal to release vital financial records until notes were executed by execution of note
more than one month after records were released); Duncan v Price (Mo App) 620 SW2d
70 (waiver of fraud by failure to plead it as affirmative defense); Graubard Mollen
Dannet & Horowitz v Edelstein (1st Dept) 173 App Div 2d 230, 569 NYS2d 639
(defenses of fraud and duress waived by soliciting and obtaining extension of time in
which to make payment); Klapper v Integrated Agricultural Management Co. (3d Dept)
149 App Div 2d 765, 539 NYS2d 812, 10 UCCRS2d 424 (waiver of defense of fraud in
the inducement); Larsen v FDIC/ Manager Fund (Tex) 835 SW2d 66 (waiver of D'Oench
immunity from defenses by failure to raise it in the lower court); Gaylord Container Div.
of Crown Zellerbach Corp. v H. Rouw Co. (Tex) 392 SW2d 118 (waiver by renewal of
paper or obtaining extension of time for payment under prior law); Stokley v Hanratty

(Tex App Houston (14th Dist)) 809 SW2d 924 (waiver of defense of failure of
consideration for promissory note).
As to the doctrine of waiver, generally, see 28 Am Jur 2d, Estoppel and Waiver 154
et seq.

Footnote 15. Jernigan Auto Parts, Inc. v Commercial State Bank, 186 Ga App 267, 367
SE2d 250.
Footnote 16. Storrs v Storrs, 130 Fla 711, 178 So 841 (decided under former law).
Footnote 17. Campbell v Citizens & Southern Nat'l Bank, 202 Ga App 639, 415 SE2d
193, 103-30 Fulton County D R 20; Wood & Huston Bank v Malan (Mo App) 815 SW2d
454.
As to fraud in the inducement, generally, see 578.
Footnote 19. Smallwood v Singer (Tex App Texarkana) 823 SW2d 319 (holding that
improper submission to jury where making payments after notice of possible fraud was
not evidence of waiver).
556 Knowledge of claim or defense
View Entire Section

Under the 1952 version of Article 3, a purchaser has notice of a claim or defense under
either of the following conditions: 20
The instrument is so incomplete, bears such visible evidence of forgery or alteration, or

is otherwise so irregular as to call into question its validity, terms, or ownership, or to
create an ambiguity as to the party to pay
The purchaser has notice that the obligation of any party is voidable in whole or in part,
or that all parties have been discharged
Comment: Notice that one party has been discharged is not notice to the purchaser
of an infirmity in the obligation of other parties who remain liable on the instrument.
21
Under the 1990 version of Article 3, a holder of an instrument is not a holder in due
course if the instrument, when issued or negotiated to the holder bears such apparent
evidence of forgery or alteration or is otherwise so irregular or incomplete as to call into
question its authenticity. 22
Under this section, questions of notice are to be determined by a subjective test of actual
knowledge, rather than an objective test that might involve constructive knowledge. 23
Footnotes
Footnote 20. UCC 3-304(1) [1952].
As to forgery or alteration, generally, see 586 et seq.
As to discharge, see 615 et seq.
Footnote 23. Carrefour U.S.A. Properties, Inc. v 110 Sand Co. (CA2 NY) 918 F2d 345,
13 UCCRS2d 178.
B. Particular Defenses [557-621]
Research References
UCC 1-102, 1-103, 1-201: UCC 3-115, 3-207, 3-305, 3-306, 4-401, 3-404 through
3-408, 3-413 [1952]; UCC 3-103 through 3-106, 3-110, 3-115, 3-117, 3-202, 3-206,
3-302, 3-303, 3-305, 3-401, 3-403 through 3-407, 3-417, 3-601 [1990 Rev]; UCC
4-401, 4-406
ALR Digest: Bills and Notes 236 et seq.; Uniform Commercial Code 1 et seq.
4A Am Jur Pl & Pr Forms (Rev), Banks 77, 80, 89; 5 Am Jur Pl & Pr Forms (Rev),
Bills and Notes 7, 8, 21-23, 31-33, 55, 75, 82, 121; 6A Am Jur Pl & Pr Forms
(Rev), Uniform Commercial Code : Article 3Negotiable Instruments 3:53, 3:64,
3:75, 3:77, 3:119, 3:128, 3:130-3:133, 3:139-3:143, 3:148, 3:149, 3:152, 3:156-3:158,
3:160, 3:161, 3:163-3:167, 3:171, 3:172, 3:175, 3:181, 3:183-3:194, 3:196-3:198, 3:331
13 Am Jur Trials 253, Misrepresentation in Automobile Sales
1 Am Jur Proof of Facts 479, Alteration of Instruments, Proofs 1-3; 17 Am Jur Proof of
Facts 507, Questioned Handwriting 46, 47; 7 Am Jur POF2d 675, Ratification of
Forged or Unauthorized Signature 6 et seq.; 11 Am Jur POF2d 23, Promissory Note
Executed Under Economic Duress or Business Compulsion 14-27; 13 Am Jur POF2d
347, Bank's Failure to Use Ordinary Care in Detecting Forged or Altered Checks 7 et
seq.; 14 Am Jur POF2d 693, Commercial Paper: Negligence Contributing to Alteration
or Unauthorized Signature Under UCC 3-406 10 et seq., 14 et seq., 22 et seq.
5A Anderson, Uniform Commercial Code 3d [Rev] 3-115:5, 3-117:6, 3-305:7,; 6
Anderson, Uniform Commercial Code 3d 3-305:58, 3-404:28; 6A Anderson, Uniform
Commercial Code 3d [Rev] 3-115:6, 3-115:10, 3-202:5, 3-206:6, 3-305:5, 3-305:14,
3-401:4, 3-403:4, 3-406:6, 3-406:8, 3-407:4, 3-407:5, 3-407:7
Bailey & Hagedorn, Brady on Bank Checks (7th ed) paras 9.15, 9.16, 27.1, 28.1, 27.1,

28.3
1. Want, Failure, or Illegality of Consideration [557-562]
557 Generally
View Entire Section

Under the provision in the 1990 version of Article 3 of the Uniform Commercial Code,
making the right to enforce the obligation of a party to pay a negotiable instrument
subject to the defenses stated in Article 3, 24 it is a defense that the instrument was
issued without consideration or that promised performance for the instrument was not
given. 25
Definition: "Consideration" means any consideration sufficient to support a simple

contract. 26
Neither want nor failure of consideration, however, is available as against a holder in due
course. 27
Illustration: The failure of the payee-seller to deliver goods to the buyer-drawer

cannot be raised against a holder in due course of the buyer's check. 28
Thus, lack 29 or failure 30 of consideration may be raised against an ordinary holder.

31
A defendant cannot defeat the action on the ground of lack or failure of consideration and
still retain any part of the consideration. 32 Further, if one comaker of a promissory note
receives consideration, the other may not allege a lack or failure of consideration as a
defense. 33
Footnotes
Under the 1952 version of Article 3, want or failure of consideration is a defense as

against any person not having the rights of a holder in due course. UCC 3-306(c),
3-408 [1952].
Forms: AnswerDefense of failure of considerationLack of ownership of goods sold

for note. 6A Am Jur Pl & Pr Forms (Rev), Uniform Commercial Code : Article

AnswerDefense of failure of considerationLack of title to land purchased under
executory contract. 6A Am Jur Pl & Pr Forms (Rev), Uniform Commercial Code :
AnswerDefense of failure of consideration and illegalityNote given for gambling

debt. 6A Am Jur Pl & Pr Forms (Rev), Uniform Commercial Code : Article
AnswerDefense of failure of considerationFailure to deposit funds to cover purchase

of certificate of deposit. 6A Am Jur Pl & Pr Forms (Rev), Uniform Commercial Code
AnswerDefenseFailure of consideration for noteDefective workmanship in home

improvementsPlaintiff not holder in due course. 5 Am Jur Pl & Pr Forms (Rev), Bills
and Notes, Form 21.
AnswerDefenseFailure of considerationFraudulent misrepresentations in sale of

business for which note given in payment. 5 Am Jur Pl & Pr Forms (Rev), Bills and
Notes, Form 22.
Footnote 26. UCC 3-303(b).
"Consideration" for a negotiable instrument is what the obligor received for his or her
obligation. Thomas v Bryant (La App 2d Cir) 597 So 2d 1065, 19 UCCRS2d 493.
Footnote 27. UCC 3-306(c), 3-408 [1952]; UCC 3-305(b) [1990 Rev], providing
that the right of a holder in due course to enforce an obligation to pay a negotiable
instrument is not subject to the defenses stated in UCC 3-305(a)(2) [1990 Rev].
A holder in due course is not subject to the defense of lack of consideration. Holm v
Woodworth (Fla App D4) 271 So 2d 167, 11 UCCRS 818; American Bank & Trust Co. v
Sunbelt Environmental Systems, Inc. (La App 1st Cir) 451 So 2d 1111, 39 UCCRS 925;
Cauffiel Machinery Co. v Eastern Steel & Metal Co. (Lucas Co) 59 Ohio App 2d 1, 13
Ohio Ops 3d 41, 391 NE2d 743, 27 UCCRS 159; Neve Welch Enters. v United Bank
(Utah) 628 P2d 1295, 32 UCCRS 173.
A holder in due course is not subject to the defense of failure of consideration. Ford
Motor Credit Co. v Branch (MD Ga) 805 F Supp 42, 19 UCCRS2d 1097; Charmley v
Alaska Mun. Employees Fed. Credit Union (Alaska) 588 P2d 1267; Lassiter v
Resolution Trust Corp. (Fla App D5) 610 So 2d 531, 17 FLW D2710 (federal rule); Gray
v American Bank of Atlanta, 122 Ga App 442, 177 SE2d 207; Peoria Sav. & Loan Asso.
v Jefferson Trust & Sav. Bank (3d Dist) 76 Ill App 3d 915, 32 Ill Dec 509, 395 NE2d
739, 27 UCCRS 1030, revd on other grounds 81 Ill 2d 461, 43 Ill Dec 712, 410 NE2d
845, 29 UCCRS 1305; Turney v Seale (La App 1st Cir) 473 So 2d 855, 41 UCCRS 1747,
cert den (La) 477 So 2d 715; Sanitary & Improv. Dist. No. 32 v Continental Western
Corp., 215 Neb 843, 343 NW2d 314, 38 UCCRS 516; Heilbronn v Fine Line, Inc. (2d
Dept) 165 App Div 2d 866, 560 NYS2d 336; Tipton v Heeren, 109 Nev 920, 859 P2d
465; Union Bank & Trust Co. v Polkinghorne (Okla App) 801 P2d 735, 13 UCCRS2d
445; Atlas Credit Corp. v Leonard, 15 Pa D & C2d 292, 1 UCCRS 220 (also stating that
if the instrument is not negotiable the holder is subject to the defense of failure of
consideration); Shotts v Pardi (Tex Civ App Corpus Christi) 483 SW2d 879, writ dism w
o j (Nov 8, 1972)
Footnote 28. Aryeh v Eastern International (1st Dept) 54 App Div 2d 850, 388 NYS2d
286, 20 UCCRS 961; Deverna v Kinney Systems, Inc. (Sup App T) 146 Misc 2d 276,
556 NYS2d 190.
Footnote 29. Schuster Dev. Corp. v Dade Sav. & Loan Asso. (Fla App D3) 490 So 2d
1048, 11 FLW 1455; Sheffer v Chromalloy Mining & Mineral Div. of Chromalloy
American Corp. (Ky App) 578 SW2d 594; Succession of Montgomery (La App 2d Cir)
506 So 2d 1309, cert den (La) 512 So 2d 1181; Klimmer v Klimmer, 66 Mich App 310,
238 NW2d 586.
Footnote 30. Royal Typewriter Co., Div. of Litton Business Systems, Inc. v Xerographic
Supplies Corp. (CA11 Fla) 719 F2d 1092, 37 UCCRS 429; Laurel Bank & Trust Co. v
City Nat'l Bank, 33 Conn Supp 641, 365 A2d 1222, 20 UCCRS 685; Holm v Woodworth
(Fla App D4) 271 So 2d 167, 11 UCCRS 818; Tallahassee Bank & Trust Co. v Raines,
125 Ga App 263, 187 SE2d 320, 10 UCCRS 665; Guzell v Kasztelanka Cafe &
Restaurant, Inc. (1st Dist) 87 Ill App 3d 381, 42 Ill Dec 415, 408 NE2d 1124; Credit
Industrial Corp. v Di Nanno, 29 Mass App Dec 40, 5 UCCRS 877; Briand v Wild, 110
NH 373, 268 A2d 896, 8 UCCRS 199; General Inv. Corp. v Angelini, 58 NJ 396, 278
A2d 193; Mansion Carpets, Inc. v Marinoff (1st Dept) 24 App Div 2d 947, 265 NYS2d
298, 3 UCCRS 68; Bank of Statesville v Blackwelder Furniture Co., 11 NC App 530, 181
SE2d 785, 9 UCCRS 608, cert den 279 NC 393, 183 SE2d 241; Allied Realty v Boyer
(ND) 302 NW2d 774; Cauffiel Machinery Co. v Eastern Steel & Metal Co. (Lucas Co)
59 Ohio App 2d 1, 13 Ohio Ops 3d 41, 391 NE2d 743, 27 UCCRS 159; L. & N. Sales
Co. v Stuski, 188 Pa Super 117, 146 A2d 154, 1 UCCRS 119.
Footnote 31. Succession of Montgomery (La App 2d Cir) 506 So 2d 1309, cert den (La)
512 So 2d 1181; Centerre Bank of Branson v Campbell (Mo App) 744 SW2d 490, 5
UCCRS2d 1403; Mahaffey v Investor's Nat'l Sec. Co., 103 Nev 615, 747 P2d 890; Weiss
v Salamone (4th Dept) 116 App Div 2d 1009, 498 NYS2d 630; Guaranty Federal Sav.
Bank v Horseshoe Operating Co. (Tex) 793 SW2d 652.
Footnote 32. Rohrbacher v Kleebauer, 119 Cal 260, 51 P 341.
Footnote 33. Armstrong v Armstrong (DC Colo) 714 F Supp 451, 10 UCCRS2d 1277,
partial summary judgment den, motion gr (DC Colo) 130 FRD 449 and dismd (DC Colo)
132 FRD 69.
558 Failure of consideration
View Entire Section

Failure of consideration is the neglect, refusal, or failure of one of the parties to perform
or furnish the consideration agreed upon. 34 A failure of consideration for a note
implies that a valuable consideration moving from the obligee to the obligor was
originally contemplated but failed to realize. 35

Except as against a holder in due course, 36 if a negotiable instrument is issued for a
promise of performance, the issuer has a defense to the extent performance of the
promise is due and the promise has not been performed. 37 Although the 1990 version
of Article 3 of the Uniform Commercial Code does not use the term "failure of
consideration" because it is subject to varying interpretations, 38 case law holds that
failure to execute a promise given in exchange for performance by the other party
constitutes failure of consideration. 39 But a failure of consideration, in whole or in
part, after a bona fide assignment of a promissory note is no defense to a suit by the
assignee against the maker, notwithstanding the assignee's full knowledge of the original
consideration for which the note was given. 40
There can be no contention that the consideration for an instrument has failed where the
maker has received the full agreed-upon consideration. 41
Caution: The defense of failure of consideration may not be available to a holder in

due course under the 1952 version of Article 3 in all circumstances. For example,
although the payee of a promissory note given for the installation of an allegedly
defective asphalt paving was a holder in due course, he was subject to the defense of
failure of consideration where he was a party to the underlying transaction out of which
execution of the note arose and had dealt directly with the defendant maker. 42
It is well established, even when a cashier's check is characterized as a bill of exchange,

that a bank may assert failure of consideration as a defense to a demand that it pay the
cashier's check if enforcement is sought by one who is not a holder in due course. 43
A defense of total failure of consideration will not stand if the maker received any benefit
in exchange for the note. 44
Where, in a suit by the maker of a note for its cancellation, the issue of failure of
consideration is determined against the maker, the defense of failure of consideration
cannot be invoked by the maker in a later suit by the payee for payment of the note
because that issue has been determined in the former action. 45
Footnotes
Footnote 34. Holm v Woodworth (Fla App D4) 271 So 2d 167, 11 UCCRS 818.
Footnote 35. Hart v Hart (Iowa) 160 NW2d 438.
Footnote 36. 557.
Footnote 39. Benson v Andrews (2nd Dist) 138 Cal App 2d 123, 292 P2d 39.
Annotation: Repossession by secured seller as affecting his right to recover on note or

other obligation given as a downpayment, 49 ALR3d 364.

Footnote 40. Flood v Petry, 165 Cal 309, 132 P 256.
Footnote 41. Oakland Medical Bldg. Corp. v Aureguy, 41 Cal 2d 521, 261 P2d 249
(superseded by statute on other grounds as stated in FPI Development, Inc. v Nakashima
(3rd Dist) 229 Cal App 3d 727, 91 CDOS 3156, 91 Daily Journal DAR 4781).
Footnote 42. Bucci v Paulick, 277 Pa Super 492, 419 A2d 1255, 28 UCCRS 1391.
Footnote 43. Banco Ganadero y Agricola, S.A., Agua Prieta v Society Nat'l Bank (ND
Ohio) 418 F Supp 520, 21 UCCRS 233.
Footnote 44. Florida Nat'l Bank & Trust Co. v Smith (Fla App D3) 139 So 2d 438.
Footnote 45. Dickey v Kuhn, 85 Cal App 8, 259 P 93.
559 Partial failure of consideration
View Entire Section

Partial failure of consideration is a defense pro tanto whether or not the failure is in an
ascertained or liquidated amount. 46 Thus, a partial failure of consideration discharges
only as much of the claim as corresponds to the failure itself. 47
Illustration: In a suit against the maker by the payee of a note given to acquire oil
leases, partial failure of consideration, which led to the rescission of the parties'
oil-development agreement, was a defense pro tanto regardless of whether such failure
involved an ascertained or liquidated amount, since the payee was not a holder in due
course of the note sued on. 48
The defense of partial failure of consideration, however, may not be asserted as against a
Partial failure of consideration is an affirmative defense to be pleaded and proved by the

defendant 50 by a preponderance of the evidence. 51 A partial failure of consideration
does not entitle the other party to cancel, but entitles him or her only to damages for such
breach, unless the partial failure can be regarded as going to the "root of the contract." 52
There is no defense of partial failure of consideration in a case where a lender gives a

borrower, on the borrower's note, the full amount called for by the note, though the lender
knows that part of the amount will be distributed to another. 53
Footnotes
Footnote 46. UCC 3-408 [1952].

Forms: AnswerDefensePartial want of considerationMutual mistake in amount of
note. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 23.
Footnote 47. Royal Typewriter Co., Div. of Litton Business Systems, Inc. v Xerographic
Supplies Corp. (CA11 Fla) 719 F2d 1092, 37 UCCRS 429.
Footnote 48. TR Drilling Co. v Howard (La App 2d Cir) 463 So 2d 923.
Footnote 49. 557.
Footnote 50. Dube v Puente De La Vega (Fla App D5) 505 So 2d 697, 12 FLW 1089.
Footnote 51. Windle v Sebold (Fla App D4) 241 So 2d 165.
As to the burden of proving defenses to action on an instrument, generally, see 552.
Footnote 52. Ralston Purina Co. v Jungers, 86 SD 583, 199 NW2d 600.
Footnote 53. Citizens Nat'l Trust & Sav. Bank v Bessolo & Gualano, Inc., 139 Cal App
34, 33 P2d 73.
560 Want of consideration
View Entire Section

The drawer or maker of a negotiable instrument has a defense if the instrument is issued
without consideration. 54 Thus, the defense of want or absence of consideration is
always a defense to a suit on a promissory note. 55 The defense of want or absence of
consideration, however, may not be asserted as against a holder in due course. 56 On
the other hand, an indorser may show lack of consideration as between the indorser and
the immediate indorsee, under circumstances that would render it inequitable to enforce
the indorser's liability. 57
Illustration: A party otherwise entitled to interpose lack of consideration was not

estopped to plead the defense of lack of consideration for the making of an instrument,
in an action by an indorsee, by the fact that the party made an interest payment to the
indorsee after the transfer of the note had been completed. 58
A plea of "no consideration" is construed most strongly against the pleader. 59
The fact that the consideration appears on the face of the instrument cannot deprive the
defendant of the statutory matters of defense. 60 Further, the fact that commercial paper
is unconditional does not bar proof of the absence of consideration. 61 The fact that a
note recites "for value received" does not bar the introduction of parol evidence to show
that, in fact, no value was ever received. 62
Any consideration which would be sufficient to uphold an ordinary contract is sufficient

consideration to validate a promissory note. 63
Illustration: Where the payee of a note agreed to sell real property to an association
for a reduced price in exchange for a promissory note executed by two individuals,
there was consideration and the makers were bound by the note, even though they
might not have benefited from the sale at the reduced price. 64
Footnotes
Footnote 54. UCC 3-408 [1952]; UCC 3-303(b) [1990 Rev].
Footnote 55. Meyer v Glenmoor Homes, Inc. (1st Dist) 246 Cal App 2d 242, 54 Cal Rptr
786, reh den (1st Dist) 246 Cal App 2d 270, 55 Cal Rptr 502.
Footnote 56. 557.
As to effect of holder-in-due course status, generally, see 547.
Footnote 57. Frace v Brown, 117 Cal 324, 49 P 213.
Footnote 58. Imperial Gypsum & Oil Corp. v Chaplin, 4 Cal App 2d 109, 40 P2d 596.
As to estoppel to assert defenses, generally, see 554.
Footnote 59. Reese v Schenck, 107 Fla 166, 144 So 313 (decided under prior law).
Footnote 60. Dougherty v Salt, 227 NY 200, 125 NE 94.
Footnote 61. Stone v Blizzard (Sup) 137 Misc 2d 92, 520 NYS2d 112.
Footnote 62. Iseman v Hobbs (App) 290 SC 482, 351 SE2d 351, 2 UCCRS2d 1357.
Footnote 63. Hallowell v Turner, 94 Idaho 718, 496 P2d 955, 10 UCCRS 1076.
Footnote 64. Hallowell v Turner, 94 Idaho 718, 496 P2d 955, 10 UCCRS 1076.
561 Assertion by accommodation party or other third person
View Entire Section

Although as a general rule the defense of want or failure of consideration relates only to
the consideration for the particular contract on the instrument under which obligation is
asserted, 65 the defense of want or failure of consideration for the principal's contract,
which he or she is called upon to perform, is available to an accommodation indorser or
surety. 66

However, it is not a defense to an accommodation party that no consideration was given
for his or her signature or obligation as distinguished from consideration for the
obligation of the party he or she accommodates; an accommodation party is liable on a
note regardless of the absence of any independent consideration for his or her signature.
67 Moreover, even though an instrument was made and indorsed as an accommodation
and without consideration, the absence of consideration is not available as a defense to an
accommodation maker or indorser when the instrument is taken for value before it is due.
68
Want of consideration to himself or herself is a defense to an accommodation party who

is sued by the party he or she accommodates. 69
Footnotes
Footnote 65. Mintz v Dallek & Zaret Associates, Ltd. (2d Dept) 120 App Div 2d 654,
502 NYS2d 248.
Footnote 66. Gillespie v Torrance, 25 NY 306.
Footnote 67. Cissna Park State Bank v Johnson (4th Dist) 21 Ill App 3d 445, 315 NE2d
675, 15 UCCRS 667; Schaeffer v United Bank & Trust Co., 32 Md App 339, 360 A2d
461, 20 UCCRS 125, affd 280 Md 10, 370 A2d 1138, 21 UCCRS 586; Transamerica
Commercial Fin. Corp. v Naef (Wyo) 842 P2d 539, 21 UCCRS2d 704.
Footnote 68. Franklin Nat'l Bank v Eurez Constr. Corp., 60 Misc 2d 499, 301 NYS2d
845, 6 UCCRS 634.
Footnote 69. 484.
562 Illegality of consideration
View Entire Section

Illegality of consideration is not listed among the "real" defenses to which an instrument
is subject in the hands of a holder in due course. 70 It has long been held, however, that
even in the case of negotiable paper, where an action is brought by a subsequent holder
and it is shown that the consideration for the instrument was illegal, a prima facie case of
notice to the holder is made out, and the burden of proving that the holder took without
notice before maturity and for value is thrown on the holder. 71 Furthermore, the
Uniform Commercial Code provides that a defense to the obligation of a party to pay a
negotiable instrument exists good, even against a holder in due course, where there is
illegality in the transaction which, under other law, nullifies the obligation of the obligor.
Under this provision, it is left to local law outside the Uniform Commercial Code to
determine whether the instrument is absolutely void, or merely voidable. 72

Footnotes
Footnote 70. 548.
Footnote 71. Union Collection Co. v Buckman, 150 Cal 159, 88 P 708.
As to the burden of proof with respect to status as a holder in due course, generally, see
665.
As to the burden of proving defenses to an action on an instrument, see 552.
Footnote 72. 569.
2. Nonissuance, Conditional Issuance, Issuance for Special Purpose [563, 564]
563 Generally
View Entire Section

Nonissuance or failure of the condition or special purpose to be fulfilled is a defense, 73

of the maker or drawer of an instrument, 74 under the Uniform Commercial Code
provision 75 making the right to enforce the obligation of a party to pay a negotiable
instrument subject to the defenses stated in Article 3 of the Code. 76 Nonperformance of
a condition precedent, nondelivery, and delivery for a special purpose are also defenses
under the 1952 version of Article 3. 77 When a note is delivered subject to a condition
precedent, it is not enforceable until such condition has been fulfilled. 78
Illustration: Where the maker's obligation on the note was subject to performance of
a condition precedent (namely, the receipt of dividends or other corporate funds
sufficient to pay the note) and there was no performance of such condition by the
payee, the maker was not liable to the payee in the latter's suit on the note. 79
The defenses of nonissuance, conditional issuance, or issuance for a special purpose,

however, are not available as against a holder in due course. 80
To establish the defense of delivery for a special purpose, the maker must prove that the
enforceability of the instrument was predicated on the occurrence of some act or event,
not that the instrument was a sham that was never intended to be enforceable. 81
Nondelivery or conditional delivery must be pleaded as an affirmative defense. 82
Footnotes

Footnote 77. UCC 3-306(c) [1952].
Footnote 78. Evenson v Hlebechuk (ND) 305 NW2d 13, 32 UCCRS 154.
Footnote 79. Scafidi v Johnson (La) 420 So 2d 1113, 35 UCCRS 167 (among conflicting
authorities on other grounds noted in American Bank & Trust Co. v Vinson (La App 2d
Cir) 528 So 2d 693).
Footnote 80. UCC 3-306(c) [1952]; UCC 3-305(b) [1990 Rev] providing that the
right of a holder in due course to enforce an obligation to pay a negotiable instrument is
not subject to the defenses stated in UCC 3-305(a)(2) [1990 Rev].
As to the delivery of instruments, generally, see 185 et seq.
Forms: Complaint, petition, or declarationAllegationDelivery of note. 5 Am Jur Pl

& Pr Forms (Rev), Bills and Notes, Form 31.
Instruction to juryWhat constitutes delivery of note. 5 Am Jur Pl & Pr Forms (Rev),

Footnote 81. Perez-Lizano v Ayers, 215 Mont 95, 695 P2d 467.
Footnote 82. Seier v Peek (Ala) 456 So 2d 1079.
As to the burden of proving defenses to an action on an instrument, generally, see 552.
564 Nondelivery or nonissuance of incomplete instrument
View Entire Section

Nonissuance of an incomplete instrument is a defense 83 of the maker or drawer of an

instrument, 84 under the Uniform Commercial Code provision 85 making the right to
enforce the obligation of a party to pay a negotiable instrument subject to the defenses
stated in Article 3 of the Code. 86 This defense, however, is not available as against a
The 1952 version of Article 3 cuts off the defense of nondelivery of an incomplete
instrument as against a holder in due course. 88 The rules as to material alteration apply
where completion is unauthorized, even though the paper was not delivered by the maker
or drawer, 89 and even though the instrument was stolen from the maker or drawer and
completed after the theft. 90
Definition: An incomplete instrument is (a) a signed writing (b) the contents of

which show that it was incomplete at the time of signing, but (c) the signer intended it
to be completed by the addition of words or numbers. 91 This definition includes both
"instruments, " that is, writings meeting all the statutory 92 requirements as well as a
writing intended to be an instrument that is signed but lacks some element of an
instrument. 93 The test in both cases is whether the contents show that it is
incomplete and that the signer intended that additional words or numbers be added. 94
If the incomplete instrument satisfies the statutory 95 requirements of an instrument, in

spite of its lack of completeness, and, in fact, is never completed, it may be enforced
according to its terms or according to its terms as augmented by completion. 96
Observation: A note that was obviously intended to be completed by filling out a

schedule of installment payments, so that the note would be payable on a stated
number of days, is left without being completed, the note is effective as a demand note,
and may be enforced as such, even though it is obviously incomplete and obviously
apparent that a demand note was not intended; likewise, if the name of the payee was
not filled in by the signer and is never added, the instrument is obviously incomplete,
but if it otherwise satisfies UCC 3-104 [1990 Rev], it is a negotiable instrument in
bearer form. 97
Footnotes
Footnote 87. UCC 3-305(b) [1990 Rev], providing that the right of a holder in due
course to enforce an obligation to pay a negotiable instrument is not subject to the
defenses stated in UCC 3-305(a)(2) [1990 Rev].
Footnote 88. Official Comment 3 to UCC 3-305(2) [1952].
Forms: AnswerDefenseNondelivery of incomplete note subsequently lost or stolen.

Footnote 89. UCC 3-115(2) [1952].

By including the requirement that the signer must have intended that the incomplete
instrument would be completed, this definition would embrace any incomplete contract if
literally interpreted. It is necessary to interpret the clause relating to the intent of the
signer as being not merely an intent to complete the writing, but as an intent to complete
it as an instrument under the 1990 version of Article 3. 5A Anderson, Uniform
Commercial Code 3d [Rev] 3-115:5.
3. Incapacity or Incompetency of Party [565-568]
565 Generally
View Entire Section

The validity of every contract, whether in the form of negotiable paper or otherwise, is
dependent upon the capacity of the parties to contract. 98 Generally, it may be said that
it is this law of contracts and the public policy behind certain disabilities, rather than
anything in the law of negotiable instruments, which governs incapacity as a defense to
an action on a negotiable instrument. 99 Certain Uniform Commercial Code provisions
do, however, restrict the availability of a defense based on incapacity; incapacity does not
preclude transfer of an instrument, 1 and the maker, drawer, or acceptor admits the
existence of the payee and his or her then capacity to indorse. 2
While negotiation by a person without capacity is effective to transfer an instrument,

even though the party negotiating the instrument incurred no liability on the instrument
and is entitled to recover it, except as against a subsequent holder in due course, 3 a
holder in due course does not take the instrument free from the defense of such incapacity
as renders the obligation of the party a nullity. 4 If under local law the effect of the
particular type of incapacity is to render the obligation of the instrument entirely null and
void, the defense may be asserted against a holder in due course; if the effect is merely to
render the obligation voidable at the election of the obligor, except in the special case of
minority or infancy, 5 the defense is cut off. 6
Footnotes

Footnote 98. 17A Am Jur 2d, Contracts 23, 24.
Footnote 99. Official Comments 4 and 5 to UCC 3-305 [1952], noting that the
questions of minority or infancy and incapacity are left to the law of each state.
Footnote 1. UCC 3-207(1)(a) [1952]; UCC 3-202(a)(i) [1990 Rev], discussed in

215.
Footnote 2. UCC 3-413(3) [1952], discussed in 441, 451, 450.
Footnote 3. UCC 3-207(1)(a) [1952], discussed in 215.
Footnote 5. 566.
Footnote 6. Official Comment 5 to UCC 3-305 [1952], referring to any incapacity apart
from minority or infancy.
566 Minority or infancy
View Entire Section

The Uniform Commercial Code provides that the right of any party to enforce an
instrument is subject to a defense of the obligor based on the minority or infancy of the
obligor, to the extent that minority or infancy is a defense to a simple contract. 7 This
provision incorporates the pre-Code law as to avoidance of contracts by minors. 8
Comment: Article 3 allows the assertion of the defense of minority or infancy

against a holder in due course, even though the effect of the defense is to render the
instrument voidable but not void. The policy is one of protection of the infant even at
the expense of occasional loss to an innocent purchaser. No attempt is made to state
when minority or infancy is available as a defense or the conditions under which it may
be asserted. In some jurisdictions it is held that an infant cannot rescind the transaction
or set up the defense unless the holder is restored to the position held before the
instrument was taken which, in the case of a holder in due course, is normally
impossible. In other states an infant who has misrepresented age may be estopped to
assert minority or infancy. Such questions are left to other law, as an integral part of
the policy of each state as to the protection of infants. 9
Observation: Negotiation by a minor is effective to transfer an instrument.

However, to the extent permitted by other law, such negotiation may be rescinded or
may be subject to other remedies, but those remedies may not be asserted against a
subsequent holder in due course or a person paying the instrument in good faith and
without knowledge of the facts that are the basis for rescission or other remedy. 10

Footnotes
Footnote 7. UCC 3-305(2)(a) [1952]; UCC 3-305(a)(1)(i) [1990 Rev].
23 ALR3d 932, 27.
Forms: Complaint, petition, declarationAllegationEstoppel to assert infancyAge

misrepresented. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article
AnswerDefenseInfancy at time of execution and delivery of note. 6A Am Jur Pl &

Instruction to juryDefenses available against holder in due course. 6A Am Jur Pl &


3-305 [1990 Rev].
Footnote 10. 216.
567 Lack of legal capacity
View Entire Section

Under the 1990 version of Article 3 of the Uniform Commercial Code, the right,
including that of a holder in due course, 11 to enforce the obligation of a party to pay a
negotiable instrument is subject to a defense of the obligor based on lack of legal
capacity which, under other law, nullifies the obligation of the obligor. 12 The 1952
version of Article 3 provides that a holder in due course takes the instrument free from all
defenses of any party to the instrument with whom the holder has not dealt except
incapacity as renders the obligation of the party a nullity. 13
Comment: This section covers mental incompetence, guardianship, ultra vires acts
or lack of corporate capacity to do business, or any other incapacity apart from
minority or infancy. Such incapacity is largely statutory. Its existence and effect is left
to the law of each state. If under the state law the effect is to render the obligation of
the instrument entirely null and void, the defense may be asserted against a holder in
due course. If the effect is merely to render the obligation voidable at the election of
the obligor, the defense is cut off. 14
Illustration: A husband who lacked the capacity to purchase community real

property without his wife's consent or subsequent ratification could assert such
incapacity in an action by the bank against the husband and wife on a note executed by
the husband for the property's purchase price as a defense to liability of the defendants'
community property for such note; and the bank was thus a holder in due course only
of the husband's separate obligation. 15
A contract in a negotiable instrument made by a party not shown to be entirely without

understanding is not void, but only voidable. 16 But a person of unsound mind, whose
incapacity has been judicially determined, cannot make a contract or delegate any power
until restored to capacity. 17 Insanity as a defense may be pleaded only by the party
incapacitated or by someone else for that party's benefit. 18
Incompetency is not established by evidence that the signer of a note was nervous,
distraught, or under strain at the time the note was executed. 19
Observation: Negotiation is effective to transfer an instrument even if obtained from

a person without capacity. However, to the extent permitted by other law, such
negotiation may be rescinded or may be subject to other remedies, but those remedies
may not be asserted against a subsequent holder in due course or a person paying the
instrument in good faith and without knowledge of the facts that are the basis for
rescission or other remedy. 20
Footnotes
Annotation: Insanity of maker, drawer, or indorser as defense against holder in due

course, 24 ALR2d 1380.
Forms: AnswerDefenseIncompetency at time of execution of note. 6A Am Jur Pl &


Footnote 13. UCC 3-305(2)(b) [1952].
3-305 [1990 Rev].
As to capacity to contract, generally, see 17A Am Jur 2d, Contracts 23, 24.
Footnote 15. Colorado Nat'l Bank v Merlino, 35 Wash App 610, 668 P2d 1304, review
den 100 Wash 2d 1032 and later proceeding (BC WD Wash) 62 BR 836, 14 BCD 873,
CCH Bankr L Rptr 71401.
Footnote 16. Hellman Commercial Trust & Sav. Bank v Alden, 206 Cal 592, 275 P 794.

Footnote 17. San Francisco Credit Clearing-House v MacDonald, 18 Cal App 212, 122 P
964.
Footnote 18. San Francisco Credit Clearing-House v MacDonald, 18 Cal App 212, 122 P
964.
Footnote 19. Katski v Boehm, 249 Md 568, 241 A2d 129, 5 UCCRS 49.
Footnote 20. 215.
568 Lack of corporate capacity; ultra vires acts
View Entire Section

The provision in the 1952 version of Article 3 of the Uniform Commercial Code, under
which incapacity as renders the obligation of the party a nullity is a defense, even as
against a holder in due course, 21 covers ultra vires acts or lack of corporate capacity to
do business, but the existence and effect of such a defense is left to local law. 22
A corporation is liable on its note, the consideration of which it had received and
retained, though the note was executed in pursuance of a contract ultra vires. 23
Observation: Negotiation is effective to transfer an instrument, even if obtained

from a corporation exceeding its powers. However, to the extent permitted by other
law, such negotiation may be rescinded or may be subject to other remedies, but those
remedies may not be asserted against a subsequent holder in due course or a person
paying the instrument in good faith and without knowledge of the facts that are the
basis for rescission or other remedy. 24
Footnotes
Footnote 21. 567.
3-305 [1990 Rev].
Footnote 23. Main v Casserly, 67 Cal 127, 7 P 426.
As to the doctrine of ultra vires generally, see 18A Am Jur 2d, Corporations
2009-2036.

ALR2d 834.

Footnote 24. 215.
4. Illegality or Public Policy [569-576]
569 Generally
View Entire Section

The Uniform Commercial Code provides that the right of any party, including a holder in
due course, to enforce an instrument is subject to a defense of the obligor based on
illegality of the transaction where, under other law, such illegality nullifies the obligation
of the obligor. 25 As against a person not a holder in due course, however, illegality that
merely makes the obligation voidable may be assertible as a defense. 26
Comment: Illegality is most frequently a matter of gambling or usury, but may arise
in other forms under a variety of statutes. The statutes differ in their provisions and the
interpretations given them. They are primarily a matter of local concern and local
policy. All such matters are, therefore, left to the local law. If under the local law the
effect of the illegality is to make the obligation entirely null and void, the defense may
be asserted against a holder in due course. Otherwise, it is cut off. 27
The fact that the illegality is an act which is also a crime does not compel the conclusion
that the contract based thereon is void, as distinguished from voidable. 28 Similarly,
fraud which induces the making of a contract does not cause the contract to be a nullity,
even though the fraud may be such as to constitute a crime. 29
Illustration: A contract induced by commercial bribery is voidable but not void; 30

however, when a note is given in payment of the purchase price for the sale of a patent
and the patent is void, the note is also void. 31
Observation: Typically, the issuing or transferring of commercial paper is one event

in a group of related events. Whether illegality with respect to one of the other related
events has any effect upon the commercial paper issued or transferred cannot be
predetermined because the courts have not articulated any general rule that can be
applied. In numerous cases, the courts have merely concluded that the validity of the
commercial paper was not affected. There is nothing in the Code or the pre-Code law
to serve as a guide. One can sense that a court is faced with the same public policy
determining situation as confronts the court in determining in the area of negligence
law whether the defendant's act was the proximate cause for the consequence of which
he should be liable or was merely a stage-setting event for which no liability should
attach. A similar problem can be seen in the field of property law in determining
whether an invalid remainder taints and invalidates a preceding otherwise valid life
estate. 32
The validity of a check given in an illegal transaction would thus depend largely on the

construction of a state statute proscribing the act in question; such a statute might be
interpreted as absolutely voiding such a check or as merely making the check
unenforceable as between the immediate parties. 33 Where the law in question, such as
federal banking regulations, does not purport to affect the rights of the parties inter se,
and provides no private remedy, the illegality of the transaction is not a defense. 34
However, if a statute makes an instrument absolutely void because of illegality, the
instrument will of course be void in the hands of a holder in due course as well as any
other holder. 35
Generally, if the consideration is in part illegal, the bill or note is fully void, at least in the
event that the illegal part is indefinite or inseparable from the remainder, whether the
illegality arises under the common law or under a statute. 36
Caution: A mere conclusory averment of illegality is not sufficient to bar recovery

by a payee bank when no facts are pleaded to connect the payee to any illegality or to
show any knowledge on its part that the loan it was making to the maker was in
furtherance of a criminal plan. 37
Observation: Negotiation is effective to transfer an instrument, even if obtained as

part of an illegal transaction. However, to the extent permitted by other law, such
Footnotes
Footnote 26. UCC 3-305(a)(2) [1990 Rev], subjecting an instrument not in the hands of
a holder in due course to any 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.
One who does not have the rights of a holder in due course takes the instrument subject
to all defenses of any party which would be available in an action on a simple contract.
UCC 3-306(b) [1952].
3-305 [1990 Rev].
As to consideration for gambling or wagering transactions, see 572.
As to usurious transactions generally, see 573.
Footnote 28. Bankers Trust Co. v Litton Systems, Inc. (CA2 NY) 599 F2d 488, 26
UCCRS 513.
Footnote 29. Citizens Nat'l Bank v Brazil, 141 Ga App 388, 233 SE2d 482, 21 UCCRS
810.
Footnote 30. Bankers Trust Co. v Litton Systems, Inc. (CA2 NY) 599 F2d 488, 26
UCCRS 513.
Footnote 31. Frequency Electronics, Inc. v National Radio Co. (SD NY) 422 F Supp 609,
193 USPQ 635, 20 UCCRS 680, affd (CA2 NY) 546 F2d 497, 20 UCCRS 684.
Footnote 34. Hinnant v American Nat'l Bank & Trust Co. (Fla App D4) 406 So 2d 1206.
Footnote 35. Commercial Nat'l Bank v Jordan, 71 Fla 566, 71 So 760 (decided under
former law).
Footnote 36. Campbell v Romfh Bros., Inc. (Fla App D2) 132 So 2d 466.
Footnote 37. Bank of Baroda v Shah (1st Dept) 191 App Div 2d 237, 594 NYS2d 255.
Footnote 38. 215.
570 As defense available to indorser
View Entire Section

While illegality in the transfer is a defense available to the transferor, 39 illegality in the
inception of an instrument is not a defense available to the regular indorser of an
instrument against one taking title through his or her indorsement, because the
indorsement is a new and independent contract. 40
The rule that an indorser for transfer may not set up illegality of the instrument has been
applied to various defenses of illegality in the inception of an instrument, including
violation of a statute requiring cash payment for the issuance of corporate stock, 41 and
usury. 42
Footnotes
Footnote 39. 569.
Footnote 40. First Bank of Notasulga v Jones, 156 App Div 277, 141 NYS 304.
Footnote 41. First Nat'l Bank v Cornell, 8 App Div 427, 40 NYS 850.

ALR2d 834.
Footnote 42. Morford v Davis, 28 NY 481.
As to the defense of usurious transactions, generally, see 573.
571 As defense available to guarantor, surety, or other accommodation party
View Entire Section

The defense of illegality of the instrument has been held available to guarantors or
sureties on the instrument, 43 and to accommodation makers 44 and accommodation or
irregular indorsers, 45 particularly in regard to the defense of usury, which has been held
available to accommodation indorsers, 46 accommodation makers, 47 and guarantors or
sureties. 48
Generally, the statute withdrawing the defense of usury from a corporation applies also to
individual guarantors, sureties, and accommodation indorsers of the corporate obligation,
so that they, as well as the corporation, are precluded from interposing usury as a
defense. 49
Footnotes
Footnote 43. Rosa v Butterfield, 33 NY 665.
Footnote 44. Kennedy v Heyman, 183 App Div 421, 170 NYS 828.
Footnote 45. Platt v Rose, 208 Misc 1, 142 NYS2d 916.
Footnote 46. Lewis v Barton, 106 NY 70, 12 NE 437.
Footnote 47. Kneher v Greengrass, 232 App Div 761, 247 NYS 723.
Footnote 48. Laux v Gildersleeve, 23 App Div 352, 48 NYS 301.
Footnote 49. Rosa v Butterfield, 33 NY 665; Freilicher v C R F General Contractors

Corp. (Sup) 225 NYS2d 811.
Annotation: Statute denying defense of usury to corporation, 63 ALR2d 924.
572 Gambling or wagering transactions
View Entire Section

Illegality frequently arises under gaming statutes, and because such statutes are primarily
a matter of local concern and local policy, matters involving the same are left to the local
law. If under the local law the effect of illegality is to make the obligation entirely null
and void, the defense may be asserted against a holder in due course; otherwise, it is cut
off. 50
Illustrations: A London gambling club which was the holder of nine bearer checks,
drawn by the defendant, who maintained a business office in Connecticut, in
connection with gambling transactions in London, could not recover on such checks
because (1) the defendant drawer, under Connecticut law, was entitled to raise a
statutory defense of illegal consideration against liability on the checks; and (2) even if
plaintiff were a holder in due course as to the checks, it would still be subject to the
defendant's liability defenses because it had dealt directly with the defendant in
gambling transactions with respect to which the checks were given. 51 Similarly,
checks drawn for the purpose of gambling are void and unenforceable in Nevada. 52
The burden of proving a gambling purpose is on the party seeking to avoid liability, but
there is a presumption of gambling purpose where the transaction occurs in proximity to
the gambling itself in terms of both time and space. 53
Illustration: Where defendant, who had executed credit applications to two casinos
and over a period of years had patronized the casinos, borrowed against these lines of
credit on gambling junkets, and previously repaid sums so borrowed, defendant's
history of gambling and the fact that the present unpaid advances were made to him in
the form of chips in proximity to the gambling activities were facts which, under the
law of Nevada, supported the presumption that the loans were made for a gambling
purpose. Thus, such debts and the checks evidencing them were void and
unenforceable. 54
Observation: Negotiation is effective to transfer an instrument, even if obtained as

part of an illegal transaction. However, to the extent permitted by other law, such
Footnotes
3-305 [1990 Rev].
Annotation: Right to recover money lent for gambling purposes, 53 ALR2d 345 8
(bona fide purchaser of note or other instrument given to cover gambling loan).
Footnote 51. Casanova Club v Bisharat, 189 Conn 591, 458 A2d 1, 35 UCCRS 1207.
Footnote 52. Sandler v Eighth Judicial Dist. Court, 96 Nev 622, 614 P2d 10, 29 UCCRS
1546; Sea Air Support v Herrmann, 96 Nev 574, 613 P2d 413, 29 UCCRS 918.
Footnote 53. National Recovery Systems v Ornstein (ED Pa) 541 F Supp 1131, 33
UCCRS 1697.
Footnote 54. National Recovery Systems v Ornstein (ED Pa) 541 F Supp 1131, 33
UCCRS 1697.
Footnote 55. 216.
573 Usurious transactions
View Entire Section

Illegality of a transaction as renders the obligation of a party a nullity, thus constituting a

defense good even against a holder in due course, 56 may arise because of usury
statutes. Such statutes are a matter of local policy and are left to local law; therefore, if
under local law the effect of such illegality is to make the obligation entirely null and
void, the defense may be asserted against a holder in due course; otherwise, it is cut off.
57 However, when the usury statute merely forfeits interest or principal as the penalty
for usury, but does not make the obligation void, the defense of usury may not be raised
The general rule is that, regardless of whether the statute declares the contract void as a
whole, or only to the extent of the usury, the right to defend against or attack a security
on the ground that it is tainted with usury is a right personal to the borrower or debtor,
and can be asserted only by him and those in legal privity with him; it is not available to
a stranger to the loan transaction. 59
A defense of civil usury is not available to a corporation. 60
If usury in the transfer of an instrument exists, it is not a defense to the maker or other
party prior to the usury. 61
When a note is usurious, the usury infects any renewal note. 62
Footnotes
Footnote 56. 569.
3-305 [1990 Rev].
Annotation: Leaving part of loan on deposit with lender as usury, 92 ALR3d 769.
Contingency as to borrower's receipt of money or other property from which loan is to

be repaid as rendering loan usurious, 92 ALR3d 623.
Usury: expenses or charges in form of commissions to agents, brokers, or like

intermediaries incident to loan of money, 52 ALR2d 703.
Footnote 58. Agristor Credit Corp. v Lewellen (ND Miss) 472 F Supp 46, 26 UCCRS
1014; Cromwell v All State Credit Corp. (Dist Col) 10 UCCRS 403.
Footnote 59. 45 Am Jur 2d, Interest and Usury 288.
Footnote 60. Ludlum Corp. Pension Plan Trust v Matty's Superservice, Inc. (2d Dept)
156 App Div 2d 339, 548 NYS2d 292.
Footnote 61. Sedbury v Duffy, 158 NC 432, 74 SE 355.
Footnote 62. Williams v Powell, 214 Ga App 216, 447 SE2d 45, reconsideration den (Ga
App) 94 Fulton County D R 2631 and cert den (Ga) 1994 Ga LEXIS 1197.
574 Instrument given for issuance of corporate stock
View Entire Section

Where stock is issued in violation of a statute which precludes the issuance of stock for
promissory notes, such notes may be held unenforceable by the corporation, 63 although
in numerous cases the stockholder has been estopped to deny liability, on the theory that
the statutory prohibition is not intended for his or her protection, or because he or she has
enjoyed the benefits of being a stockholder. 64 Such notes are generally enforced at the
suit of a holder in due course. 65
Footnotes
Footnote 63. 182.
Footnote 64. Backus v Hutson, 136 Misc 290, 240 NYS 610.

ALR2d 834.
Footnote 65. Washer v Smyer, 109 Tex 398, 211 SW 985, 4 ALR 1320.
575 Instrument executed to noncomplying foreign corporation

View Entire Section
Where commercial paper is executed in a state to a foreign corporation which is doing

business in that state without authority, such fact constitutes a defense to an action on
such paper (so long as the corporation does not procure such authority) as against the
corporation or one taking from it who is not a holder in due course. 66 The fact that
commercial paper is executed in a state to a foreign corporation which is doing business
in that state without authority does not constitute a defense against a holder in due course
of paper thus executed, since the validity of the contract is not impaired. 67
Caution: In at least one state, it is held that where a statute made contracts entered
into within the state by unregistered foreign corporations unenforceable, promissory
notes given to an unregistered foreign corporation by a resident of that state pursuant to
a sales transaction were void ab initio, and an assignee of the notes could not be a
holder in due course, and the maker was not liable. 68
Footnotes
Footnote 66. Manufacturers' Commerical Co. v Blitz, 131 App Div 17, 115 NYS 402.
Footnote 67. Allison Hill Trust Co. v Sarandrea, 236 App Div 189, 258 NYS 299.

Footnote 68. Pacific Nat'l Bank v Hernreich, 240 Ark 114, 398 SW2d 221, 3 UCCRS
152.
576 Miscellaneous illegalities
View Entire Section

The following illegalities have been held not to constitute a defense against a holder in
due course:
That securities were sold in violation of the Blue Sky Laws 69
That a payee/seller was doing business under, and took a note in, a tradename which it
had not registered as required by statute 70
That an instrument was given in contravention of the bankruptcy statute 71 as where it

was exacted as a preference for uniting in a deed of composition 72
That a note is executed under unethical circumstances to improve the financial
condition of the bank before it is examined 73
Footnotes
Footnote 69. Bank of Balboa v Benneson, 122 Cal App 121, 9 P2d 540; Molsons Bank v
Berman, 224 Mich 606, 195 NW 75, 35 ALR 1289; National Bank of Republic v Price,
65 Utah 57, 234 P 231.
Footnote 70. Peoples Loan & Finance Corp. v Latimer, 183 Ga 809, 189 SE 899,
conformed to 55 Ga App 422, 190 SE 391.
Annotation: Construction and effect of statute as to doing business under an assumed

or fictitious name or designation not showing the names of the persons interested, 42
ALR2d 516.
Footnote 71. Cowing v Altman, 71 NY 435.
Footnote 72. New Howard Mfg. Co. v Cohen, 207 App Div 588, 202 NYS 449.
Footnote 73. Scott v Citizens Bank of Americus, 188 Ga App 618, 373 SE2d 633, 8
UCCRS2d 68.
5. Fraud [577-584]
577 Generally
View Entire Section

It is settled that fraud committed at the time an instrument has its origin or inception is a
defense against a holder not protected as a holder in due course, 74 and that, as between
the original parties to a negotiable instrument, or as against holders other than holders in
due course, fraud may be set up as a defense against liability on the instrument. 75
The necessary elements of fraud must exist in order to constitute fraud as a defense 76
or grounds for relief. 77 The Uniform Commercial Code does not contain any definition
of fraud as it relates to a defense against a party, but the express preservation of contract
law and of the law of fraud 78 will have the effect in most jurisdictions of requiring that
the commercial paper defendant establish the elements of "fraud" that would be required
in an ordinary contract action. 79 A general rule cannot be readily established for the
effect of fraudulent practices and each case must be considered carefully on the basis of
its own facts. 80
In determining whether there has been fraud as to the nature of the instrument, a number
of factors must be considered, including the age and sex of the allegedly defrauded party,
his or her intelligence, education, and business experience, his or her ability to read or
understand English, the representations made to the party and his or her reason to rely on
them or have confidence in the person making them, the presence or absence of any third
person who might read or explain the instrument to the party, and the apparent necessity,
or lack of it, for acting without delay. 81
Caution: A mere conclusory statement of fraud is not sufficient as a defense to a

promissory note. 82
Oral statements as to the making of future payments cannot rise to fraud, so as to be a

defense to liability for the face of the paper. 83 There is no liability for failure to
disclose in the absence of a duty to make a disclosure. 84 Misrepresentations made after
a note has been executed do not give rise to a defense against enforcement of the note. 85
Caution: Because the defense of fraud may be waived, the party defrauded must be
careful to stay at arm's length from the other party. The party defrauded must comply
with the terms of the contract on that party's part, must not ask favors of the other party
or offer to perform the contract on conditions the defrauded party has no right to exact,
and must not make any new agreement or engagement respecting the contract. 86
The maker of a note is barred from asserting fraud in the underlying transaction when the
circumstances are such as to amount to a ratification of the transaction. 87
Observation: Negotiation is effective to transfer an instrument, even if obtained by

fraud. However, to the extent permitted by other law, such negotiation may be
rescinded or may be subject to other remedies, but those remedies may not be asserted
against a subsequent holder in due course or a person paying the instrument in good
faith and without knowledge of the facts that are the basis for rescission or other
remedy. 88
Footnotes
Footnote 74. New York Bankers, Inc. v Duncan, 257 NY 160, 177 NE 407; Westbury
Small Business Corp. v Ballarine (2d Dept) 125 App Div 2d 462, 509 NYS2d 569.
Footnote 75. Gerlach v Donnelly (Fla) 98 So 2d 493.
249, 538 NYS2d 249.
As to the elements of fraud and particular fraudulent acts, see 37 Am Jur 2d, Fraud and
Deceit 12 et seq.
Footnote 77. First Nat'l Bank v Level Club, Inc., 254 App Div 255, 4 NYS2d 734, affd
282 NY 577, 24 NE2d 991.
Footnote 79. Chemical Bank of Rochester v Ashenburg, 94 Misc 2d 64, 405 NYS2d
175; Psomas v Approved Bancredit Corp., 40 Pa D & C2d 51, 3 UCCRS 873.
Footnote 80. Burchett v Allied Concord Fin. Corp., 74 NM 575, 396 P2d 186, 2 UCCRS
279.
Footnote 81. First Nat'l Bank v Anderson,7 Pa D & C2d 661,1 UCCRS 238.
Footnote 82. J & B Schoenfeld Fur Merchants,Inc. v Kilbourne & Donohue, Inc. (SD
NY) 704 F Supp 466, 9 UCCRS2d 968; Chrysler Credit Corp. v Dioguardi Jeep Eagle
(4th Dept) 192 App Div 2d 1066, 596 NYS2d 230.
Footnote 83. Marchman Oil & Chemical Co. v Southern Petroleum Trading Co., 167 Ga
App 691, 307 SE2d 509.
Footnote 84. Custom Craft Tile, Inc. v Bridgecrest, Inc. (Mo App) 662 SW2d 320, 37
UCCRS 1204.
Footnote 85. Bale v Mammoth Cave Production Credit Asso. (Ky) 652 SW2d 851.
Footnote 86. Howland v Scott, 117 Cal App 275, 4 P2d 200.
As to waiver of defenses, see 555.
Footnote 87. Yawn v Powell, 146 Ga App 554, 246 SE2d 737.
Footnote 88. 216.
578 Fraud in the inducement
View Entire Section

The Uniform Commercial Code restates the prior law with respect to the effect of fraud
as to the inducement. 89 In determining whether fraud as to the inducement exists, the
courts follow the pre-Code definition of fraud, 90 which approach to the problem is, of
course, mandated by the Code provision, which declares that the law as to fraud
continues under the Code, unless displaced. 91
Fraud in the inducement exists where the party fully understands what he or she is
signing, and is aware of the nature and character of the instrument he or she executed, but
is deceived by fraudulent representations as to the facts outside the instrument itself. 92
Fraud in the inducement is available to the obligor as a defense against one other than a
holder in due course, since it is a defense that would be available under a simple contract.
93 Fraud in the inducement cannot be raised against a holder in due course. 94
In order to constitute the defense of fraudulent inducement of a contract, the

representation in question (1) must be of a material fact which has been made for the
purpose of inducing the other party to act; (2) must be known to be false by the maker,
but reasonably believed to be true by the other party; and (3) must be relied upon by such
party and acted upon to his or her damage. 95
Illustration: When the obligor fraudulently misrepresents his or her intention to

perform the contract, there is fraud in the inducement; 96 and when the holder induces
the signing of the renewal note on the representation that the note was secured when, in
fact, it was not, because the collateral for the note had already been sold, there is fraud
as to inducement when the holder, in fact, knew that the collateral had already been
sold. 97 Similarly, in a bank's action to recover on promissory notes, the defense of
fraud in the inducement was sufficiently supported by evidence that the borrower's
father asked her to "sign some papers" which were actually promissory notes, a bank
employee completed the notes' blank portions with the amount loaned and the finance
charge and deposited the note proceeds into the borrower's account, and the borrower's
father then withdrew the proceeds and used them to fulfill his personal indebtedness to
the bank, intending to deceive the borrower pursuant to a scheme he had discussed
with the bank president. 98
The defense of fraud in the inducement is available against the payee, even though the
fraud consisted of the false making of a promise, which promise would not be binding,
because there was no writing to satisfy the statute of frauds. 99
The mere representation by the payee to the maker, that the maker would not be liable on
the note, does not constitute fraud in the inducement; to constitute fraud in the
inducement, in addition to the payee's representation that the maker would not be liable,
there must be a showing of some type of trickery, artifice, or device that was employed
by the payee. 1 The fact that promises are not kept does not constitute fraud as to the
inducement. 2 The failure to perform a promise as to the future does not constitute fraud
when the promise was not made with the intent to deceive. 3 The fact that the
execution of a note was induced by sales talk does not constitute a defense to liability on
the note, as such statements do not constitute fraud. 4
Illustration: The affirmative defense of fraud in the inducement, asserted by a gem

company and its controlling shareholder in a bank's action on a promissory note and
shareholder's guarantee, required dismissal where:
(1) a written loan agreement was unambiguous on its face;
(2) the defendants possessed business expertise;
(3) the defendants had a three-year relationship with the bank during which they had
executed 18 promissory notes, many in excess of $250,000; and
(4) defendants had a similar relationship with another bank for 20 years. 5 Fraud in the
inducement renders a note voidable but not void. 6
Footnotes
Footnote 89. Marine Midland Trust Co. v Blackburn, 50 Misc 2d 954, 271 NYS2d 388,
3 UCCRS 740.

Footnote 90. Vandeputte v Soderholm, 298 Minn 505, 216 NW2d 144; Foyer Key Sung v
Ramirez (Sup) 121 Misc 2d 313, 467 NYS2d 486; First State Bank v Fatheree (Tex App
Amarillo) 847 SW2d 391, writ den (Sep 10, 1993) and rehg of writ of error overr (Oct
20, 1993).
Footnote 92. Belleville Nat'l Bank v Rose (5th Dist) 119 Ill App 3d 56, 74 Ill Dec 779,
456 NE2d 281.
As to fraud as a defense available under a simple contract, generally, see 17A Am Jur 2d,
Contracts 230.
Practice Aids: Misrepresentation inducing a car buyer's execution of a promissory

note later negotiated to a finance company. 13 Am Jur Trials 253, Misrepresentation
in Automobile Sales 9.
Forms: Failure of considerationFraudulent misrepresentations in sale of business for

which note given in payment. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form
22.
AnswerDefenseNote obtained by fraud of payee. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefensePlaintiff knew note was procured by fraudulent misrepresentations.

Instruments 3:75.
Footnote 94. Welt v Abrams (SD NY) 832 F Supp 88; Exchange International Leasing
Corp. v Consolidated Business Forms Co. (WD Pa) 462 F Supp 626, 25 UCCRS 1383;
Mellon Bank, N.A. v Ternisky (CA4 Va) 999 F2d 791, 26 FR Serv 3d 546; FDIC v
Aetna Casualty & Sur. Co. (CA6 Tenn) 947 F2d 196, 15 UCCRS2d 941, reh, en banc,
den (CA6) 1992 US App LEXIS 3960 and (criticized on other grounds by FDIC v
Oldenburg (CA10 Utah) 34 F3d 1529, 30 FR Serv 3d 1277); Federal Deposit Ins. Corp. v
Lesselyoung (ED Wis) 476 F Supp 938, affd (CA7 Wis) 626 F2d 1327; City Nat'l Bank v
Vanderboom (WD Ark) 290 F Supp 592, CCH Fed Secur L Rep 92277, 58 CCH LC
12947, affd (CA8 Ark) 422 F2d 221, CCH Fed Secur L Rep 92587, cert den 399 US
905, 26 L Ed 2d 560, 90 S Ct 2196 and (disapproved on other grounds as stated in
Stephenson v Paine Webber Jackson & Curtis, Inc. (CA5 La) 839 F2d 1095, CCH Fed
Secur L Rep 93675); In re Nusor (BAP9 Cal) 123 BR 55, 91 CDOS 844, 91 Daily
Journal DAR 1019, 13 UCCRS2d 773; Myers v Prattville (Ala) 341 So 2d 726; Valley
Bank v JER Management Corp. (App) 149 Ariz 415, 719 P2d 301, 1 UCCRS2d 807;
Tokai Bank of California v First Pacific Bank (2nd Dist) 186 Cal App 3d 1664, 231 Cal
Rptr 503, 2 UCCRS2d 983; Stotler v Geibank Industrial Bank (Colo App) 827 P2d 608;
Lassiter v Resolution Trust Corp. (Fla App D5) 610 So 2d 531, 17 FLW D2710; Schuster
v CIC-Union Europeenne Int'l, 208 Ga App 646, 431 SE2d 378, 93 Fulton County D R

1511; Atlanta Nat'l Bank v Johnson Tractor Sales (4th Dist) 130 Ill App 2d 793, 267
NE2d 358, 9 UCCRS 278; Nida v Michael, 34 Mich App 290, 191 NW2d 151, 9 UCCRS
1380; Audsley v Allen (Mo) 774 SW2d 142, 10 UCCRS2d 413; Sanitary & Improv. Dist.
No. 32 v Continental Western Corp., 215 Neb 843, 343 NW2d 314, 38 UCCRS 516;
Citizens Nat'l Bank v Ft. Lee Sav. & Loan Asso., 89 NJ Super 43, 213 A2d 315, 2
UCCRS 1029; Hall v Bank of Blasdell, 306 NY 336, 118 NE2d 464; Federal Deposit Ins.
Corp. v Kassel (2d Dept) 72 App Div 2d 787, 421 NYS2d 609, 27 UCCRS 1426; Union
Bank & Trust Co. v Polkinghorne (Okla App) 801 P2d 735, 13 UCCRS2d 445; Favors v
Yaffe (Tex Civ App Houston (14th Dist)) 605 SW2d 342, 31 UCCRS 154, writ ref n r e
(Mar 11, 1981); Maynard v England, 13 Wash App 961, 538 P2d 551, 17 UCCRS 1036.
Cal Rptr 508, 91 CDOS 4707, 91 Daily Journal DAR 7396 (holding that fraud in the
inducement is distinct from the claim that the transaction was a sham transaction);
Schwaner v Belvidere Medical Bldg. Partnership (2d Dist) 155 Ill App 3d 976, 108 Ill
Dec 361, 508 NE2d 522, 4 UCCRS2d 785.
Footnote 96. Sanitary & Improv. Dist. No. 32 v Continental Western Corp., 215 Neb 843,
343 NW2d 314, 38 UCCRS 516.
Footnote 97. Lee v Heights Bank (3d Dist) 112 Ill App 3d 987, 68 Ill Dec 514, 446 NE2d
248.
Footnote 98. First State Bank v Fatheree (Tex App Amarillo) 847 SW2d 391, writ den
(Sep 10, 1993) and rehg of writ of error overr (Oct 20, 1993).
Footnote 99. Crystal Springs Ins. Agency, Inc. v Commercial Union Ins. Co. (Miss) 554
So 2d 884.
Footnote 1. Wooldridge v Groos Nat'l Bank (Tex Civ App Waco) 603 SW2d 335, 29
UCCRS 1548.
Footnote 2. McGarr v Bank of Pinehurst, 159 Ga App 116, 282 SE2d 739; Bank of
Hawaii v Allen, 2 Hawaii App 185, 628 P2d 211, 31 UCCRS 1645; Lindeburg v Gulfway
Nat'l Bank (Tex App Corpus Christi) 624 SW2d 278, writ ref n r e (Feb 3, 1982).
Footnote 3. Benderson Dev. Co. v Hallaway Properties, Inc. (4th Dept) 115 App Div 2d
339, 495 NYS2d 820, affd 67 NY2d 963, 502 NYS2d 1001, 494 NE2d 106.
Footnote 4. Charter Medical Management Co. v Ware Manor, Inc., 159 Ga App 378, 283
SE2d 330.
Footnote 5. Chemical Bank v Alco Gems Corp. (1st Dept) 151 App Div 2d 366, 543
NYS2d 426, 10 UCCRS2d 1039.
Footnote 6. Langley v FDIC, 484 US 86, 98 L Ed 2d 340, 108 S Ct 396, 5 UCCRS2d 1

(not followed on other grounds by FDIC v Manatt (CA8 Ark) 922 F2d 486) and (not
followed on other grounds by Resolution Trust Corp. v Wilson (DC NJ) 851 F Supp
141).

579 Fraud in the factum
View Entire Section

Fraud in the essence or fraud in the factum, in the absence of negligence, is a real defense
available against holders in due course. 7 Fraud in the factum exists where a person is
induced to sign something entirely different from what that person thought he or she was
signing. 8
Under Article 3, the right to enforce the obligation of any party to pay an instrument,
including a holder in due course, is subject to a defense of the obligor based on fraud that
induced the obligor to sign the instrument with neither knowledge nor opportunity to
learn of its character or its essential terms. 9 Thus, with respect to the defense of
fraud in the factum, all plaintiffs stand alike; the defense is a universal defense and the
status of holder in due course does not confer any protection. 10
Observation: Although the 1952 version of Article 3 speaks of "misrepresentation"

while the revised version speaks of "fraud," there is no actual change in the law. The
Official Comments to the prior version and the decisions in the prior version show that
"fraud" was contemplated, as opposed to innocent misrepresentation. 11
This provision was designed to accord with the great majority of decisions under the
prior law, to the effect that only fraud as to the nature of the instrument, itself signed by
the defendant is a defense to an action by a holder in due course. 12 The provision is
meant to apply to an uneducated person, unable to read and determine that a document is
not what it was represented to him. 13
Illustration: The common illustration is that of the maker who is tricked into signing
a note in the belief that it is merely a receipt or some other document, although the
defense also extends to an instrument signed with knowledge that it is a negotiable
instrument, but without knowledge of its essential terms. 14
Observation: Courts are reluctant to find that there has been fraud in the factum.
Most defenses of fraud, connected with the issuance of an instrument are considered
personal defenses and cut off by holder-in-due-course status. 15
A misrepresentation of the legal effect of an instrument does not constitute fraud in the
factum. 16 Consequently, there is no basis for a defense based on the contention that the
maker misunderstood the effect of the note which he knew he was signing. 17
The fact that a note incorrectly recites that it is secured when, in fact, it is not, does not
constitute fraud in the factum. 18
Footnotes
Footnote 7. Exchange International Leasing Corp. v Consolidated Business Forms Co.

(WD Pa) 462 F Supp 626, 25 UCCRS 1383; FDIC v Aetna Casualty & Sur. Co. (CA6
Tenn) 947 F2d 196, 15 UCCRS2d 941, reh, en banc, den (CA6) 1992 US App LEXIS
3960 and (criticized on other grounds by FDIC v Oldenburg (CA10 Utah) 34 F3d 1529,
30 FR Serv 3d 1277); Federal Deposit Ins. Corp. v Turner (CA6 Tenn) 869 F2d 270, 8
UCCRS2d 1094; Massey-Ferguson Credit Corp. v Wiley (MD Ga) 655 F Supp 655, 3
UCCRS2d 1153; Christinson v Venturi Constr. Co. (5th Dist) 109 Ill App 3d 34, 64 Ill
Dec 674, 440 NE2d 226, 34 UCCRS 1604; Illinois Valley Acceptance Corp. v Woodard,
159 Ind App 50, 304 NE2d 859, 13 UCCRS 1058; Schaeffer v United Bank & Trust Co.,
32 Md App 339, 360 A2d 461, 20 UCCRS 125, affd 280 Md 10, 370 A2d 1138, 21
UCCRS 586; First Nat'l Bank v Fazzari, 10 NY2d 394, 223 NYS2d 483, 179 NE2d 493,
89 ALR2d 1324; American Plan Corp. v Woods (Franklin Co) 16 Ohio App 2d 1, 45
Ohio Ops 2d 2, 240 NE2d 886, 5 UCCRS 842; Jonwilco, Inc. v C.I.T. Financial Services
(Tex App Houston (14th Dist)) 662 SW2d 664, 38 UCCRS 216.
Footnote 8. Savoy v White (DC Mass) 788 F Supp 69; First Nat'l Bank v Fazzari, 10
NY2d 394, 223 NYS2d 483, 179 NE2d 493, 89 ALR2d 1324; Norstar Bank of Upstate
NY v Office Control Systems, Inc. (3d Dept) 165 App Div 2d 265, 566 NYS2d 743, app
dismd 78 NY2d 1110, 578 NYS2d 868, 586 NE2d 51.
Footnote 9. UCC 3-305(2)(c) [1952]; UCC 3-305(a)(1)(iii) [1990 Rev].
As to the law regarding fraud, generally, see 37 Am Jur 2d, Fraud and Deceit 1 et seq.
Forms: Cross-complaintAgainst bankFor cancellation of promissory

noteFraudulent inducement to sign note. 5 Am Jur Pl & Pr Forms (Rev), Bills and
Notes, Form 82.
AnswerDefenseIncompetency at time of execution of note. 6A Am Jur Pl & Pr


AnswerDefensePlaintiff knew note procured by fraudulent misrepresentations. 6A

3:75.
AnswerDefenseNotice that signature of maker of note was obtained by fraud. 6A

3:119.
AnswerDefenseNote obtained by fraud of payee. 6A Am Jur Pl & Pr Forms (Rev),

Complaint, petition, or declarationAllegationImpostor induced issuance of


Footnote 10. Stotler v Geibank Industrial Bank (Colo App) 827 P2d 608; Bill Heard
Chevrolet Co. v General Motors Acceptance Corp., 120 Ga App 328, 170 SE2d 454;
Sanitary & Improv. Dist. No. 32 v Continental Western Corp., 215 Neb 843, 343 NW2d
314, 38 UCCRS 516; Cranesville Block Co. v Pentagon Constr. Co. (3d Dept) 51 App
Div 2d 610, 378 NYS2d 127; Deverna v Kinney Systems, Inc. (Sup App T) 146 Misc 2d
276, 556 NYS2d 190; American Plan Corp. v Woods (Franklin Co) 16 Ohio App 2d 1,
45 Ohio Ops 2d 2, 240 NE2d 886, 5 UCCRS 842; Riley v First State Bank (Tex Civ App
Amarillo) 469 SW2d 812, 9 UCCRS 867, writ ref n r e (Dec 31, 1971).
Footnote 12. Marine Midland Trust Co. v Blackburn, 50 Misc 2d 954, 271 NYS2d 388,
3 UCCRS 740.
The provision of UCC 3-305 [1952] follows the common law in recognizing "real"
fraud or "fraud in the factum" as a defense against a holder in due course, but real fraud
must be within the instrument itself; that is, it must concern the very nature of the
agreement. Leasing Service Corp. v River City Constr., Inc. (CA11 Ala) 743 F2d 871,
39 UCCRS 1054.
Footnote 13. State Bank of Albany v Roarke (3d Dept) 91 App Div 2d 1093, 458 NYS2d
300, app dismd 59 NY2d 763.
3-305 [1990 Rev].
UCCRS 505.
UCCRS 505.
Footnote 18. Federal Deposit Ins. Corp. v Willis (SD Ga) 497 F Supp 272.
580 --Effect of negligence or inexcusable ignorance as to character or terms of

instrument
View Entire Section

It is a well-settled rule that where one voluntarily signs a negotiable instrument,

supposing it to be an obligation of a different character, but has full means of information
in the premises and neglects to avail himself or herself thereof, relying on the
representations of another, he or she cannot set up such ignorance and mistake as a
defense against an innocent holder for value before maturity. 19

Illustration: One who signs a note without reading it is deemed to be negligent, and
fraud would not be a defense to an action on the note by a holder in due course. 20
In order to establish fraud in the factum as a defense under the Uniform Commercial
Code, the defendant must prove that he or she lacked knowledge as to the true character
of the paper signed or its essential terms and that he or she did not have a reasonable
opportunity to obtain such knowledge. 21 In other words, the maker of a note who
claims fraud in the factum must show excusable ignorance of the contents of the writings
signed. 22
Comment: The test of the defense is that of excusable ignorance of the contents of
the writing signed. The party must not only have been in ignorance, but must also have
had no reasonable opportunity to obtain knowledge. In determining what is a
reasonable opportunity, all relevant factors are to be taken into account, including the
intelligence, education, business experience, and ability to read and understand English
of the signer. Also relevant is the nature of the representations that were made,
whether the signer had good reason to rely on the representations or to have confidence
in the person making them, the presence or absence of any third person who might read
or explain the instrument to the signer, or any other possibility of obtaining
independent information, and the apparent necessity, or lack of it, for acting without
delay. Unless the misrepresentation meets this test, the defense is cut off by a holder in
due course. 23
Ordinarily, one who, being able to read, signs a negotiable instrument in reliance upon
representations of another person that the instrument is of another character, is guilty of
negligence as a matter of law. 24
Illustrations: Although fraud in the factum would render underlying documents void
as opposed to voidable, and was a "real" defense which the maker/guarantor of
promissory notes could assert as against the receiver for a federal credit union lender,
the maker/guarantor's contention that she was the victim of fraud in the factum, in that
she did not understand that she was actually closing the transaction at the time she
executed several documents, failed, where the maker/guarantor knew that the
documents were associated with the transaction which she alleged was fraudulently
induced, and where she did not allege any facts from which a case of fraud in the
factum could be made, such as that the false document was placed in such a way as to
conceal the words "MORTGAGE" or "PROMISSORY NOTE" on the face of the
documents signed, or that she was denied an opportunity to examine the contents of the
agreements. 25 Also, a holder in due course of a cashier's check, who was unaware of
efforts of the party procuring the check's issuance to reclaim it or stop payment
thereon, because of misgivings about a proposed venture with the check's payee, was
not subject to the defense of fraud in the factum, which would have defeated the
holder's claim to the check, since the party who procured the check knew both its
character and its terms when he procured it and had it mailed to the check's payee. 26
Fraud in the factum is not available as a defense where a debtor cannot show that he or
she had no reasonable opportunity to obtain knowledge of the instrument's character or
its essential terms at the time of signing the contract in blank and never bothered to
discover anything about it. 27

Illustration: The fact that a salesman showing the product in the buyer's home
described himself as a "demonstrator" and not as a "salesman" did not constitute
"fraud" which would enable the buyer to avoid liability on a negotiable instrument on
the theory that he had no reason to believe that the demonstrator was making a sales
contract with him. 28
Footnotes
Footnote 19. Lewinson v Frumkes (Fla) 64 So 2d 321 (decided under former law); New
Bedford Inst. for Sav. v Gildroy, 36 Mass App 647, 634 NE2d 920, 25 UCCRS2d 450,
review den 418 Mass 1106, 639 NE2d 1082; Ricks v Bank of Dixie (Miss) 352 So 2d
798.
Footnote 20. Leedy v Ellsworth Constr. Co. (Lawrence Co) 9 Ohio App 2d 1, 38 Ohio
Ops 2d 18, 222 NE2d 653.
Footnote 21. FDIC v Rusconi (DC Me) 808 F Supp 30; Federal Deposit Ins. Corp. v
Culver (DC Kan) 640 F Supp 725, 1 UCCRS2d 1585; Leasing Service Corp. v River City
Constr., Inc. (CA11 Ala) 743 F2d 871, 39 UCCRS 1054.
Footnote 22. Slaughter v Jefferson Federal Sav. & Loan Asso. (DC Dist Col) 361 F Supp
590, 13 UCCRS 89, revd on other grounds 176 US App DC 49, 538 F2d 397, 19 UCCRS
171, 19 UCCRS 534.
3-305 [1990 Rev].
Footnote 24. Munnich v Jaffe, 164 App Div 30, 149 NYS 338.
Footnote 25. Savoy v White (DC Mass) 788 F Supp 69.
Footnote 26. Key Bank v Crawford (ED Pa) 600 F Supp 843, affd (CA3 Pa) 781 F2d 39,
42 UCCRS 801.
Footnote 27. Ford Motor Credit Co. v Branch (MD Ga) 805 F Supp 42, 19 UCCRS2d
1097; National Loan Investors, L.P. v Martin (Iowa) 488 NW2d 163, 19 UCCRS2d 193.
Footnote 28. Reading Trust Co. v Hutchison, 35 Pa D & C2d 790, 2 UCCRS 481.
581 Fraud in the factum or fraud in the inducement as defense available to

comaker, indorser, or surety
View Entire Section

An indorser or surety may defend on the ground of fraud inducing the contract of the

principal where the principal makes the same defense, 29 but fraud in the inducement is
a defense personal to the principal, which may not be set up by a surety on an instrument,
unless the principal repudiates the contract on that ground. 30 At any rate, the
indorsement of a renewal note with knowledge of the fraud is an affirmance of the
contract. 31
Where no representation is made to a comaker of a note that the instrument was anything
other than a note, the comaker may not successfully assert misrepresentation that
constitutes fraud in the factum as a defense to liability. 32
Footnotes
Footnote 29. Pioneer Credit Corp. v Bon Bon Cleaners Corp. (2d Dept) 38 App Div 2d
743, 329 NYS2d 350, 10 UCCRS 169.
Footnote 30. Elliott v Brady, 192 NY 221, 85 NE 69, reh den 192 NY 582, 85 NE 1109.
Footnote 31. Elliott v Brady, 192 NY 221, 85 NE 69, reh den 192 NY 582, 85 NE 1109.
864.
582 Fraud in transfer or negotiation of instrument
View Entire Section

A holder in due course takes the instrument free from all claims to it on the part of any
person, 33 so that fraud in the transfer of an instrument is not available as a defense
against a holder in due course. 34 Such fraud is, however, a defense against one who is
not a holder in due course. 35
Footnotes
Footnote 33. 547.
3-202 [1990 Rev].
Footnote 35. Mitchell v Colonial Trust Co. (City Ct) 41 NYS2d 562.
583 Fraud on accommodation party or surety

View Entire Section
Generally, an accommodation party is not liable to a holder for value who has
participated in, or has had notice of, fraud on such party; 36 but an accommodation party
may not, on the ground of fraud inducing him or her to sign the instrument, avoid liability
to a holder in due course of the accommodation paper or a holder for value without notice
of the fraud, including the payee. 37 Thus, an accommodation indorser is liable to the
payee of a note, even though the indorsement was procured by fraud and
misrepresentation, where the payee is not charged with having knowledge of, or as
having any part in, the fraud and misrepresentation. 38
It is not a defense to an action by a payee, or his or her assignee against an

accommodation maker that the payee knew the nature of the defendant's obligation and
failed to disclose the fact that he or she had been unable to obtain payment on earlier
past-due notes executed by the accommodated party. The very fact that a loan was
refused upon the personal obligation of such party is, in itself, sufficient to put the
accommodation party on notice that the accommodated party's financial responsibility
was questioned by the lenders. 39
An accommodation maker may present the defense of fraud in the factum where the bank
fails to explain the nature of the transaction to the accommodation maker, he or she does
not understand that he or she was assuming any financial responsibility upon signing the
note, and the maker of the note falsely and fraudulently misrepresents the document. 40
Footnotes
Footnote 36. Wiesenthal v Krane, 226 App Div 82, 234 NYS 392.
Footnote 37. Thompson v Franklin Nat'l Bank, 45 App DC 218, cert den 242 US 637,
61 L Ed 540, 37 S Ct 21; Potts v First State Bank, 51 Okla 162, 151 P 859.
As to the defenses available to an accommodation party, generally, see 551.
Footnote 38. Treadwell v Exchange Nat'l Bank, 127 Fla 40, 172 So 914.
Footnote 39. Conlew, Inc. v Uhler, 239 App Div 380, 267 NYS 596.
Footnote 40. United Bank & Trust Co. v Schaeffer, 280 Md 10, 370 A2d 1138, 21
UCCRS 586.
584 Proof
View Entire Section

Under Article 3 of the Uniform Commercial Code, once signatures are proved or
admitted and the instrument is produced, the defendant has the burden of establishing the
defense of fraud or a similar affirmative defense, by a preponderance of the total
evidence. 41 Fraud in the inducement may be shown by parol evidence. 42
But when fraud in the negotiation of an instrument is shown, the burden of proof shifts
and it is then incumbent upon a plaintiff to show that he or she is a lawful holder in due
course. 43
Footnotes
Footnote 41. 552.
Footnote 42. McManus v Sturniolo (Sup) 129 Misc 2d 534, 493 NYS2d 284.
Footnote 43. 655, 666.
6. Breach of Faith [ 585]
585 Generally
View Entire Section

It is a defense against one not a holder in due course that the instrument was negotiated in
breach of faith with the defendant, 44 even where a note was diverted or negotiated in
violation of an agreement under which it was given, 45 as where a note was given under
an agreement that it would not be negotiated by the payee until he or she had made full
performance under the contract giving rise to the note, 46 or where a brokerage house
entrusted with bonds for deposit and ultimate sale transferred them for a loan for its own
account and not for the account of the owner. 47
Where an accommodation party has imposed terms and conditions specifying what use
must be made of the instrument which he or she signs, no person who takes the
instrument in violation of such terms and conditions, and with notice of them, can
enforce the instrument against him. 48
A mere failure of an agent to account for proceeds of a note which he or she was given to
discount does not amount to a negotiation in breach of faith or under circumstances
amounting to fraud. 49
Observation: Negotiation is effective to transfer an instrument even if obtained in

breach of duty. However, to the extent permitted by other law, such negotiation may
be rescinded or may be subject to other remedies, but those remedies may not be
asserted against a subsequent holder in due course or a person paying the instrument in
good faith and without knowledge of the facts that are the basis for rescission or other
remedy. 50
Footnotes
Footnote 44. Interboro Brewing Co. v Doyle, 165 App Div 646, 151 NYS 325, affd 221
NY 699, 117 NE 1072.
Footnote 45. German-American Bank v Cunningham, 97 App Div 244, 89 NYS 836.
Footnote 46. Finkelstein v Fine, 182 App Div 521, 169 NYS 772.
Footnote 47. Kittredge v Grannis, 244 NY 168, 155 NE 88.
Footnote 48. Benjamin v Rogers, 126 NY 60, 26 NE 970; Salt Springs Nat'l Bank v
Hitchcock, 238 App Div 150, 263 NYS 55.
Footnote 49. Loper v Nixon, 179 App Div 912, 165 NYS 1096.
Footnote 50. 215.
7. Unauthorized Signature; Fraudulent Indorsement; Fictitious Payee; Alteration and

Unauthorized Completion [586-609]
a. In General; Unauthorized Signature; Fraudulent Indorsement [586-595]
586 Generally
View Entire Section

Although generally, a person is not liable on a negotiable instrument, unless he or she

signed the instrument or is bound by the signature of an agent or representative who
signed, 51 an unauthorized signature is effective as the signature of the unauthorized
signer in favor of a person who, in good faith, pays the instrument or takes it for value; an
unauthorized signature may be ratified for all purposes of Article 3. 52
The 1952 version of Article 3 provides that an unauthorized signature is inoperative as

the signature of the person whose name was signed, unless that person is "precluded from
denying it." 53
Observation: "Forged indorsement" in UCC 3-419(1)(c) [1952] has the same legal

effect as "unauthorized signature" in UCC 3-404(1) [1952]. 54 This language was
omitted from the 1990 version in order to avoid any confusion resulting from the
overlap between UCC 3-404(1) [1952] and UCC 3-406 [1952], under which a
person whose negligence contributed to an unauthorized signature was "precluded
from asserting the lack of authority." 55
Footnotes
Footnote 51. UCC 3-401(1) [1952], providing only that no person is liable on an
instrument, unless his or her signature appears thereon; UCC 3-401(a) [1990 Rev].
As to liability of agents and principals on negotiable instruments, generally, see 491.
Annotation: Right of check owner to recover against one cashing it on forged or

unauthorized indorsement and procuring payment by drawee, 100 ALR2d 670.
As to an unauthorized signature operating as the signature of the unauthorized signer, see

493.
As to ratification of an unauthorized signature, see 601.
As to a failure to exercise ordinary care precluding a person from asserting that a

signature was forged, see 605.
Annotation: Falsifying of money order as forgery, 65 ALR3d 1307.
Payee's right of recovery, in conversion under UCC 3-419(1)(c), for money paid on
unauthorized indorsement, 23 ALR4th 855.

Right and remedy of drawer of check against collecting bank which receives it on
forged indorsement and collects it from drawee bank, 99 ALR2d 637.
When statute of limitations starts to run against depositor's cause of action against bank
to recover funds paid out on check bearing forged indorsement, 82 ALR2d 933.
Who must bear loss as between drawer or indorser who delivers check to an impostor
and one who purchases, cashes, or pays it upon the impostor's indorsement, 81 ALR2d
1365.
Alteration of figures indicating amount of check, bill, or note, without change in

written words, as forgery, 64 ALR2d 1029.
Practice Aids: Proof of genuineness of standards of comparison where handwriting is

questioned. 17 Am Jur Proof of Facts 507, Questioned Handwriting 46.

Proof of authorship of questioned writing. 17 Am Jur Proof of Facts 507, Questioned
Handwriting 47.
Notes, Form 7.
AnswerDefenseDenial of indorsement of note. 5 Am Jur Pl & Pr Forms (Rev), Bills

and Notes, Form 55.
Footnote 53. UCC 3-404(1) [1952].
Footnote 54. Continental Bank v Wa-Ho Truck Brokerage (App) 122 Ariz 414, 595 P2d
206, 26 UCCRS 101.
As to negligence as precluding assertion of defense, see 605.
587 Forged or unauthorized signature as defense
View Entire Section

A check bearing the forged or unauthorized signature of the drawer is a nullity as far as
the drawer is concerned; in other words, a forgery of a person's signature normally
imposes no liability on the instrument as against the forgery victim. 56 Article 3 of the
Uniform Commercial Code provides that a person is not liable on an instrument, unless
the person signed the instrument or the person is represented by an agent or
representative who signed the instrument and the signature is binding on the represented
person under the Code. 57 Thus, a person cannot be held liable on an instrument,
unless he or she has signed the instrument or it has been signed for him or her by an
authorized agent. No liability on the instrument can be imposed on the basis of an oral
promise to pay the instrument or on a promise made in another writing or letter. 58
Since an unauthorized signature is wholly inoperative as that of the person whose name is
signed, it follows that a bank paying a forged check, one on which the drawer's signature
is forged, may not charge the amount of the check against the account of the person
whose name is forged. Such a check would not be properly payable. In other words, any
loss resulting from the payment of a forged check must be borne by the drawee or payor
bank. 59
Observation: With respect to forged checks, the Code initially places the risk of
forgeries on bank, in that a forged signature is wholly inoperative as that of person
whose name is signed, 60 the check is not properly payable, and the bank cannot debit
the depositor's account; 61 although the Code imposes on the customer the duty to
inspect its statement and canceled checks with reasonable care and promptness, 62 the
loss of repeated forgeries is shifted back to the bank when the customer, although in
breach of its duty of inspection, is able to establish that the bank lacked ordinary care
in paying the forged checks. 63
Footnotes
Forms: AffidavitUnauthorized signature or indorsement. 6A Am Jur Pl & Pr Forms




3:157.
AnswerDefenseSignature was unauthorized. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefenseSignature of partner not authorized to bind firm. 6A Am Jur Pl & Pr


Footnote 63. Putnam Rolling Ladder Co. v Manufacturers Hanover Trust Co., 74 NY2d
340, 547 NYS2d 611, 546 NE2d 904.
As to the effect of the failure of a bank to follow reasonable commercial practices, see
605.
588 What constitutes forged or unauthorized signature

View Entire Section
Under the Uniform Commercial Code, an "unauthorized" signature means one made
without actual, implied, or apparent authority, and includes a forgery. 64 It also includes
a signature made by one exceeding his or her actual or apparent authority. 65
A signature is deemed an authorized signature when it is effective to bind the represented

person; conversely, if it is not effective to bind the represented person it is an
"unauthorized signature." Whether a signature is authorized or unauthorized will be
determined according to the pre-Code law of agency as that law has not been displaced
by the Code. 66
Illustration: An indorsement of the payee's signature on a draft issued by an

insurance company to both the payee and the payee's attorney in settlement of an
insurance claim, which was made by the payee's attorney without the payee's
authorization, is a forgery. 67 However, where the maker signed notes with loan
amounts left blank prior to the time he discontinued doing business with the bank, and
someone without authority later filled in dates and amounts on the notes, the signatures
were not unauthorized signatures which could constitute forgery, and the holder in due
course could enforce the notes as completed. 68
Footnotes
Annotation: Implied or apparent authority of agent to purchase or order goods or

merchandise, 55 ALR2d 6.
Forms: Instruction to juryAuthority of agent or representative to sign for principal.

Instruments 3:157.
Forms: Instruction to juryBurden of establishing genuineness of, or authorization for,

Instruments 3:181.
Footnote 67. Smith v General Casualty Co. (3d Dist) 75 Ill App 3d 971, 31 Ill Dec 602,
394 NE2d 804, 27 UCCRS 493.
Footnote 68. National Loan Investors, L.P. v Martin (Iowa) 488 NW2d 163, 19
UCCRS2d 193.

589 Liability of unauthorized signer
View Entire Section

Any unauthorized signature operates as the signature of the unauthorized signer in favor
of any person who, in good faith, pays the instrument or takes it for value. 69
Comment: The unauthorized signature is effective to impose liability upon the

actual signer or to transfer any rights that he or she may have in the instrument. The
signer's liability is not in damages for breach of a warranty of his or her authority, but
is full liability on the instrument in the capacity in which he or she has signed. It is,
however, limited to parties who take or pay the instrument in good faith; and one who
knows that the signature is unauthorized cannot recover from the signer on the
instrument. 70
Footnotes
Forms: Instruction to juryLiability of party signing instrument. 6A Am Jur Pl & Pr


Instruction to juryLiability of authorized representative on incomplete signature. 6A

3:158.
Complaint, petition, or declarationTo recover from agent who signed note without
authority. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:160.
3-403 [1990 Rev].
590 Forged or unauthorized indorsement
View Entire Section

The definition of "unauthorized" signature unambiguously refers to any signature and

applies to indorsements, 71 and where a person indorses drafts without the actual or
apparent authority to do so, such indorsements are unauthorized under the Uniform
Commercial Code. 72 Thus, the provision that any unauthorized signature is "wholly
inoperative" as that of the person whose name is signed 73 applies to an unauthorized or
forged indorsement. 74
A forged indorsement is wholly ineffective to convey title to a negotiable instrument and

no right to enforce payment of the checks against the maker is acquired through or under
such an indorsement. 75 There is no distinction between the taking of an instrument
without the payee's indorsement and the taking of an instrument with a forged payee's
indorsement. 76
One who acts upon the indorsement of negotiable paper must ascertain its genuineness at
its peril. 77 However, not every unauthorized indorsement is a forgery or has the effect
of an unauthorized signature; a necessary element is that the signature is one essential to
the further negotiation of the instrument. 78 The fact that an indorsee's name was written
without authorization is no defense to the drawer of a check where the payee of the check
never delivered it to the indorsee and his signature never became necessary to
negotiation. 79
Footnotes
Forms: AffidavitUnauthorized signature or indorsement. 6A Am Jur Pl & Pr Forms


Footnote 72. The Florida Bar v Allstate Ins. Co. (Fla App D3) 391 So 2d 238, 30 UCCRS
1054, petition den (Fla) 399 So 2d 1140.
Footnote 73. UCC 3-404(1) [1952].
Footnote 74. Franklin Nat'l Bank v Chase Manhattan Bank, N. A., 68 Misc 2d 880, 328
NYS2d 25, 16 UCCRS 173.

Forms: Answer-,Defense-,Denial of indorsement of note. 5 Am Jur Pl & Pr Forms

Footnote 75. Security-First Nat'l Bank v Bank of America Nat'l Trust & Sav. Asso., 22
Cal 2d 154, 137 P2d 452; Ocala Nat'l Farm Loan Ass'n v Munroe & Chambliss Nat'l
Bank, 89 Fla 242, 103 So 609 (decided under former law).
A forged, unauthorized indorsement of a check is wholly inoperative, regardless of

whether the check is made payable to a principal alone or to the principal and the
principal's agent. Navrides v Zurich Ins. Co., 5 Cal 3d 698, 97 Cal Rptr 309, 488 P2d

637, 49 ALR3d 828.
Annotation: Payee's right of recovery, in conversion under UCC 3-419(1)(c), for

money paid on unauthorized indorsement, 23 ALR4th 855.
Discharge of debtor who makes payment by delivering check payable to creditor to

latter's agent, where agent forges creditor's signature and absconds with proceeds, 49
ALR3d 843.

When statute of limitations starts to run against depositor's cause of action against bank
to recover funds paid out on check bearing forged indorsement, 82 ALR2d 933.
1365.
Footnote 76. Federal Deposit Ins. Corp. v Marine Nat'l Bank (CA5 Fla) 431 F2d 341, 7
UCCRS 1327.
Footnote 77. Jacoby v Kline Bros. Co., 241 App Div 470, 272 NYS 871.
Annotation: Right and remedy of drawer of check against collecting bank which
receives it on forged indorsement and collects it from drawee bank, 99 ALR2d 637.
591 Signature by impostor
View Entire Section

Under the 1990 version of Article 3 of the Uniform Commercial Code, if an impostor, by
use of the mail or otherwise, induces the issuer of a negotiable instrument to issue the
instrument to the impostor, or to a person acting in concert with the impostor, by
impersonating the payee of the instrument 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 person who, in good faith, pays the instrument or
takes it for value or for collection. 80
The 1952 version of Article 3 provides that an indorsement by any person in the name of
a named payee is effective if an impostor, by use of the mail or otherwise, has induced
the maker or drawer to issue the instrument to the impostor or the impostor's confederate
in the name of the payee. 81
Comment: This provision rejects the fiction of "dominant intent" where the maker or
drawer deals with an impostor. 82
Illustration: X pretends to be A; if the drawer issues a check to X payable to A, the

impostor defense is available as the drawer intended to issue the check to X, the
impostor, albeit in the name of A, the person impersonated; A's forged indorsement is
effective, and the drawee bank cannot be held liable for paying the check over the
forged indorsement. 83
The Uniform Commercial Code "impostor" rule does not distinguish between
face-to-face impersonation and imposture, by mail or otherwise, through nonpersonal
contact. 84 Thus, inherent in the "impostor" rule is the concept that, as between the
impostor and the rest of the world, an impostor/payee acquires title to commercial paper
issued by the drawer/maker whose only recourse is then to sue the impostor, subsequent
indorsements notwithstanding. 85
The policy of the Code is to place the loss on the bank that dealt with the forger on the
theory that it was best able to detect and prevent the wrongdoing. 86 However,
"impostor" refers to impersonation, and does not extend to a false representation that the
party is the authorized agent of the payee. The maker or drawer who takes the precaution
of making the instrument payable to the principal is entitled to have his or her
indorsement. 87 Where a check is delivered to an impostor as payee and the drawer
believes that the impostor is the person on whose indorsement it will be paid, an
indorsement by the impostor in the name being used to impersonate another is not a
forgery. 88
In cases governed by the above Code provision, the dispute will normally be between the
drawer of the check that was obtained by the impostor and the drawee bank that paid it.
The drawer is precluded from obtaining recredit of the drawer's account by arguing that
the check was paid on a forged indorsement so long as the drawee bank acted in good
faith in paying the check. If a check payable to an impostor is paid, the effect of the
Code provision is to place the loss on the drawer of the check rather than on the drawee
or the depositary bank that took the check for collection. These cases always involve
fraud; the drawer is in the best position to avoid the fraud, and thus, should take the loss.
But, in some cases, the person taking the check might have detected the fraud, and thus,
have prevented the loss by the exercise of ordinary care. In those cases, if that person
failed to exercise ordinary care, it is reasonable that that person bear loss to the extent the
failure contributed to the loss. 89 Thus, if a person paying the instrument or taking it for
value or for collection fails to exercise ordinary care in paying or taking the instrument
and that failure contributes to loss resulting from payment of the instrument, the person
bearing the loss may recover from the person failing to exercise ordinary care to the
extent the failure to exercise ordinary care contributed to the loss. 90
The "impostor" rule codified in the Code provisions applies only when the issuance of
the instrument has been accomplished through impersonation of the payee, whether the
perpetrator of the deception pretends to be the principal, that is, the payee, or an agent. 91

Footnotes
Under UCC 3-404(a) [1990 Rev], an indorsement is made in the name of a payee if (1)
it is made in a name substantially similar to that of the payee or (2) the instrument,
whether or not indorsed, is deposited in a depositary bank to an account in a name
substantially similar to that of the payee. UCC 3-404(c) [1990 Rev].
Footnote 81. UCC 3-405(1)(a) [1952].
Footnote 83. Fidelity & Deposit Co. v Manufacturers Hanover Trust Co., 63 Misc 2d
960, 313 NYS2d 823, 7 UCCRS 1142.

1365.
Forms: Complaint, petition, or declarationAllegationImpostor induced issuance of

Footnote 85. Fidelity & Deposit Co. v Chemical Bank New York Trust Co., 62 Misc 2d
509, 309 NYS2d 266, 7 UCCRS 508, revd on other grounds 65 Misc 2d 619, 318
NYS2d 957, 8 UCCRS 541, affd (1st Dept) 39 App Div 2d 1019, 333 NYS2d 726, 10
UCCRS 1080.
UCCRS2d 1107; Dominion Bank, N.A. v Household Bank, F.S.B. (SD Ohio) 827 F Supp
463, 23 UCCRS2d 781.
The rationale of the allocation of loss made by Article 3 is to place the loss on the party
the better able to have prevented the loss. Menichini v Grant (CA3 Pa) 995 F2d 1224, 20
UCCRS2d 959.
Footnote 88. Guaranty Bank & Trust Co. v Federal Reserve Bank (WD Okla) 454 F Supp
488, 24 UCCRS 932 (disapproved on other grounds by McAdam v Dean Witter
Reynolds, Inc. (CA3 NJ) 896 F2d 750, 10 UCCRS2d 1085) (applying Okla law) (stating
that "impostor" does not extend to a false representation that the borrower was an
authorized agent of the check's payee); Title Ins. Co. v Comerica Bank - California (6th
Dist) 27 Cal App 4th 800, 32 Cal Rptr 2d 735, 94 CDOS 6325, 94 Daily Journal DAR
11493, 24 UCCRS2d 584.

As to the application of this provision to cases involving fictitious payees and payees not
intended to have an interest in the instrument, see 593.
As to the similar provision with respect to a fraudulent indorsement made by an

employee with responsibility for the instrument, see 592.
Footnote 91. Title Ins. Co. v Comerica Bank - California (6th Dist) 27 Cal App 4th 800,
32 Cal Rptr 2d 735, 94 CDOS 6325, 94 Daily Journal DAR 11493, 24 UCCRS2d 584.
592 Fraudulent indorsement made by employee with responsibility for

instrument
View Entire Section

When an employer entrusts an employee with responsibility with respect to a negotiable

instrument and the employee or a person acting in concert with the employee makes a
fraudulent indorsement of the instrument, the Uniform Commercial Code provides that,
for the purpose of determining the rights and liabilities of a person who, in good faith,
pays the instrument or takes it for value or for collection, the indorsement is effective as
the indorsement of the person to whom the instrument is payable if it is made in the name
of that person. 92
Definition: "Employee" includes an independent contractor and employee of an

independent contractor retained by the employer. 93
"Responsibility" with respect to instruments means authority to do any of the following:
To sign or indorse instruments on behalf of the employer
To process instruments received by the employer for bookkeeping purposes, for deposit
to an account, or for other disposition
To prepare or process instruments for issue in the name of the employer
To supply information determining the names or addresses of payees of instruments to

be issued in the name of the employer
To control the disposition of instruments to be issued in the name of the employer
To act otherwise with respect to instruments in a responsible capacity 94

Caution: "Responsibility" does not include authority that merely allows an employee
to have access to instruments or blank or incomplete instrument forms that are being
stored or transported or are part of incoming or outgoing mail, or similar access. 95
This provision covers two categories of fraudulent indorsements: indorsements made in

the name of the employer to instruments payable to the employer, 96 and indorsements
made in the name of payees of instruments issued by the employer. 97
Comment: With respect to indorsements made in the name of payees of instruments

issued by the employer, UCC 3-405 [1990 Rev] includes cases that were covered by
UCC 3-405(1)(c) [1952], but its scope is somewhat wider that under the 1952
version; it covers some cases not covered by UCC 3-405(1)(c) [1952], in which the
entrusted employee makes a forged indorsement to a check drawn by the employer.
Moreover, a larger group of employees is included in UCC 3-405 [1990 Rev]; the
key provision is UCC 3-405(a)(3) [1990 Rev], which identifies the kind of
responsibility delegated to an employee which will cause the employer to take
responsibility for the fraudulent acts of that employee. An employer can insure this
risk by employee fidelity bonds. 98 Cases involving fraudulent indorsements of the
name of the employer to instruments payable to the employer were covered by the
1952 version of Article 3 in UCC 3-406 [1952], under which the employer took the
loss only if negligence of the employer could be proved. Under the 1990 version of
Article 3, UCC 3-406 (prescribing the effect of a failure to exercise ordinary care that
contributes to the making of a forged signature on an instrument) need not be used with
respect to forgeries of the employer's indorsement. UCC 3-405 [1990 Rev] imposes
the loss on the employer without proof of negligence. 99
In addition to the above Code provision, the provision respecting the effect of a signature
in the name of a fictitious payee or payee intended to have no interest in the instrument
also applies to cases of employee fraud. 1
Comment: The above Code provision applies to instruments generally, but normally
the instrument will be a check. The Code adopts the principle that the risk of loss for
fraudulent indorsements by employees who are entrusted with responsibility with
respect to checks should fall on the employer rather than the bank that takes the check
or pays it, if the bank was not negligent in the transaction, because the employer is in a
far better position to avoid the loss by care in choosing employees, in supervising
them, and in adopting other measures to prevent forged indorsements on instruments
payable to the employer or fraud in the issuance of instruments in the name of the
employer. 2
However, if the person paying the instrument or taking it for value or for collection fails
to exercise ordinary care in paying or taking the instrument and that failure contributes to
loss resulting from the fraud, the person bearing the loss may recover from the person
failing to exercise ordinary care to the extent the failure to exercise ordinary care
contributed to the loss. 3
Observation: Employee causes Employer's check-writing machine to issue a check

for a very large amount of money payable to a well-known national corporation.
Before depositing the check, Employee opens an account in Depositary Bank in the
name of the corporation and states to the person conducting the transaction for the bank

that Employee is manager of a new office being opened by the corporation. Depositary
Bank opens the account without requiring Employee to produce any resolutions of the
corporation's board of directors or other evidence of authorization of Employee to act
for the corporation. A few days later, the check is deposited, the account is credited,
and the check is presented for payment. After Depositary Bank receives payment, it
allows Employee to withdraw the credit by a wire transfer to an account in a bank in a
foreign country. The trier of fact could find that Depositary Bank did not exercise
ordinary care and that the failure to exercise ordinary care contributed to the loss
suffered by Employer, and could allow recovery by Employer from Depositary Bank
for all or part of the loss suffered by Employer. 4
Thus, if a bank taking or paying a check fraudulently indorsed by an employee failed to

exercise ordinary care, this provision allows the employer to shift loss to the bank to the
extent the bank's failure to exercise ordinary care contributed to the loss, regardless of
whether the employer was negligent. 5
Comment: As compared to cases governed by UCC 3-405(1)(c) [1952], UCC

3-405 [1990 Rev] is more favorable to employers in one respect. The bank was
entitled to the preclusion provided by UCC 3-405(1)(c) [1952] if it took the check in
good faith. The fact that the bank acted negligently did not shift the loss to the bank so
long as the bank acted in good faith. Under UCC 3-405 [1990 Rev] the loss may be
recovered from the bank to the extent the failure of the bank to exercise ordinary care
contributed to the loss. 6
Footnotes
As to when an indorsement is made under UCC 3-405(b) [1990 Rev] in the name of the
person to whom an instrument is payable, see UCC 3-405(c), discussed in 593.
As to the effect of a failure to exercise ordinary care that contributes to the making of a
forged signature, see 605.
Footnote 1. Official Comment 3 to UCC 3-405 [1990 Rev] (also giving several
illustrative cases to which UCC 3-405 [1990 Rev] applies).

As to the effect of a signature in the name of a fictitious payee or payee intended to have
no interest in the instrument, see 593.
As to the similar provision with respect to an instrument payable to an impostor,

fictitious payee, or payee not intended to have an interest in the instrument, see 591,
593.
593 Signature in name of fictitious payee or payee intended to have no interest in

instrument
View Entire Section

The Uniform Commercial Code prescribes a rule for cases in which a person whose
intent determines to whom a negotiable instrument is payable, 7 that is, the drawer or
maker, 8 does not intend the person identified as payee to have any interest in the
instrument, or in which the person identified as payee of an instrument is a fictitious
person. In both of those cases, until the instrument is negotiated by special indorsement,
any person in possession of the instrument is its holder, and an indorsement by any
person in the name of the payee stated in the instrument is 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. 9
Under the 1990 version of Article 3, an indorsement is made in the name of a payee if (1)
it is made in a name substantially similar to that of the payee or (2) the instrument,
whether or not indorsed, is deposited in a depositary bank to an account in a name
substantially similar to that of the payee. 10
The 1952 version of Article 3 provides that an indorsement by any person in the name of
a named payee is effective if a person signing as or on behalf of a maker or drawer
intends the payee to have no interest in the instrument. 11 Under the 1952 version of
Article 3, in all of the following cases an indorsement by any person in the name of the
payee is effective: 12
The drawer of a check, for his or her own reasons, makes it payable to P, knowing that P
does not exist

The drawer makes the check payable in the name of P; a person named P exists, but the
drawer does not know it
The drawer makes the check payable to P, an existing person whom the drawer knows,
intending to receive the money himself or herself and that P shall have no interest in the
check
The treasurer of a corporation draws its check payable to P, who, to the knowledge of
the treasurer, does not exist
The treasurer of a corporation draws its check payable to P; P exists but the treasurer has
fraudulently added his or her name to the payroll intending that he or she shall not
receive the check
The president and the treasurer of a corporation both sign its check payable to P; P does
not exist; the treasurer knows it but the president does not
The same facts as immediately above, except that P exists and the treasurer knows it, but
intends that P will have no interest in the check
Under the 1952 version, the risk of loss from wrongful indorsement is placed on the
drawer by making such an indorsement effective, even though unauthorized. 13 The test
stated is not whether the named payee is "fictitious," but whether the signer intends that
the named payee shall have no interest in the instrument. 14
This Code provision applies to any instrument, as well as to forged check cases, but its
primary importance is with respect to checks of corporations and other organizations. 15
Although this provision is not limited to such cases, most of the cases to which it applies
will be cases of employee fraud. 16
If a check payable to a fictitious payee or a payee not intended to have an interest in the
check is paid, the effect of the above Code provision is to place the loss on the drawer of
the check rather than on the drawee or the depositary bank that took the check for
collection. These cases almost always involve fraud; the drawer is in the best position to
avoid the fraud, and thus, should take the loss. But, in some cases, the person taking the
check might have detected the fraud, and thus, have prevented the loss by the exercise of
ordinary care. In those cases, if that person failed to exercise ordinary care, it is
reasonable that that person bear loss to the extent the failure contributed to the loss. 17
Thus, if a person paying the instrument or taking it for value or for collection fails to
exercise ordinary care in paying or taking the instrument and that failure contributes to
loss resulting from payment of the instrument, the person bearing the loss may recover
from the person failing to exercise ordinary care to the extent the failure to exercise
ordinary care contributed to the loss. 18
Comment: Cases involving checks payable to a fictitious payee or a payee not

intended to have an interest in the check are often forged check cases as well.
Normally, the loss in forged check cases is on the drawee bank that paid the check.
The doctrine that prevents a drawee bank from recovering payment with respect to a
forged check if the payment was made to a person who took the check for value and in
good faith is incorporated into UCC 3-417(a)(3) [1990 Rev], 4-208(a)(3) and UCC
3-418 [1990 Rev]. This doctrine is based on the assumption that the depositary bank,

normally, has no way of detecting the forgery, because the drawer is not that bank's
customer. On the other hand, the drawee bank, at least in some cases, may be able to
detect the forgery by comparing the signature on the check with the specimen signature
that the drawee has on file. But in some forged check cases the depositary bank is in a
position to detect the fraud. Those cases typically involve a check payable to a
fictitious payee or a payee not intended to have an interest in the check. UCC
3-404(d) [1990 Rev] applies to those cases. 19
Illustration: The fictitious payee defense operated to shield the collecting bank from
liability to the drawer whose employee had induced the drawer to issue checks,
supplied the name of payee, intended that named payee had no interest in the checks,
procured checks, fraudulently endorsed them for deposit into his account at collecting
bank, and subsequently was permitted to withdraw from his account all funds
representing such checks. 20
The fictitious payee rule cannot be circumvented by claims for conversion and for money
had and received. 21
Footnotes
Footnote 7. UCC 3-404(b) [1990 Rev], referring to UCC 3-110(a).
Annotation: Bills and notes: nominal payee rule of UCC 3-405(1)(b), 92 ALR3d
268.
Forms: Complaint, petition, or declarationAllegationMaker did not intend payee to

have any interest in instrument. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Instruction to juryEffectiveness of indorsement in name of payee where make did not

intend payee to have interest. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code :
Footnote 11. UCC 3-405(1)(b) [1952].
Footnote 13. Northbrook Property & Casualty Ins. Co. v Citizens & Southern Nat'l Bank,
184 Ga App 326, 361 SE2d 531, 5 UCCRS2d 399.
Footnote 15. Official Comment 2 to UCC 3-404 [1990 Rev], also giving several
illustrative cases.

As to a fraudulent indorsement made by an employee with responsibility for an

As to the application of UCC 3-404(d) [1990 Rev] to cases involving impostors, see
591.
As to the similar provision with respect to a fraudulent indorsement made by an

employee with responsibility for the instrument, see 592.
Footnote 20. Shearson Lehman Bros. v Wasatch Bank (DC Utah) 788 F Supp 1184, 18
UCCRS2d 208.
Footnote 21. Prudential-Bache Secur., Inc. v Citibank, N.A., 73 NY2d 263, 539 NYS2d
699, 536 NE2d 1118, 7 UCCRS2d 1345.
594 Where payee's name supplied by agent or employee of maker or drawer
View Entire Section

An indorsement by any person in the name of a named payee is effective if the maker's or
drawer's agent or employee has supplied the indorser with the payee's name intending the
payee to have no such interest. 22 The rationale behind this Code provision is that such a
loss is caused by dishonest employees; thus, the risk of such loss should be borne by the
dishonest person's employer rather than the drawee bank. 23
Comment: The Uniform Commercial Code extends the original "fictitious payee"
rule to include padded payroll cases, where the drawer's agent or employee prepares
the check for signature or otherwise furnishes the signing officer with the name of the
payee. The principle followed is that the loss should fall upon the employer as a risk of
his or her business enterprise rather than upon the subsequent holder or drawee, since
the employer is normally in a better position to prevent such forgeries by reasonable
care in the selection or supervision of his or her employees, or, if not, he or she is at
least in a better position to cover the loss by fidelity insurance. 24
Footnotes

Footnote 22. UCC 3-405(1)(c) [1952].
Footnote 23. Northbrook Property & Casualty Ins. Co. v Citizens & Southern Nat'l Bank,
184 Ga App 326, 361 SE2d 531, 5 UCCRS2d 399.
595 Absence of required signature
View Entire Section

If the signature of more than one person is required to constitute the authorized signature
of an organization, the signature of the organization is unauthorized if one of the required
signatures is lacking. 25
Comment: This Uniform Commercial Code provision clarifies the meaning of

"unauthorized" in cases in which an instrument contains fewer than all of the
signatures that are required as authority to pay a check. It resolves a split in judicial
authority by following the line of cases holding that it is the customer's signature at
issue, not the authenticity of any individual signature appearing on the instrument;
hence the customer's signature is unauthorized if not all signatures required to
authorize payment of the check are on the check. The same result occurs if one of the
required signers forges the signature of another required signer. Because the forgery is
not effective as a signature of the latter, the required signature of the latter is lacking.
26
The Code definition of "organization" is very broad. It covers not only commercial
entities but also "two or more persons having a joint or common interest." 27 Under this
broad definition of "organization," the above Code provision would apply when a
husband and wife are both required to sign a negotiable instrument. 28
Illustration: A bank was sued by a corporate customer's insurer after the insurer had
paid embezzlement losses sustained by the corporation as a result of the bank's
payment of checks drawn on the corporation's accounts that did not contain two
handwritten signatures of authorized persons as required by corporate resolutions
submitted on forms furnished by the bank. These resolutions stated that they were to
remain in effect until written notice of their rescission or amendment had been received
by the bank. Although the resolutions required two handwritten signatures for checks
over a certain amount, the comptroller of the corporation, who was one of the
authorized signers and devised the embezzlement plan, subsequently advised the bank
by telephone that it should pay checks bearing one handwritten and one facsimile
signature. Since there was no evidence that the comptroller had the actual or apparent
authority to permit the bank to deviate from the two-hand-signature condition in the
corporate resolution and since there was nothing to show that the corporation ratified
the payment of the checks, the bank was liable to the corporation's subrogated insurer.
29

Footnotes
Footnote 27. Official Comment 4 to UCC 3-403 [1990 Rev], referring to the definition
of "organization" in UCC 1-201(28).
Footnote 29. Federal Ins. Co. v NCNB Nat'l Bank (CA11 Fla) 958 F2d 1544, 17
UCCRS2d 497, 6 FLW Fed C 467.
b. Alteration and Unauthorized Completion [596-600]
596 Generally; materiality of alteration
View Entire Section

An alteration can be loosely described as any change of the writing on an instrument

made without the authority of the drawer or of any other party to the instrument; a
material alteration may consist of raising or otherwise changing the amount of a check,
changing the name of the payee, or making other changes, such as to the date or to the
name of the drawee or payor bank. 30 The 1990 version of Article 3 of the Uniform
Commercial Code states that "alteration" means an unauthorized change in an instrument,
which change purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers, or other change to an incomplete instrument,
which addition or change relates to the obligation of a party. 31 The 1952 version of
Article 3 provides that an alteration of an instrument is material if it changes the contract
of any party thereto in any respect 32 and that, as against any person other than a
subsequent holder in due course, alteration by a holder which is both fraudulent and
material discharges any party whose contract is thereby changed. 33
An alteration is an unauthorized change to the instrument that purports to modify the

obligation of any party or an unauthorized completion of an incomplete instrument. The
change must be made to the instrument and, thus, does not include a release or other
collateral agreement entered into with a party to the paper. By embracing both changes
to an existing instrument and the improper completion of an incomplete instrument,
alteration takes on the broad aspect of changes to an instrument that exists and changes to
a writing that is intended to be an instrument. 34
Thus, any change in a party's contract, however slight, is a material alteration. 35

Although the 1990 version of Article 3 makes a change in terminology by omitting the
word "material" as used in the 1952 version, there is no change in result; it therefore
follows that cases under the 1952 version of Article 3 should hold under the revised
version. 36
The defense of alteration may only be raised by a party to the instrument. 37 Further,
significant alterations of an instrument by one who is not a party to it will not affect the
rights of the holder. 38
Examples of material alterations which will operate as a discharge if they are fraudulent
include: (1) the addition of one cent to the amount payable; (2) an advance of one day in
the date of payment. 39 Also, writing in an interest rate after the maker had signed a note
is a material alteration, 40 as is the substitution by a faithless employee of her own name
for that of the original payee on checks drawn on the employer's account; 41 however,
notations made on the margin of a note concerning the amounts of credit life insurance
premiums and the amount of interest charged, which did not alter or change the
obligation of the note itself, 42 and a bank clerk's attempt to obliterate a "paid" stamp
mistakenly applied to a promissory note by covering the stamp with "liquid paper" 43
are not material alterations.
Further, altering the provision in a promissory note which required a specific listing of
collateral securing the note, which alteration took out the requirement, did not materially
alter the terms of the note which permitted the bank freely to substitute or exchange such
collateral. Such an alteration was not material, and thus, was not sufficient to discharge
the maker. 44 Also, an alteration of the month under which payment of an installment
note was to begin was of no effect where the defendants admitted that they had paid the
particular sum on the note and where the sum still owing was not in dispute. 45
The making of a forgery on commercial paper is not an alteration, because it merely

purports to add to the paper rather than to change what is already on the paper, although
it would appear that the adding of a forgery could be held to be a material alteration when
it makes a "change in the number or relations of the parties." 46
Footnotes
The term "alteration," as used in relation to negotiable instruments, means physical

alteration of the document, for instance, by erasure or interlineation, not acts done outside
of the instrument affecting the rights of the parties. Borden v Berg (2nd Dist) 232 Cal
App 2d 169, 42 Cal Rptr 664.

Forms: Complaint, petition, or declarationAllegationChange in note authorized by

maker. 6A Am Jur Pl & Pr Forms (Rev), Commercial Code : Article 3Negotiable
Instruments 3:184.

ReplyDenial of making alteration. 6A Am Jur Pl & Pr Forms (Rev), Commercial
ReplyDefense of alteration precluded by consent to alteration. 6A Am Jur Pl & Pr

Footnote 32. UCC 3-407(1) [1952].
Footnote 33. UCC 3-407(2)(a) [1952].
As to the requirement that alteration be fraudulently made, see 598.
As against one not a holder in due course, for a party to be fully discharged by virtue of
alteration of an instrument subsequent to its being signed, the alteration must: (1) change
the signer's contract; (2) be significant or material; (3) be fraudulently made; and (4) be
made by the holder. Curtis v First Nat'l Bank, 158 Ga App 379, 280 SE2d 404, 33
UCCRS 1038.
Practice Aids: Proving fact of alteration. 1 Am Jur Proof of Facts 479, Alteration of
Instruments, Proofs 1-3.
Forms: Instructions to juryMaterial alteration defined. 5 Am Jur Pl & Pr Forms

Footnote 37. Delta Bank & Trust Co. v Chisholm (La App 5th Cir) 601 So 2d 345.
Footnote 38. Official Comment 3a to UCC 3-407 [1952].
Footnote 40. Hughes v Talley (La App 4th Cir) 400 So 2d 253, 31 UCCRS 1419, cert den
(La) 406 So 2d 609, later proceeding (La App 4th Cir) 481 So 2d 172.
Footnote 41. Hanover Ins. Cos. v Brotherhood State Bank (DC Kan) 482 F Supp 501, 28
UCCRS 430.
Footnote 42. Franco v Bank of Forest Park, 118 Ga App 700, 165 SE2d 593, 5 UCCRS
1252.
Footnote 43. Delta Bank & Trust Co. v Chisholm (La App 5th Cir) 601 So 2d 345.
Footnote 44. Martin v Herr, 158 Ga App 329, 280 SE2d 387.

597 Unauthorized completion as material alteration
View Entire Section

Under Article 3 of the Uniform Commercial Code, an "incomplete instrument" means a

signed writing, whether issued 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. 47 An unauthorized completion is a material
authorization. 48 If words or numbers are added to an incomplete instrument without
authority of the signer, there is an alteration of the incomplete instrument. 49
The completion of an incomplete instrument must be made with the authority of the
signer. Whether there is such authority is a question of fact to be determined by the
pre-Code law of agency. If it is completed without such authority, the act of completion
is treated as an alteration and has the effect determined by the Code provision governing
the alteration of negotiable instruments. 50
Whether or not the completion is authorized, a holder in due course may enforce the
instrument as completed. 51 As against any person other than a subsequent holder in
due course, completion which is fraudulent and which is unauthorized discharges any
party whose contract is changed, unless that party assents or is precluded from asserting
the defense; no other completion discharges any party, and the instrument may be
enforced according to the authority given. 52
Footnotes
Footnote 47. 117.
As to the law governing incomplete instruments, generally, see 117 et seq.
Footnote 48. UCC 3-115(2) [1952].
Forms: AnswerDefenseUnsigned and undelivered note not intended as valid

instrumentUnauthorized alteration. 6A Am Jur Pl & Pr Forms (Rev), Commercial
As to the effect of alteration of a negotiable instrument, see 600.

Footnote 51. UCC 3-407(3) [1952].
Footnote 52. UCC 3-407(2) [1952], as read in terms of unauthorized completion as a

material alteration.
598 Requirement that alteration be fraudulently made
View Entire Section

If an alteration is not fraudulent, it has no effect upon the instrument; no party is

discharged thereby and the instrument may be enforced according to its original terms. 53
Illustration: Consequently, notations made on an instrument by the bookkeeping

department or other personnel to show that proper entries of an instrument had been
made or to reflect the balance due on the instrument have no effect, as such alterations
are not fraudulently made. 54
The Uniform Commercial Code does not define "fraudulently" and, therefore, it is to be
interpreted as a change made to obtain an advantage that the person acting is not entitled
to obtain. 55
Comment: As under the 1952 version of Article 3, discharge because of alteration

occurs under the 1990 version only in the case of an alteration fraudulently made.
There is no discharge if a blank is filled in the honest belief that it is authorized or if a
change is made with a benevolent motive, such as a desire to give the obligor the
benefit of a lower interest rate. Changes favorable to the obligor are unlikely to be
made with any fraudulent intent, but if such intent is found the alteration may operate
as a discharge. 56
Illustration: In a foreclosure action on real property that was mortgaged as security

for loans secured from the plaintiff bank, even if the notes in question had been
materially altered, the debtors, as guarantors, would not be discharged from their
obligation inasmuch as the debtors failed to show that the bank had supplied additional
terms or materially altered the notes for a fraudulent purpose. 57
Footnotes
The word "fraudulent" as used in UCC 3-407 requires a deceitful and dishonest purpose
to acquire more than one is entitled to under the note as signed by the maker. Logan v
Central Bank, N. A. (Ala Civ App) 397 So 2d 151, 31 UCCRS 1029.
As to the alteration of an instrument resulting in an obligor being discharged, see 600.
Footnote 57. Peacock v Farmers & Merchants Bank (Fla App D1) 454 So 2d 730, 9 FLW
1807, 39 UCCRS 937.
599 Alteration by consent
View Entire Section

The Uniform Commercial Code provides that an alteration fraudulently made discharges
a party whose obligation is affected, unless that party assents. 58 Thus, by definition,
there is no alteration or improper completion within the Code when the parties affected
by such action consent thereto. 59 Assent to an alteration given before or after it is made
will prevent the party from asserting the discharge. 60
Illustration: The addition of a cosigner with the consent of the parties does not
constitute an alteration. 61
Comment: A party who is affected by a fraudulent alteration is discharged from

liability on the instrument, unless that party assents to the alteration. As no limitation
is placed upon "assents," it should follow that any evidence, whether oral or written,
that the party consented to the alteration is sufficient. Likewise, it is immaterial
whether the assent is manifested before or after the alteration is made. The use of the
word "assent" also emphasizes that there is no requirement that the assent be a binding
agreement. 62
Once a party, against whom the change would operate, consents to the change, the prior
terms cease to exist and a holder can only sue on the paper as modified, with the result
that, if the paper is usurious as modified, the usury sanctions are applicable and can not
be avoided by returning to the original terms of the paper. 63
Footnotes

Forms: ReplyDefense of alteration precluded by consent to alteration. 6A Am Jur Pl


Footnote 59. Succession of Vidrine (La App 3d Cir) 377 So 2d 564.
Footnote 61. Reagan v City Nat'l Bank, N.A. (Tex App Eastland) 714 SW2d 425, 2
UCCRS2d 537, writ ref n r e (Oct 22, 1986) and rehg of writ of error overr (Dec 3, 1986).
Footnote 63. Citizen's Nat'l Bank v Taylor (Minn) 368 NW2d 913, 41 UCCRS 516.
600 Effect of alteration; parties discharged
View Entire Section

Except as provided under specified circumstances, an alteration fraudulently made

discharges a party whose obligation is affected by the alteration, unless that party assents
or is precluded from asserting the alteration. No other alteration discharges a party, and
the instrument may be enforced according to its original terms. 64
Illustration: If a bank, as holder of a promissory note, fraudulently and materially

alters the note, the comaker is discharged from liability. 65
Comment: Discharge is a personal defense of the party whose obligation is modified

and anyone whose obligation is not affected is not discharged. But if an alteration
discharges a party there is also discharge of any party, having a right of recourse
against the discharged party, because the obligation of the party with the right of
recourse is affected by the alteration. 66
As an exception to the provision discharging a party whose obligation is affected by a

fraudulently made alteration or unauthorized completion, the Uniform Commercial Code
provides that 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 according to its original terms or, in the case of an
incomplete instrument altered by unauthorized completion, according to its terms as
completed. 67
Comment: Under the exception, a person paying a fraudulently altered instrument or

taking it for value, in good faith and without notice of the alteration, is not affected by
a discharge under the Code. The person paying or taking the instrument may assert
rights with respect to the instrument according to its original terms or, in the case of an
incomplete instrument that is altered by unauthorized completion, according to its
terms as completed. If blanks are filled or an incomplete instrument is otherwise
completed, Article 3 places the loss upon the party who left the instrument incomplete
by permitting enforcement in its completed form. This result is intended,even though
the instrument was stolen from the issuer and completed after the theft. 68

Observation: A purchaser who takes an instrument with notice of any material
alteration takes with notice of a claim or defense and cannot be a holder in due course.
69
A person not having the rights of a holder in due course may not enforce the paper
against a party who has been discharged by the alteration, or in the case of a completed
instrument, may not enforce an improper completion; otherwise stated, he or she may
enforce the altered paper according to its original tenor against anyone who is not
discharged by alteration and he or she may enforce a completed paper according to the
authority given. 70
Footnotes
Footnote 64. UCC 3-407(2) [1952], providing that discharge is limited as against any
person other than a subsequent holder in due course; UCC 3-407(b) [1990 Rev].
As to an obligor's assent to the alteration of an instrument, see 599.
As to an obligor being precluded from asserting that an instrument was altered, see
601 et seq.
Forms: ChecklistMatters to be alleged in answer to complaint to enforce altered

AnswerDefenseChange in date from which interest payable. 6A Am Jur Pl & Pr

AnswerDefenseInterest provision changed. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefenseChange in rate of interest. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefenseIncrease in face amount of note. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefenseChange in name of payee. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefenseAdditional language inserted. 6A Am Jur Pl & Pr Forms (Rev),

AnswerDefenseAdditional signature of maker inserted. 6A Am Jur Pl & Pr Forms

Footnote 65. Logan v Central Bank, N. A. (Ala Civ App) 397 So 2d 151, 31 UCCRS
1029 (stating that there are three elements to that defense against payment of the note:
the alteration must (1) have been made by the holder of the note, (2) have been a material

change, and (3) have been made for a fraudulent purpose).
As to the unauthorized completion of an instrument as a material alteration, see 597.
Footnote 69. 264, 265.
Footnote 70. UCC 3-407(2)(b) [1952].
c. Preclusion of Defense [601-609]
(1). Ratification; Estoppel [601-603]
601 Ratification; generally
View Entire Section

An unauthorized signature may be ratified for all purposes of Article 3 of the Uniform
Commercial Code. 71 Under the 1952 version of Article 3, a forged signature may be
ratified, even where the forger is not the agent of the purported signer. 72
Comment: Ratification is a retroactive adoption of the unauthorized signature by the

person whose name is signed and may be found from conduct as well as express
statements. For example, it may be found from the retention of benefits received in the
transaction with knowledge of the unauthorized signature. 73
Thus, in a foreclosure action the trial court properly declared certain mortgages null and
void, where the owners of the land were not bound by the unauthorized and unratified
signatures of their attorney who was acting as a manager but did not have the power to
mortgage the land; the owners were not entitled, however, to keep the financial benefits
derived from the mortgages while simultaneously having those same mortgages declared
null and void, where retention of the benefits would constitute a ratification and would
preclude the equitable relief sought by the owners. 74
Comment: Ratification is effective for all purposes of Article 3. The unauthorized

signature becomes valid so far as its effect as a signature is concerned. Although the
ratification may relieve the signer of liability on the instrument, it does not, of itself,
relieve the signer of liability to the person whose name is signed. It does not in any
way affect the criminal law. No policy of the criminal law prevents a person whose

name is forged to assume liability to others on the instrument by ratifying the forgery,
but the ratification cannot affect the rights of the state. While the ratification may be
taken into account with other relevant facts in determining punishment, it does not
relieve the signer of criminal liability. 75
Caution: The rules regarding ratification set forth in Article 3 apply only to
negotiable instruments. Thus, defendants who were sued on a written guaranty to
which their names had been forged were not liable under Article 3, which permits an
unauthorized signature to bind the person whose name is signed in favor of anyone
who in good faith and for full value takes the instrument where the person whose name
is signed ratifies the unauthorized signature or is precluded from denying it, even
though they had learned of the forgeries but had not repudiated them prior to suit. The
Article 3 sections at issue apply only to negotiable instruments, and neither the
underlying lease obligation nor the guaranty sued upon were negotiable instruments. 76
Although a forger is not an agent, ratification of an unauthorized signature is governed by

the rules and principles applicable to ratification of unauthorized acts of an agent. 77
Upon ratification, an unauthorized signature becomes valid so far as its effect as a

signature is concerned. 78 Thus, ratification makes the signature effective as the
signature of the purported principal and, therefore, it is no longer to be deemed the
signature of the person signing. 79 This change resulting from ratification does not,
however, alter the liability, if any, of the actual signer to the person whose name was
signed. 80
Ratification is a definitive and irrevocable act and bars the victim ratifying from later
complaining that the signing was a forgery. 81
Observation: The Code speaks merely of the ratification of the signature that is
unauthorized, without making any statement as to the identity of the person ratifying.
In view of the fact that ratification is the substitute for initial authorization, it is
obvious that the person to ratify is the person who could have authorized the signing
before it was made. 82
Footnotes


3-404, 93 ALR3d 967.
Practice Aids: Proof of ratification of forged signature. 7 Am Jur POF2d 675,


Instruments 3:161.

(Rev), Banks 89.
Footnote 74. Bloom v G.P.F., S.A. (Fla App D3) 588 So 2d 607, 16 FLW D2366, reh gr
(Fla App D3) 1991 Fla App LEXIS 11537.
Footnote 75. Official Comment 3 to UCC 3-404 [1952], stating that no policy of the
criminal law requires that the person whose name is forged must not assume liability to
others on the instrument, but he cannot affect the rights of the state; while the ratification
may be taken into account with other relevant facts in determining punishment, it does
not relieve the signer of criminal liability; Official Comment 3 to UCC 3-403 [1990
Rev].
Footnote 76. European American Bank & Trust Co. v Starcrete International Ind., Inc.
(CA5 Fla) 613 F2d 564, 28 UCCRS 722.
3-403 [1990 Rev].
Footnote 79. Eggleston v George Braun Packing Co. (Tex Civ App San Antonio) 470
SW2d 69, 9 UCCRS 1084.
Footnote 80. Starkey Constr., Inc. v Elcon, Inc., 248 Ark 958, 248 Ark 978A, 457 SW2d
509, 7 UCCRS 923; Rakestraw v Rodrigues, 8 Cal 3d 67, 104 Cal Rptr 57, 500 P2d
1401, 11 UCCRS 780.
Footnote 81. Fulka v Florida Commercial Banks, Inc. (Fla App D3) 371 So 2d 521, 26
UCCRS 1198.
Footnote 82. 6 Anderson, Uniform Commercial Code 3-404:28.
602 What constitutes ratification
View Entire Section

Ratification of an unauthorized signature may be found from conduct as well as from

express statements; thus, it may be found from the retention of benefits received in the
transaction with knowledge of the unauthorized signature. 83
Illustration: The payee of a check ratified an unauthorized indorsement where, after

discovering the forgery, he took no action against the forger and took no action of any
kind until he brought an action against the bank eight months later, but meanwhile had
entered into an agreement with the forger to treat the amount involved as a loan to the
forger and the forger had, in fact, made payments of interest and principal on such
loan. 84
Illustration: Ratification of the unauthorized execution of a note by an agent

occurred when the principal assumed the obligation to and did make payments on the
note, 85 although pursuit by the plaintiff of the forger to recover payments for the
plaintiff's losses from a check does not constitute ratification of an unauthorized
indorsement. 86
Ratification may also be found from an admission of genuineness of the signature, an

admission of liability, or a promise to pay the instrument. 87
In any event, ratification requires knowledge of all material facts. 88 Ratification

requires conduct to be consistent with an intent to affirm an unauthorized act and must be
inconsistent with any other purpose. 89
The "affirmance" required to create a ratification may arise from conduct which can be
rationally explained only if there were an election to treat a supposedly unauthorized act
as, in fact, authorized. 90
The failure to repudiate an unauthorized indorsement by an agent within a reasonable

time after learning of the transaction will be deemed a ratification. 91
Footnotes
3-403 [1990 Rev].

3-404, 93 ALR3d 967.
Practice Aids: Proof of ratification of forged signature. 7 Am Jur POF2d 675,

Forms: Instruction to juryRatification of unauthorized signature. 6A Am Jur Pl & Pr


(Rev), Banks 89.
Footnote 84. Hendrix v First Bank of Savannah, 195 Ga App 510, 394 SE2d 134.
Footnote 85. Guthrie v National Homes Corp. (Tex Civ App Fort Worth) 387 SW2d 158,
writ granted (Tex) 8 Tex Sup Ct Jour 411 and reformed on other grounds (Tex) 394
SW2d 494.
Footnote 86. Twellman v Lindell Trust Co. (Mo App) 534 SW2d 83, 19 UCCRS 604, 93
ALR3d 943.
Footnote 87. Continental Nat'l Bank v National Bank of Commonwealth, 50 NY 575.
Footnote 88. Bernardo v Anello (Cuyahoga Co) 61 Ohio App 3d 453, 573 NE2d 126;
Bank of Hoven v Rausch (SD) 382 NW2d 39, 42 UCCRS 1359, later proceeding (SD)
449 NW2d 263.
Footnote 89. American Travel Corp. v Central Carolina Bank & Trust Co., 57 NC App
437, 291 SE2d 892, 33 UCCRS 1707, 34 UCCRS 1233, petition den 306 NC 555, 294
SE2d 369.
Footnote 90. Fulka v Florida Commercial Banks, Inc. (Fla App D3) 371 So 2d 521, 26
UCCRS 1198.
Footnote 91. Ft. Dodge Creamery Co. v Commercial State Bank (Iowa App) 417 NW2d
245, 5 UCCRS2d 666.
603 Estoppel from denial of unauthorized signature
View Entire Section

An unauthorized signature is operative as that of the person whose name is signed if he or

she is precluded from denying it. 92 Under this provision, the person whose name is
signed may be precluded from denying the signature by estoppel. 93 Accordingly, a
person whose name is forged on an instrument by his or her agent is, by the unwise
selection of the agent, estopped or precluded from denying the unauthorized signature. 94
Estoppel may exist where the person whose name is signed expressly or tacitly represents
to an innocent purchaser that the signature is genuine. 95
Illustration: Where the defendant employer represented to the plaintiff check

cashing service that his trusted employee was clothed with the authority to approve the
cashing of checks presented to the plaintiff for cashing, and subsequently, the plaintiff
cashed checks for third-person payees with the approval of the defendant's trusted
employee, the defendant was precluded or estopped from asserting that the checks
were forged where it appeared that the defendant's representation was relied upon by
the plaintiff to its detriment. 96
Footnotes
Footnote 92. UCC 3-404(1) [1952].

As to estoppel as precluding defenses, generally, see 554.
Annotation: When depositor-drawer of check is "precluded," under Negotiable

Instruments Law 23, from setting up forgery of indorsement or want of authority
against drawee bank, 39 ALR2d 641.

Instruments 3:161.
Footnote 94. Hutzler v Hertz Corp., 39 NY2d 209, 383 NYS2d 266, 347 NE2d 627, 18
UCCRS 1089.
Footnote 96. Boulevard Check Cashing, Inc. v Copen (NY Civ Ct) 7 UCCRS 822.
(2). Negligence [604-609]
604 Generally
View Entire Section

Under the 1990 Revision of the UCC, a person whose failure to exercise ordinary care
substantially contributes to an alteration of a negotiable instrument or to the making of a
forged signature on the instrument is precluded from asserting the alteration or the
forgery against a person who, in good faith, pays the instrument or takes it for value or
for collection. 97
The preclusion rule set forth in the Code only protects certain persons. The person to be
protected must have taken the paper, in good faith, and must have paid the instrument or
taken it for value or collection. The Code does not require that the person claiming the
benefit of the preclusion rule be a holder of the instrument. While a person's taking of
the instrument for value or its payment will, in most cases, produce an indorsement to
that person that makes that person a holder, the Code does not require this status; thus, a
transferee who is not a holder may claim the benefit of the preclusion rule. 98
Observation: UCC 3-406 [1990 Rev] refers to "forged signature" rather than to
"unauthorized signature" as in UCC 3-406 [1952], because it more accurately
describes the scope of the provision. Unauthorized signature is a broader concept that
includes not only forgery but also the signature of an agent which does not bind the
principal under the law of agency. The agency cases are resolved independently under
agency law. UCC 3-406 [1990 Rev] is not necessary in those cases. 99
Comment: This Uniform Commercial Code provision adopts the rule of an English
decision, 1 which held that a drawer who so negligently draws an instrument as to
facilitate its material alteration is liable to a drawee who pays the altered instrument in
good faith. The rule is expanded to apply not only to drafts but to all instruments. The
Code also rejects decisions holding that the maker of a note owes no duty of care to the
holder, because at the time the instrument is issued there is no contract between them.
By issuing the instrument and "setting it afloat upon a sea of strangers," the maker or
drawer voluntarily enters into a relation with later holders which justifies imposition of
a duty of care. In this respect, an instrument so negligently drawn as to facilitate
alteration does not differ in principle from an instrument containing blanks which may
be filled. 2
The concept of "preclusion" preserves the concept of estoppel, 3 and this provision of
the Code operates as a conditional estoppel which shields a bank from liability where a
drawer's negligence substantially contributes to an alteration or forgery. 4
The negligence that gives rise to the preclusion under this section may be the failure to
maintain proper supervision over the wrongdoing agent. 5 The provision governing
negligence contributing to unauthorized signatures is not a substantive provision of tort
liability. 6
Comment: Under another Code provision, UCC 3-407(c) [1990 Rev], a person
paying an altered instrument or taking it for value, in good faith and without notice of
the alteration, may enforce rights with respect to the instrument according to its
original terms. If negligence of the obligor substantially contributes to an alteration,
the above Code provision gives the holder or the payor the alternative right to treat the
altered instrument as though it had been issued in the altered form. In that case, the
person taking the instrument is fully protected; the above general Code provision
therefore does not make the negligent party liable in tort for damages resulting from
the alteration. 7
Footnotes
Under the prior version of this provision, any person who by his negligence substantially
contributes to a material alteration of the instrument or to the making of an unauthorized
signature is precluded from asserting the alteration or lack of authority against a holder in
due course or against a drawee or other payor who pays the instrument in good faith and
in accordance with the reasonable commercial standards of the drawee's or payor's
business. UCC 3-406 [1952].
Practice Aids: Proof of negligence of drawer substantially contributing to alteration or

forgery. 14 Am Jur POF2d 693, Commercial Paper: Negligence Contributing to
Alteration or Unauthorized Signature Under UCC 3-406 10 et seq.
Forms: ChecklistMatters to be alleged in answer by bank to complaint by depositor

for bank's payment of fraudulently altered instrument. 6A Am Jur Pl & Pr (Rev),
AnswerDefenseDepositor's negligence facilitated alteration of checks paid by bank.
6A Am Jur Pl & Pr (Rev), Commercial Code: Article 3Negotiable Instruments
3:197.
AnswerDefenseDepositor's negligence facilitated alteration of checks paid by

bankNegligent use of perforating safety device. 6A Am Jur Pl & Pr (Rev),
AnswerDefenseDepositor's negligence facilitated alteration of checks paid by bank.

4A Am Jur Pl & Pr Forms (Rev), Banks 80.
AnswerDefenseNegligence contributed to unauthorized signature. 4A Am Jur Pl &

Pr Forms (Rev), Banks 77.
As to what constitutes a failure to exercise ordinary care, and the applicable standard of
causation, see 605.
Footnote 1. Young v Grote (1827) 4 Bing 253, 130 Eng Reprint 764.
Footnote 3. Cook v Great W. Bank & Trust (App) 141 Ariz 80, 685 P2d 145, 39 UCCRS
214.
Footnote 4. Jacoby Transport Systems, Inc. v Continental Bank, 277 Pa Super 440, 419
A2d 1227, 28 UCCRS 1398.
Footnote 5. Lund v Chemical Bank (SD NY) 797 F Supp 259, 19 UCCRS2d 151.
Footnote 6. National Bank of Fairhaven v United States (DC Mass) 660 F Supp 125, 4
UCCRS2d 131.
605 What constitutes negligence
View Entire Section

The Uniform Commercial Code makes no attempt to define particular conduct that will
constitute "failure to exercise ordinary care" that contributes to an alteration of a
negotiable instrument or the making of a forged signature on the instrument. 8 Rather,
Article 3, respecting negotiable instruments, defines "ordinary care" in general terms;
"ordinary care" in the case of a person engaged in business means observance of
reasonable commercial standards, prevailing in the area in which the person is located,
with respect to the business in which the person is engaged. 9
Illustration: A missing indorsement should arouse suspicion and the failure to be

suspicious is a failure to act in accordance with reasonable commercial standards; a
misspelling of names and typographical errors in indorsements should also arouse
suspicion. 10
Comment: The following cases illustrate the kind of conduct that can be the basis of
preclusion under Article 3: Case No. 1. Employer signs checks drawn on Employer's
account by use of a rubber stamp of Employer's signature. Employer keeps the rubber
stamp alone with Employer's personalized blank check forms in an unlocked desk
drawer. An unauthorized person fraudulently uses the check forms to write checks on
Employer's account. The checks are signed by use of the rubber stamp. If Employer
demands that Employer's account in the drawee bank be reaccredited, because the
forged check was not properly payable, the drawee bank may defend by asserting that
Employer is precluded from asserting the forgery. The trier of fact could find that
Employer failed to exercise ordinary care to safeguard the rubber stamp and the check
forms and that the failure substantially contributed to the forgery of Employer's
signature by the unauthorized use of the rubber stamp. Case No. 2. An insurance
company draws a check to the order of Sarah Smith in payment of a claim of a
policyholder, Sarah Smith, who lives in Alabama. The insurance company also has a
policyholder with the same name who lives in Illinois. By mistake, the insurance
company mails the check to the Illinois Sarah Smith, who indorses the check and
obtains payment. Because the payee of the check is the Alabama Sarah Smith, the
indorsement by the Illinois Sarah Smith is a forged indorsement. The trier of fact
could find that the insurance company failed to exercise ordinary care when it mailed
the check to the wrong person and that the failure substantially contributed to the
making of the forged indorsement. In that event the insurance company could be
precluded from asserting the forged indorsement against the drawee bank that honored
the check. 11
Footnotes

3-406 [1990 Rev].
As to negligence contributing to alteration or unauthorized signature, see 604.
Failure to conform to reasonable commercial standards of one's business may constitute

such negligence, under UCC 3-406, as to preclude assertion of claim that negotiable
instrument was paid in altered form or on forged indorsement or other unauthorized
signature. Bagby v Merrill Lynch, Pierce, Fenner & Smith, Inc. (CA8 Mo) 491 F2d 192,
13 UCCRS 1069 (criticized on other grounds by McAdam v Dean Witter Reynolds, Inc.
(CA3 NJ) 896 F2d 750, 10 UCCRS2d 1085); Fidelity & Deposit Co. v Chemical Bank
New York Trust Co., 65 Misc 2d 619, 318 NYS2d 957, 8 UCCRS 541, affd (1st Dept)
39 App Div 2d 1019, 333 NYS2d 726, 10 UCCRS 1080.
Law Reviews: Norwood, Negligence as an exception to the forgery doctrinewhen
does it exist? 25 UCC LJ 169 (1993).
Annotation: Commercial paper: what amounts to "negligence contributing to

alteration or unauthorized signature" under UCC 3-406, 67 ALR3d 144.
Practice Aids: Proof of negligence of drawer substantially contributing to forgery of

drawer's signature. 14 Am Jur POF2d, Commercial Paper: Negligence Contributing
to Alteration or Unauthorized Signature Under UCC 3-406 14 et seq.
Proof of negligence of drawer substantially contributing to forged indorsement of

check. 14 Am Jur POF2d, Commercial Paper: Negligence Contributing to Alteration
or Unauthorized Signature Under UCC 3-406 22 et seq.
Forms: AnswerDefenseNegligence contributed to unauthorized signature. 6A Am

3:164.
ALR3d 943.
606 Dishonest acts of employee
View Entire Section

Misplaced confidence in an employee will not excuse a depositor from the duty of
notifying the bank of alterations on items from the depositor's account; rather, the
depositor is charged with the knowledge of all facts which a reasonable and prudent
examination of his or her bank account would have disclosed if made by an honest
employee. 12
Illustration: A bank met its burden of proof of showing that a depositor substantially
contributed to forgeries on its account by its bookkeeper and failed to exercise
reasonable care and promptness in examining monthly accounts where the record
showed that the depositor trusted the bookkeeper completely with both writing checks
and reconciling monthly statements and made no spot checks of the records, although
he was informed by a bank officer that his personal account was overdrawn on 12
occasions during the year in which the forgeries took place and did nothing to discover
the reasons therefor, and also was aware that the bookkeeper's work was both
inaccurate and tardy during the period in question. That the bookkeeper was a
previously honest employee did not excuse the depositor's negligence. 13
A plaintiff may be precluded, on the ground of negligence substantially contributing to

the making and acceptance of a forged check, from asserting a claim against a bank
which paid on a forged check where the drawer of the forged check is the forger's
employer and the employer fails to make basic inquiries into the employee's background.
14
Illustration: Where the conduct of a union in relying almost entirely upon a fictitious
resume, instead of conducting, or insisting upon, a reasonable and trustworthy
background investigation in hiring an individual, who, in fact, had an extensive
criminal record, to manage many millions of dollars in funds, constituted negligence
substantially contributing to the forging of four $25,000 checks by him. 15
A plaintiff may also be precluded from asserting a claim against a bank on the ground
that the plaintiff's conduct substantially contributed to the loss caused by a forgery by an
employee where the plaintiff operates its offices in such a manner that the forger had free
access to its checks and check-writing machine. 16
Footnotes
Footnote 12. Lund v Chemical Bank (SD NY) 797 F Supp 259, 19 UCCRS2d 151;
Menichini v Grant (CA3 Pa) 995 F2d 1224, 20 UCCRS2d 959; Mid-American Clean
Water Sys. v First Sav. Bank (In re Mid-American Clean Water Sys.) (BC DC Kan) 159
BR 941, 22 UCCRS2d 272; K & K Mfg. v Union Bank (App) 129 Ariz 7, 628 P2d 44, 31
UCCRS 177 (disapproved on other grounds by Schoenfelder v Arizona Bank, 165 Ariz
79, 796 P2d 881, 65 Ariz Adv Rep 12, 12 UCCRS2d 469); Cooper v Union Bank, 9 Cal
3d 371, 107 Cal Rptr 1, 507 P2d 609, 12 UCCRS 209 (wherein although the plaintiff who
had employed the secretary knew that she had been in financial difficulties which were
primarily due to considerable gambling losses she had sustained, he exercised practically
no supervision over her and never checked the bank reconciliation of deposits on the
accounts she handled); Westport Bank & Trust Co. v Lodge, 164 Conn 604, 325 A2d
222, 12 UCCRS 450; Husker News Co. v South Ottumwa Sav. Bank (Iowa) 482 NW2d
404, 19 UCCRS2d 203; Ashley-Hall Interiors, Ltd. v Bank of New Orleans (La App 4th
Cir) 389 So 2d 850, 30 UCCRS 582; Parent Teacher Asso., Public School 72 v
Manufacturers Hanover Trust Co. (Civ Ct) 138 Misc 2d 289, 524 NYS2d 336, 5
UCCRS2d 679; Hicks-Costarino Co. v Pinto (NY Sup) 23 UCCRS 680; Read v South
Carolina Nat'l Bank, 286 SC 534, 335 SE2d 359, 42 UCCRS 974 (not followed on other
grounds by Dennis v South Carolina Nat'l Bank (App) 299 SC 34, 382 SE2d 237, 10
UCCRS2d 444); Exchange Bank & Trust Co. v Kidwell Constr. Co. (Tex Civ App Tyler)
463 SW2d 465, 8 UCCRS 1079, writ ref n r e (Tex) 472 SW2d 117, 9 UCCRS 482, rehg
of writ of error overr (Nov 17, 1971).
Footnote 13. K & K Mfg. v Union Bank (App) 129 Ariz 7, 628 P2d 44, 31 UCCRS 177
(disapproved on other grounds by Schoenfelder v Arizona Bank, 165 Ariz 79, 796 P2d
881, 65 Ariz Adv Rep 12, 12 UCCRS2d 469).
Footnote 14. Commercial Credit Equipment Corp. v First Alabama Bank, N.A. (CA5
Ala) 636 F2d 1051, 30 UCCRS 1185 (wherein an employee had been discharged from a
previous job for fraudulent conduct toward the previous employer and a bank); Webster
Soda Found. Mfg. Corp. v Chemical Bank (NY Sup) 15 UCCRS2d 999.
Footnote 15. Fireman's Fund Ins. Co. v Bank of New York (1st Dept) 146 App Div 2d
95, 539 NYS2d 339, 8 UCCRS2d 410 (wherein the union only called a number the

applicant furnished and spoke to someone, purportedly his former employer, who
vouched for him).
Footnote 16. Commercial Credit Equipment Corp. v First Alabama Bank, N.A. (CA5
Ala) 636 F2d 1051, 30 UCCRS 1185.
607 Causation; what constitutes negligence that "substantially contributes" to

alteration or unauthorized signature
View Entire Section

The Code refers to a failure to exercise ordinary care that "substantially contributes" to an
alteration or forged signature. 17 This test is meant to be less stringent than a "direct and
proximate cause" test; under the less stringent test the preclusion to assert the alteration
or forgery should be easier to establish. 18
Illustration: A defendant's negligence substantially contributed to the theft of checks

and, thus, precluded it from asserting the defense of forgery to a check cashing
business's suit against it, where checks were in the defendant's possession after the
account had been closed, and the defendant did not shred checks for several months,
but left the checks in a place where they were accessible to the public, although the
defendant could have easily locked the door to the mail room from which the checks
were stolen when the room was unattended. 19
The phrase "substantially contributes" is better understood as conduct that made it easier
for the wrongdoer to commit his wrong; it is, thus, distinguished from concepts of
causation in which there is a cause and effect relationship between the negligence and
what happened thereafter. 20
Conduct "substantially contributes" to a material alteration or forged signature if it is a

contributing cause of the alteration or signature and a substantial factor in bringing it
about. 21
The phrase "substantially contributes" has not been equated by the majority of courts
which have had occasion to consider the question with "proximate cause." The common
thread running through these cases is that the substantial contribution test under the Code
includes negligent conduct on the part of the drawer which previously had been viewed
as too remote in the chain of causation to preclude recovery. The former standard of
"proximate cause" has been replaced with the "substantial factor" test enunciated in the
Restatement of Torts which is broader than the "but for" formula traditionally applied in
deciding questions of proximate cause. It, therefore, follows that if a negligent act is a
substantial factor in causing a particular result, the negligent person will not be absolved
from liability merely because other elements may have contributed to that result. 22
The use of the expression "substantially contributes" rather than the wording "direct and
proximate cause," which was the sine qua non of pre-Code law necessary to deny a
drawer's recovery, does not create a broader test which shortens the chain of causation;
while UCC 3-406 makes no attempt to define negligence, the intended use of
"substantially contributes" necessarily requires some showing of a casual relationship
equivalent to the "substantial factor" test generally applied in the law of negligence. 23
Caution: A few courts have held that to "substantially contribute" to an alteration

means that the drawer's negligence must proximately cause the making of the alteration
in question. 24
"Substantially contributes" means a substantial contribution to the forgery rather than that
the negligence must be substantial; therefore, the party seeking to establish negligence
does not have to prove gross negligence. 25 Where a depositor is on notice concerning
the forgery of its checks and does not take action to prevent future forgeries, such
inaction constitutes negligence that may substantially contribute to such later forgeries.
26
Illustration: Where a magazine distributor:

(1) authorized one of its drivers to deposit cash received from customers in his personal
bank account;
(2) placed the driver in complete control of the customers' accounts;
(3) never asked to inspect his account; and
(4) ignored customer complaints of his manipulations, the distributor, as a matter of fact,
was guilty of negligence which substantially contributed to the driver's having
fraudulently indorsed checks he received from customers payable to the distributor. 27
Illustration: Where a bank customer turned over to an employee complete and

unsupervised control of its finances, including access to its checks (which he forged),
use of the signature stamp of customer's president (which the employee used for his
own benefit), and daily receipt of the mail (which allowed the employee to destroy two
bank statements containing the checks he forged), and did not even notice the absence
of two months of bank statements, the customer's negligence "substantially
contributed" to the employee's repeated forgeries of its checks. 28
Footnotes
Footnote 19. Dubin v Hudson County Probation Dep't (Law Div) 267 NJ Super 202, 630
A2d 1207, 22 UCCRS2d 558.
Footnote 21. Official Comment 2 to UCC 3-406 [1990 Rev], further noting that the
analysis of "substantially contributes" in UCC 3-406 [1952] by the court in Thompson
Maple Products, Inc. v Citizens Nat'l Bank, 211 Pa Super 42, 234 A2d 32, 4 UCCRS 624
states what is intended by the use of the same words in UCC 3-406 [1990 Rev].
Footnote 22. Dominion Constr. v First Nat'l Bank, 271 Md 154, 315 A2d 69, 14 UCCRS
129.
Footnote 23. Bagby v Merrill Lynch, Pierce, Fenner & Smith, Inc. (CA8 Mo) 491 F2d
192, 13 UCCRS 1069 (criticized on other grounds by McAdam v Dean Witter Reynolds,
Inc. (CA3 NJ) 896 F2d 750, 10 UCCRS2d 1085); Gast v American Casualty Co., 99 NJ
Super 538, 240 A2d 682, 5 UCCRS 155; Gresham State Bank v O & K Constr. Co., 231
Or 106, 370 P2d 726, 1 UCCRS 276, 100 ALR2d 654, clarified 231 Or 129, 372 P2d
187.
Footnote 24. J. Gordon Neely Enterprises, Inc. v American Nat'l Bank (Ala) 403 So 2d
887, 32 UCCRS 1525; Commonwealth of Pennsylvania v Nat. Bank & Trust Co. of
Central Pennsylvania (1976) 469 Pa 188, 364 A2d 1331, 20 UCCRS 138.
In order for the negligence of the drawer of a personal money order to preclude recovery
against the collecting bank, it must be such that it directly and proximately affects the
conduct of the collecting bank and contributes to or induces the bank's acceptance of the
forged or unauthorized indorsement. Thompson v Lake County Nat'l Bank (Lake Co) 47
Ohio App 2d 249, 1 Ohio Ops 3d 313, 353 NE2d 895, 20 UCCRS 142.
Footnote 25. Dubin v Hudson County Probation Dep't (Law Div) 267 NJ Super 202, 630
A2d 1207, 22 UCCRS2d 558.
Footnote 26. Zambia Nat'l Commercial Bank v Fidelity Int'l Bank (SD NY) 855 F Supp
1377, 24 UCCRS2d 1141, motion gr, in part (SD NY) 1994 US Dist LEXIS 11247, later
proceeding (SD NY) 1994 US Dist LEXIS 14321.
Footnote 27. Husker News Co. v South Ottumwa Sav. Bank (Iowa) 482 NW2d 404, 19
UCCRS2d 203.
Footnote 28. Mid-American Clean Water Sys. v First Sav. Bank (In re Mid-American
Clean Water Sys.) (BC DC Kan) 159 BR 941, 22 UCCRS2d 272.
608 What does not constitute negligence
View Entire Section

Conduct is not negligent and, therefore, no estoppel arises when the conduct is regarded
as being merely laxity in the conduct of business affairs or unbusinesslike. 29 The fact
that the name of the payee lacks clarity as to the exact identity of the payee does not give
rise to a preclusion under UCC 3-406. 30 There is no negligence that gives rise to an
estoppel in the fact that the drawer fails to supervise the employee who alters the check,
31 the drawer issues the checks at the request of the forger, 32 the drawer delivers the
checks to a trusted employee who, in fact, is the forger, 33 to the payee's agent, 34 to a
person purporting to be the agent or employee of the payee, 35 to an insurance broker,
36 to an attorney, 37 or to the forger, 38 or the blank checks that were forged were
stolen from the drawer's premises without his or her knowledge. 39 When a cashier's
check is payable to the order of a named person, it is not negligence as a matter of law to
mail that check by United States certified mail. 40 A bank is not negligent, because it
makes a check payable to the order of an "estate" and mails the check to an address other
than that of the administrator of the estate. 41
The mere failure to check apparently valid indorsements does not establish as a matter of
law that there was a failure to act in accordance with reasonable commercial standards
and it is a question of fact whether a reasonable person would have been put on notice of
some impropriety from the form of the instruments, their indorsements, or known facts
outside of the instruments. 42 A payee receiving a corporate check from a corporate
employee, which check is used by the employee to pay his or her personal debt to the
payee, has no duty to inquire of the corporate employer why the check was made payable
to the payee. 43
The fact that the depositor's check protectograph was kept in an unmarked drawer does
not constitute negligence with respect to a signature, where the protectograph merely
stamped the amount of the check and it was still necessary to add a hand signature. 44
Footnotes
Footnote 29. Federal Deposit Ins. Corp. v Turner (CA6 Tenn) 869 F2d 270, 8 UCCRS2d
1094 (holding, however, that laxity will constitute negligence if it is the proximate cause
of the loss); Guaranty Bank & Trust Co. v Federal Reserve Bank (WD Okla) 454 F Supp
Reynolds, Inc. (CA3 NJ) 896 F2d 750, 10 UCCRS2d 1085); Trust Co. Bank v Bronner
(Ala) 451 So 2d 247, 38 UCCRS 267; Ernst & Co. v Chemical Bank (1st Dept) 209 App
Div 2d 241, 618 NYS2d 705, 27 UCCRS2d 240; Society Nat'l Bank v Capital Nat'l Bank
(Cuyahoga Co) 30 Ohio App 2d 1, 59 Ohio Ops 2d 1, 281 NE2d 563, 10 UCCRS 831.
Footnote 30. Joffe v United California Bank (2nd Dist) 141 Cal App 3d 541, 190 Cal
Rptr 443, 36 UCCRS 191.
Footnote 31. Hanover Ins. Cos. v Brotherhood State Bank (DC Kan) 482 F Supp 501, 28
UCCRS 430.
ALR3d 943.
Footnote 33. Jackson v First Nat'l Bank, Inc., 55 Tenn App 545, 403 SW2d 109, 3
UCCRS 630 (disapproved on other grounds by Vending Chattanooga, Inc. v American
Nat'l Bank & Trust Co. (Tenn) 730 SW2d 624, 4 UCCRS2d 506).
Footnote 35. Guaranty Bank & Trust Co. v Federal Reserve Bank (WD Okla) 454 F Supp
Reynolds, Inc. (CA3 NJ) 896 F2d 750, 10 UCCRS2d 1085).

Footnote 36. Guardian Life Ins. Co. v Chemical Bank (1st Dept) 47 App Div 2d 608,
363 NYS2d 820, 16 UCCRS 786.
Footnote 37. Gast v American Casualty Co., 99 NJ Super 538, 240 A2d 682, 5 UCCRS
155; Guardian Life Ins. Co. v Chemical Bank (1st Dept) 47 App Div 2d 608, 363 NYS2d
820, 16 UCCRS 786.
The mere fact that the maker entrusted his note to his attorney did not preclude the maker
from asserting as against an ordinary holder the defenses of alteration or unauthorized
signature by the attorney. Collins v Drake (Mo App) 746 SW2d 424, 7 UCCRS2d 804.
ALR3d 943.
Footnote 39. Mortimer Agency, Inc. v Underwriters Trust Co., 73 Misc 2d 970, 341
NYS2d 75, 13 UCCRS 270.
Footnote 40. Parker v Dudley (Fla App D5) 527 So 2d 240, 13 FLW 1268, 6 UCCRS2d
149, review den (Fla) 536 So 2d 243.
Footnote 41. First Federal Sav. & Loan Asso. v Alabama Nat'l Bank (Ala Civ App) 372
So 2d 350.
Footnote 42. Inventory Locator Service, Inc. v Dunn (Tenn App) 776 SW2d 523, 10
UCCRS2d 894.
Footnote 43. Hartford Acci. & Indem. Co. v American Express Co., 74 NY2d 153, 544
NYS2d 573, 542 NE2d 1090, 8 UCCRS2d 865.
Footnote 44. Fred Meyer, Inc. v Temco Metal Products Co., 267 Or 230, 516 P2d 80, 13
UCCRS 853.
609 Effect of comparative negligence or contributory negligence
View Entire Section

If the person asserting that the negligence of another precludes the other from asserting
that the instrument was forged failed to exercise ordinary care in paying or taking the
instrument and that failure substantially contributed to the loss, the loss is allocated
between the person precluded and the person asserting the preclusion according to the
extent to which the failure of each to exercise ordinary care contributed to the loss. 45
Comment: The 1990 version of Article 3 differs from the 1952 version in that it
adopts the concept of comparative negligence. If the person precluded from asserting
the forgery proves that the person asserting the preclusion failed to exercise ordinary
care and that failure substantially contributed to the loss, the loss may be allocated
between the two parties on a comparative negligence basis. In the case of a forged
indorsement, the litigation is usually between the payee of the check and the depositary
bank that took the check for collection. An example would be a case in which the
duties of Employee, a bookkeeper, include posting the amounts of checks payable to
Employer to the accounts of the drawers of the checks. Employee steals a check
payable to Employer, which was entrusted to Employee, and forges Employer's
indorsement. The check is deposited by Employee to an account in Depositary Bank
which Employee opened in the same name as Employer, and the check is honored by
the drawee bank. If Employer brings an action for conversion against the depositary
bank that took the check from the forger, the depositary bank could assert the
preclusion under Article 3 and, if the trier of fact finds that Employer failed to exercise
ordinary care in safeguarding the check and that the failure substantially contributed to
the making of the forged indorsement, Employer would be precluded from asserting
the forgery. But suppose the forger opened an account in the depositary bank in a
name identical to that of Employer, the payee of the check, and then deposited the
check to the account. The comparative negligence provision might apply. There may
be an issue whether the depositary bank should have been alerted to possible fraud
when a new account was opened for a corporation shortly before a very large check
payable to a payee with the same name is deposited. Circumstances surrounding the
opening of the account may have suggested that the corporation to which the check
was payable may not be the same as the corporation for which the account was opened.
If the trier of fact finds that collecting the check under these circumstances was a
failure to exercise ordinary care, it could allocate the loss between the depositary bank
and Employer, the payee. 46
By contrast, the prior version of the UCC protects those parties who act not only in good
faith, but also in observance of the reasonable standards of their business. 47 Thus, any
bank which takes or pays an altered check, which ordinary banking standards would
require it to refuse, cannot take advantage of the estoppel established by the prior version
of 3-406. 48 Absent this demonstration of the payor's good faith and adherence to
reasonable commercial standards, the payor may not assert that another's negligence
substantially contributed to the making of his or her unauthorized signature and that he or
she is thereby precluded from denying that the signature operates as his or her own. 49
In other words, it is necessary for the drawee or other payor to show that it exercised
good faith and reasonable commercial standards when paying the instrument, in order to
be able to assert the negligence of the drawer as an affirmative defense. 50
Footnotes
Footnote 49. Trust Co. of Georgia Bank, N. A. v Port Terminal & Warehousing Co., 153
Ga App 735, 266 SE2d 254, 29 UCCRS 587.

Footnote 50. American Title Ins. Co. v Shawmut Bank of R. I., N.A. (DC RI) 812 F Supp
301, 20 UCCRS2d 535; In re Lou Levy & Sons Fashions, Inc. (CA2 NY) 988 F2d 311,
19 UCCRS2d 1107; Mid-Atlantic Tennis Courts, Inc. v Citizens Bank & Trust Co. (DC
Md) 658 F Supp 140, 4 UCCRS2d 137; Webb Carter Constr. Co. v Louisiana Cent. Bank
(CA5 La) 922 F2d 1197, 15 UCCRS2d 196; Matco Tools Corp. v Pontiac State Bank
(ED Mich) 614 F Supp 1059, 41 UCCRS 883; Hermetic Refrigeration Co. v Central
Valley Nat'l Bank, Inc. (CA9 Cal) 493 F2d 476, 14 UCCRS 995; American Nat'l Ins. Co.
v Fidelity Bank, N. A. (CA10 Okla) 691 F2d 464, 34 UCCRS 1228; Hanover Ins. Cos. v
Brotherhood State Bank (DC Kan) 482 F Supp 501, 28 UCCRS 430; Federal Ins. Co. v
NCNB Nat'l Bank (CA11 Fla) 958 F2d 1544, 17 UCCRS2d 497, 6 FLW Fed C 467;
Apcoa, Inc. v Fidelity Nat'l Bank (CA11 Ga) 906 F2d 610, 12 UCCRS2d 158; AmSouth
Bank, N.A. v Spigener (Ala) 505 So 2d 1030, 4 UCCRS2d 115; Continental Bank v
Wa-Ho Truck Brokerage (App) 122 Ariz 414, 595 P2d 206, 26 UCCRS 101; American
Sec. Bank, N.A. v American Motorists Ins. Co. (Dist Col App) 538 A2d 736, 5
UCCRS2d 1413; Empire Moving & Warehouse Corp. v Hyde Park Bank & Trust Co.
(1st Dist) 43 Ill App 3d 991, 2 Ill Dec 753, 357 NE2d 1196, 20 UCCRS 480; Waukon
Auto Supply v Farmers & Merchants Sav. Bank (Iowa) 440 NW2d 844, 8 UCCRS2d
587; Mohr v State Bank of Stanley, 241 Kan 42, 734 P2d 1071, 3 UCCRS2d 1459;
Owensboro Nat'l Bank v Crisp (Ky) 608 SW2d 51, 30 UCCRS 240; Bank of Southern
Maryland v Robertson's Crab House, Inc., 39 Md App 707, 389 A2d 388, 24 UCCRS
702; First Nat'l Bank v Hovey, 10 Mass App 715, 412 NE2d 889, 30 UCCRS 681;
Acrometal Cos. v First American Bank (Minn App) 475 NW2d 487, 15 UCCRS2d 532;
Twellman v Lindell Trust Co. (Mo App) 534 SW2d 83, 19 UCCRS 604, 93 ALR3d 943;
Martin Glennon, Inc. v First Fidelity Bank, N.A. (App Div) 279 NJ Super 48, 652 A2d
199, 25 UCCRS2d 842, certif gr 141 NJ 95, 660 A2d 1194 and certif den 141 NJ 95, 660
A2d 1194 and app dismd 142 NJ 510, 665 A2d 1104; Federal Ins. Co. v Bank of New
York (NY Civ Ct) 2 UCCRS2d 580; American Travel Corp. v Central Carolina Bank &
Trust Co., 57 NC App 437, 291 SE2d 892, 33 UCCRS 1707, 34 UCCRS 1233, petition
den 306 NC 555, 294 SE2d 369; Mott Grain Co. v First Nat'l Bank & Trust Co. (ND) 259
NW2d 667, 23 UCCRS 104; Ed Stinn Chevrolet, Inc. v National City Bank, 28 Ohio St
3d 221, 28 Ohio BR 305, 503 NE2d 524, 2 UCCRS2d 1565, on reh, on other grounds en
banc 31 Ohio St 3d 150, 31 Ohio BR 316, 509 NE2d 945, 3 UCCRS2d 1850; Medford
Irrigation Dist. v Western Bank, 66 Or App 589, 676 P2d 329, 38 UCCRS 411; Inventory
Locator Service, Inc. v Dunn (Tenn App) 776 SW2d 523, 10 UCCRS2d 894; Exchange
Bank & Trust Co. v Kidwell Constr. Co. (Tex) 472 SW2d 117, 9 UCCRS 482, rehg of
writ of error overr (Nov 17, 1971); Seattle-First Nat'l Bank v Pacific Nat'l Bank, 22 Wash
App 46, 587 P2d 617, 25 UCCRS 821; Winkie, Inc. v Heritage Bank of Whitefish Bay,
99 Wis 2d 616, 299 NW2d 829, 31 UCCRS 163.
Even the slightest contributory negligence on the bank's part makes the defense of the
customer's negligence unavailable to the bank. New Jersey Steel Corp. v Warburton, 139
NJ 536, 655 A2d 1382, 26 UCCRS2d 14.
Practice Aids: Proof of lack of due care of bank in paying altered or forged checks.
13 Am Jur POF2d 347, Bank's failure to use ordinary care in detecting forged or
altered checks 7 et seq.
8. Theft or Loss of Instrument [610, 611]

610 Generally
View Entire Section

The UCC provision enumerating the defenses that may be asserted against a holder in
due course does not include, among such defenses, loss or theft of an instrument. 51
Thus, it has often been held that loss or theft of a negotiable instrument is not a defense
that may be asserted against a holder in due course. 52 The express provision in the
1952 version of Article 3, that a person who does not have the rights of a holder in due
course, takes the instrument subject to the defense that the person taking the instrument
or a person through whom the person taking the instrument holds the instrument acquired
it by theft 53 was not retained when Article 3 of the Code was revised in 1990.
However, if the plaintiff does not have the rights of a holder in due course, the defendant
may bar recovery by proving that the paper was lost or stolen; with respect to this issue,
the 1990 version of Article 3 of the Uniform Commercial Code continues the law under
the prior version. 54 The Code, thus, provides that in an action to enforce the obligation
of a party to pay the instrument, an obligor is not obliged to pay the instrument if the
person seeking enforcement of the instrument does not have the rights of a holder in due
course and the obligor proves that the instrument is a lost or stolen instrument. 55
Comment: The Code provision allows the issuer of an instrument, such as a cashier's
check to refuse payment in the rare case in which the issuer can prove that the
instrument is a lost or stolen instrument and the person seeking enforcement does not
have rights of a holder in due course. 56
Footnotes
Footnote 51. UCC 3-305 [1952 Rev]; UCC 3-305 [1990 Rev].
Footnote 52. Unbank Co. v Dolphin Temporary Help Services, Inc. (Minn App) 485
NW2d 332, 19 UCCRS2d 810; John Deere Co. v Boelus State Bank, 233 Neb 818, 448
NW2d 163, 10 UCCRS2d 418; Dubin v Hudson County Probation Dep't (Law Div) 267
NJ Super 202, 630 A2d 1207, 22 UCCRS2d 558; Hartford Acci. & Indem. Co. v Walston
& Co., 21 NY2d 219, 287 NYS2d 58, 234 NE2d 230, 5 UCCRS 205, reh gr 21 NY2d
1041 and adhered to 22 NY2d 672, 291 NYS2d 366, 238 NE2d 754.
Where instruments were complete and indorsed in blank, and they passed into the hands
of innocent purchasers through the negligence of those who had them in their custody,
the makers could not escape their obligations though the instruments had been stolen.
Transcontinental & Western Air, Inc. v Bank of America Nat'l Trust & Sav. Asso., 46
Cal App 2d 708, 116 P2d 791 (traveler's checks).
846.
Footnote 53. UCC -3-306(d) [1952].

611 Theft or loss before delivery
View Entire Section

The fact that a negotiable instrument never had a valid inception, but was lost by, or
stolen from, the maker or drawer before delivery is no defense to an action by a holder in
due course. 57 The defense of nondelivery of an incomplete instrument is cut off as
against a holder in due course where the instrument was lost by the maker or drawer, or
stolen from him or her, in incomplete form, and was completed by the finder or thief. 58
Footnotes
Footnote 58. Official Comment 5 to UCC 3-115 [1952], stating that under UCC
3-305, 3-407 [1952] neither nondelivery nor unauthorized completion is a defense against
a holder in due course; a holder in due course sees and takes the same paper, whether it
was complete when stolen or completed afterward by the thief, and in each case he relies
in good faith on the maker's signature; the loss should fall upon the party whose conduct
in signing blank paper had made the fraud possible, rather than upon the innocent
purchaser; this result is consistent with the theory of decisions holding the drawer of a
check stolen and afterwards filled in to be estopped from setting upon the nondelivery
against innocent party.
9. Duress and Mistake [612-614]
612 Duress generally
View Entire Section

As against a person not a holder in due course, any kind of duress may be asserted as a
defense. 59 But, the right of a holder in due course to enforce the obligation of a party
to pay a negotiable instrument is subject to a defense of duress only where the duress,

under other law, nullifies the obligation of the obligor. 60
Observation: Under the UCC, the defense of duress to an action for nonpayment of a
note enjoys an even higher status than does lack of consideration, because where the
effect of the duress is to make the obligation void, the defense is not cut off, even by a
Comment: Duress, as that term is used here, is a matter of degree and may render an
instrument void or merely voidable. For example, an instrument signed at the point of
a gun is void even in the hands of a holder in due course. However, one signed under
threat to prosecute the son of the maker for theft may be merely voidable, so the
defense is cut off. In other words, if the effect of the particular duress is to make the
obligation a nullity, the defense may be asserted against a holder in due course; but a
defense based on such duress as does not make the obligation entirely null and void is
cut off as against a holder in due course. 62
To constitute duress, there must be such compulsion as to show that the paper was not
executed as a voluntary act, 63 and the act of the party compelling obedience of another
must itself be unlawful or wrongful. 64
Illustration: Evidence that a wife who cosigned a note with her husband had been
subjected to physical beatings by, and psychological pressure from, her husband over a
three-year period that preceded the note's execution did not give rise to a reasonable
inference (1) that the husband's acts had directly caused the wife to sign the note, and
(2) that such acts constituted "duress" within Article 3. 65
A threat to exercise a legal right does not constitute duress. 66 A party does not sign a
note under duress when the party does so to avoid a lawsuit which he or she fears he or
she would lose. 67
No duress is present when a creditor states that he or she will pursue a particular remedy
which the law provides and a party signs a note in order to prevent that. 68 Thus, a
threat to enforce a valid claim held against a maker if he or she does not execute a note to
cover a different obligation does not constitute duress. 69
Also, it is not duress for a holder to threaten to sue on a promissory note as the holder has
the right to do so. 70
The refusal of a creditor to release a lien until he or she is given a promissory note for the
amount of his or her claim is not improper and does not constitute duress so as to avoid
liability on the note. 71
The fact that a note is signed to keep a brother from going into bankruptcy, because of a
possible harmful effect on his business future does not constitute duress. 72
Duress in obtaining the execution of a note is waived by voluntary renewals and

payments on the note by the maker extending over a period of several years. 73
Moreover, one who would repudiate a voidable contract obtained by duress must act
promptly or he or she will be deemed to have elected to affirm it. 74
Where the maker of a check claims that he made the check to the payee under duress, the
defense of duress would be available against the payee, but it is not available against a
bank which did not have notice of the duress. 75 Where a defense of duress in signing a
check is raised, the drawer of the check must affirmatively plead and prove that defense.
76
Observation: Negotiation is effective to transfer an instrument even if obtained by

duress. However, to the extent permitted by other law, such negotiation may be
remedy. 77
Footnotes
Footnote 59. UCC 3-305(a)(1)(ii) [1990 Rev], subjecting an instrument not in the hands
of a holder in due course to any 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.
For discussion of the effect of duress on contracts, generally, see 17A Am Jur 2d,
Contracts 234.
Footnote 60. UCC 3-305(2)(b) [1952]; UCC 3-305(a)(1)(B), 3-305(b) [1990 Rev].
Footnote 61. Quazzo v Quazzo, 136 Vt 107, 386 A2d 638, 24 UCCRS 914.
3-305 [1990 Rev].

note, 79 ALR3d 598.
Practice References Proof that promissory note was executed under economic duress
or business compulsion. 11 Am Jur POF2d 23, Promissory Note Executed Under
Economic Duress or Business Compulsion 14-27.
Footnote 63. First Sec. Bank v Bawoll (2d Dist) 120 Ill App 3d 787, 76 Ill Dec 54, 458
NE2d 193.
Footnote 64. Sulner v Traver (2d Dept) 75 App Div 2d 616, 427 NYS2d 58.
864.
Footnote 66. Marine Midland Bank, N. A. v Hallman's Budget Rent-A-Car (4th Dept)
204 App Div 2d 1007, 613 NYS2d 92.
Footnote 67. Gooding v Millet (La App 5th Cir) 517 So 2d 396.
Footnote 68. Norris v Stewart (Fla App D1) 350 So 2d 31, cert den (Fla) 362 So 2d 1055.

Footnote 69. Marine Midland Bank v Stukey (4th Dept) 75 App Div 2d 713, 427 NYS2d
123, affd 55 NY2d 633, 446 NYS2d 265, 430 NE2d 1318.
Footnote 70. Avco Fin. Servs. v Foreman-Donovan, 237 Mont 260, 772 P2d 862; Helena
Chemical Co. v Rivenbark, 45 NC App 517, 263 SE2d 305.
Footnote 71. Richardson v Office Bldgs. of Houston (Tex App Houston (14th Dist)) 704
SW2d 373.
Footnote 72. Wiesen v Short, 43 Colo App 374, 604 P2d 1191.
Footnote 73. Greenpoint Nat'l Bank v Gilbert, 237 NY 19, 142 NE 338.
As to the waiver of defenses, generally, see 555.
Footnote 74. Port Chester Electrical Constr. Corp. v Hastings Terraces, Inc., 284 App
Div 966, 134 NYS2d 656.
Annotation: Ratification of contract voidable for duress, 77 ALR2d 426.
Footnote 75. Acker v First Federal Sav. & Loan Asso. (Fla App D2) 173 So 2d 170
(decided under former law).
Footnote 77. 216.
613 Economic duress or business compulsion
View Entire Section

Economic duress or business compulsion is a defense available to the maker against the
payee. 78 It is essential to constitute economic duress that there is a threat of conduct,
such as a breach of contract, and that the threat comes from the obligee seeking to
enforce the obligation and not from a third person. 79
Illustrations: Economic duress was established by an attorney on the part of a bank

from which he derived half his income from legal services where the bank threatened
to withhold legal business, unless the attorney executed a note to cover losses the bank
incurred from a failed venture which the attorney had brought to the bank's attention.
80 Also, a threat to discharge an employee may constitute duress when the employee
is bound by an anti-competitive covenant to refrain from competing with his employer
upon the termination of his employment and at the time the employee's daughter is
hospitalized. 81
The defense of business duress or compulsion ordinarily cannot be sustained upon proof
of a demand which is lawful, or upon doing or threatening to do that which a party has a
legal right to do; business duress is not established merely by proof that consent was
secured by the pressure of financial circumstances. 82
Illustration: A creditor's declaration of intention to collect a debt or the debtor's fear

of financial ruin does not establish economic duress, as it must be shown that the
defendant acted unlawfully with respect to the alleged victim. 83
Also, the existence of financial pressure combined with unequal bargaining position is
insufficient to constitute economic duress. 84
Economic duress is not established by the fact that
a party signs a note, because of the force of his or her circumstances for which the other
party is not responsible. 85
a party is in a weak bargaining position and is under financial pressure. 86
after a judgment creditor executed upon the business of the debtor another substantial
creditor gave the judgment creditor a note for the amount due, particularly when the note
was signed after substantial negotiation and the payee had not made any threats of any
kind. 87
the creditor asserting a mechanic's lien against property of the owner agrees to release
the lien claim if the owner would execute a promissory note payable to the creditor which
would cover the unpaid balance for which the lien was claimed and other unpaid
accounts, particularly where the maker was represented by an attorney who was present
at the time of the execution of the note and several days were consumed in the
preliminary negotiations; such circumstances leading to the conclusion that the creditor
had acted in a lawful manner in asserting a claim which he or she was entitled to assert.
88
a note is signed to keep a brother from going into bankruptcy, because of a possible
harmful effect on his business future. 89
a threat is made by the payee to whom a note is given that he will do his best to interfere
with a business transaction if he is not paid his price. 90
the seller makes it clear that he or she will forfeit the buyer's earnest money if the buyer
does not complete the purchase of land. 91
the signer has a subjective belief that she was pressured into signing a document, when
the action of the signer was, in fact, voluntary. 92
a mere threat is made to break a contract, unless a promissory note is signed, unless
facts are established that show that a breach would subject the victim to irreparable harm.
93
a lender threatens to commence legal proceedings to collect the debt owed to the lender.
94

Observation: Negotiation is effective to transfer an instrument even if obtained by
duress. However, to the extent permitted by other law, such negotiation may be
remedy. 95
Footnotes
Footnote 78. Gerber v First Nat'l Bank (1st Dist) 30 Ill App 3d 776, 332 NE2d 615, 17
UCCRS 1072, 79 ALR3d 592; Gelb v Bucknell Press, Inc. (2d Dept) 69 App Div 2d
829, 415 NYS2d 89; Mancino v Friedman (Cuyahoga Co) 69 Ohio App 2d 30, 23 Ohio
Ops 3d 27, 429 NE2d 1181, motion overr; Tower Contracting Co. v Burden Bros., Inc.
(Tex Civ App Dallas) 482 SW2d 330, writ ref n r e (Nov 22, 1972); Avco Fin. Servs. v
Johnson (Utah) 596 P2d 658.

note, 79 ALR3d 598.
249, 538 NYS2d 249.
The defense of economic duress requires the proof of an unlawful or wrongful act that is
sufficiently coercive to cause a reasonable prudent person faced with no reasonable
alternative to succumb to the pressure. First Nat'l Bank & Trust Co. v Kissee (Okla) 859
P2d 502.
Footnote 80. Gerber v First Nat'l Bank (1st Dist) 30 Ill App 3d 776, 332 NE2d 615, 17
UCCRS 1072, 79 ALR3d 592.
Footnote 81. Shurtleff v Giller (Tex Civ App Waco) 527 SW2d 214.
Footnote 82. Kohen v H. S. Crocker Co. (CA5 Fla) 260 F2d 790 (decided under former
law); Aldrich & Co. v Donovan, 238 Mont 431, 778 P2d 397; Star Bank, N.A. v
Management Technologies, Inc. (Hamilton Co) 69 Ohio App 3d 147, 590 NE2d 298.
Footnote 83. Apfelblat v National Bank Wyandotte-Taylor, 158 Mich App 258, 404
NW2d 725, 4 UCCRS2d 336.
249, 538 NYS2d 249.
Footnote 85. Avco Fin. Servs. v Foreman-Donovan, 237 Mont 260, 772 P2d 862.
249, 538 NYS2d 249.
Footnote 87. Mitchell v Rothwell, 92 NC App 460, 374 SE2d 627.
Footnote 88. Tower Contracting Co. v Burden Bros., Inc. (Tex Civ App Dallas) 482

SW2d 330, writ ref n r e (Nov 22, 1972).
Footnote 89. Wiesen v Short, 43 Colo App 374, 604 P2d 1191.
Footnote 90. Smith v Lenchner, 204 Pa Super 500, 205 A2d 626, 2 UCCRS 436 (holding,
however, that the instrument was nonnegotiable, because a confession of judgment at any
term was authorized).
Footnote 91. Anziano v Appalachee Enters., Inc., 208 Ga App 760, 432 SE2d 117, 93
Fulton County D R 2045.
Footnote 92. FDIC v Rusconi (DC Me) 808 F Supp 30.
Footnote 93. Sosnoff v Carter (1st Dept) 165 App Div 2d 486, 568 NYS2d 43.
Footnote 94. Resolution Trust Corp. v Palmetto Fort of Mount Pleasant Ltd. Partnership
(DC SC) 831 F Supp 510.
Footnote 95. 215.
614 Mistake
View Entire Section

Under pre-Code law, with respect to a nonnegotiable instrument, or a negotiable

instrument held by a person who is not a holder in due course, a mistake of fact by the
maker of the instrument may be set up as a defense in an action involving the original
parties and those charged with notice. 96
Illustrations: Where an accommodation indorser thought he was backing an entirely

different note, it was a sufficient defense in an action by the payee that he signed under
that mistaken belief and that the note he intended to indorse had been paid. 97 But an
alleged mistake and want of consideration in issuing a negotiable note or bill will not
avail the makers in a suit against them by a holder in due course, or by any subsequent
holder through the holder in due course. 98 An acceptor who was sued on a bill of
exchange could not defend against the claim of an innocent holder for value before
maturity by claiming that he or she did not intend to create any liability against himself
or herself. 99
These pre-Code rules are retained under the Uniform Commercial Code, which does not
include "mistake" as one of the defenses that may be asserted against a holder in due
course, 1 but does provide, as to a person other than a holder in due course, that the right
to enforce the obligation of a party to pay a negotiable instrument is subject to 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. 2 Mistake is among these
defenses. 3 A person who signs a contractual writing, such as a note, is charged with
knowledge of its contents and cannot claim that he or she did not read it or was
inattentive to its provisions; a payee who receives a note in the mail has a right to assume
that the maker voluntarily signed and thereby consented to the note with knowledge of its
contents, and to rely upon that fact. 4
A bank is not required to honor a certified check where the certification was made
through error and the holder's position was not changed on the faith of the certification. 5
The same rule has been applied in an action against a bank as drawer of a cashier's check
which it had issued in exchange for its depositor's check upon which payment had been
earlier stopped. 6 However, the bank may not resist payment on its check, unless it
can show actual or potential injury by reason of the mistake. 7
Observation: Negotiation is effective to transfer an instrument, although the

negotiation is obtained by mistake of any kind. 8
Where the mistake is unilateral, and arises largely due to the negligence of the maker
asserting it, it will not operate as a defense to enforcement of a note against the maker. 9
A mistake as to expectation is not a mistake of fact, and therefore, cannot constitute a
mutual mistake of fact that gives an obligor the right to avoid his liability. 10
Illustration: The fact that the parties to the transaction believed that a security
interest would be perfected thereafter by filing does not constitute a mistake of fact
when this was never done, as it was merely a mistake as to future expectations. 11
Footnotes
Footnote 96. Hardison v Davis, 131 Cal 635, 63 P 1005.
Footnote 97. Hardison v Davis, 131 Cal 635, 63 P 1005.
Footnote 98. Poorman v D. O. Mills & Co., 39 Cal 345.
Footnote 99. First Nat'l Bank v Trognitz, 14 Cal App 176, 111 P 402.
Footnote 1. UCC 3-305 [1952]; UCC 3-305(a)(1) [1990 Rev], 3-305(b) [1990 Rev].
For discussion of the effect of mistake on a contract, see 17A Am Jur 2d, Contracts
213-229.
Forms: AnswerDefensePartial want of considerationMutual mistake in amount of

note. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 23.
Footnote 4. Copeland Planned Futures, Inc. v Obenchain, 9 Wash App 32, 510 P2d 654.
Footnote 5. Metropolitan Life Ins. Co. v Bank of United States, 259 NY 365, 182 NE 18.
Annotation: Right of bank certifying check or note by mistake to cancel, or avoid

effect of, certification, 25 ALR3d 1367.
Footnote 6. Rosenbaum v First Nat'l City Bank (1st Dept) 13 App Div 2d 100, 213
NYS2d 513, affd 11 NY2d 845, 227 NYS2d 670, 182 NE2d 280, reh den 11 NY2d
1017.
Footnote 7. Rosenbaum v First Nat'l City Bank (1st Dept) 13 App Div 2d 100, 213
NYS2d 513, affd 11 NY2d 845, 227 NYS2d 670, 182 NE2d 280, reh den 11 NY2d
1017.
Footnote 8. UCC 3-207(i)(b) [1952], discussed in 216.
Footnote 9. Berry v Atlas Metals, Inc., 152 Ga App 437, 263 SE2d 179, 28 UCCRS 731
(disapproved on other grounds by Deep South Services, Inc. v Wade, 248 Ga 80, 281
SE2d 561, 31 UCCRS 1645).
Footnote 10. Mooney v GR & Assocs. (Utah App) 746 P2d 1174, 72 Utah Adv Rep 43, 5
UCCRS2d 1419.
Footnote 11. Mooney v GR & Assocs. (Utah App) 746 P2d 1174, 72 Utah Adv Rep 43, 5
UCCRS2d 1419.
10. Discharge [615, 616]
615 In insolvency proceedings
View Entire Section

Under Article 3 of the Uniform Commercial Code, the right to enforce the obligation of a
party to pay an instrument is subject to a defense of the obligor based on discharge of the
obligor in insolvency proceedings. 12
Comment: The Code specifically states that the defense of discharge in insolvency
proceedings is not cut off when the instrument is purchased by a holder in due course.
13
Insolvency proceedings include any assignment for the benefit of creditors or other
proceedings intended to liquidate or rehabilitate the estate of the person involved. 14
The reference to insolvency proceedings in Article 3 includes bankruptcy whether or not
the debtor is insolvent. 15
Footnotes
Footnote 12. UCC 3-305(2)(d) [1952]; UCC 3-305(a)(1)(iv) [1990 Rev].

Forms: AnswerDefenseDischarge in bankruptcy. 6A Am Jur Pl & Pr Forms (Rev),

3-305 [1990 Rev].
As to a defense based on a discharge other than in insolvency proceedings, see 616.
616 Other than in insolvency proceedings
View Entire Section

With respect to discharges other than in insolvency proceedings, the 1990 version of
Article 3 of the Uniform Commercial Code deleted the provision in the 1952 version that
a holder in due course does not take the instrument free of the defense of any such
discharge of which the holder has notice when taking the instrument. 16 Thus, the 1990
version of Article 3 does not express discharge as a defense, and does not include it in the
Code provision that, except as to a holder in due course, the right to enforce the
obligation of a party to pay a negotiable instrument is subject to a defense of the obligor
stated in Article 3. 17 On the other hand, the Code does provide that, with the exception
of discharge in insolvency proceedings, a discharge of the obligation of a party is not
effective against a person acquiring the rights of a holder in due course of the instrument
without notice of the discharge. 18 The Code also reiterates this principle by providing
that notice of discharge of a party, other than discharge in an insolvency proceeding, is
not notice of a defense, but discharge is effective against a person who became a holder
in due course with notice of the discharge. 19
When an instrument is paid in whole or in part before maturity, it is the duty of the party
making payment to have the payment indorsed or to require surrender of the instrument,
and if such party omits these precautions and the instrument is transferred before
maturity to a holder in due course without notice of the payments, he or she may not avail
himself or herself of the defense of prior payment against such a holder. 20 A
promissory note as a negotiable instrument, thus, entitles a holder in due course to
payment, irrespective of the payor's claim that he or she has discharged his or her
obligation by payment to someone else. 21
If there is payment to the holder or the holder's authorized agent which discharges in
whole or in part the obligation of a negotiable instrument, such payment is a defense
against the holder to whom or to whose authorized agent the payment was made, or
against a subsequent holder who does not have the rights of a holder in due course,
including one who takes the instrument after maturity without notice of a prior payment.
22
A former holder who reacquires an instrument may cancel indorsements made after the
reacquirer first became a holder of the instrument. An indorser whose indorsement is
canceled is discharged and the discharge is effective against any subsequent holder
including a holder in due course. 23
Footnotes
Footnote 16. UCC 3-305(2)(e) [1952].
As to the rights of a holder in due course, generally, see 247.
As to a discharge in insolvency being a defense against a holder in due course, see 615.
Footnote 19. UCC 3-302(b)[1990 Rev].
Footnote 20. Trustees of Internal Imp. Fund v Lewis, 34 Fla 424, 16 So 325; Haug v
Riley, 101 Ga 372, 29 SE 44 (superseded by statute on other grounds as stated in Ballard
v Frey, 179 Ga App 455, 346 SE2d 893) and (superseded by statute on other grounds as
stated in Northeast Factor & Discount Co. v Mortgage Invest., Inc., 107 Ga App 705, 131
SE2d 221); Rogers v Gallagher, 49 Ill 182; Williams v Keyes, 90 Mich 290, 51 NW 520;
Rice v Jones, 103 NC 226, 9 SE 571; Ehrlich v Jennings, 78 SC 269, 58 SE 922;
Harrison v Edwards, 12 Vt 648; Perkins v Hall, 123 W Va 707, 17 SE2d 795.
Footnote 21. International Center of Americas v Chemical Bank (Fla App D3) 384 So 2d
725, 29 UCCRS 920.
Footnote 22. Bank of Willard v Pennsylvania & Kentucky Fire Brick Co., 175 Ky 192,
194 SW 110; Edney v Willis, 23 Neb 56, 36 NW 300; Mansfield v Wade, 208 NC 790,
182 SE 475; Clayton v Read House Co., 24 Tenn App 149, 141 SW2d 916.
Forms: AnswerDefensePayment of note. 5 Am Jur Pl & Pr Forms (Rev), Bills and

Notes, Form 121.
AnswerDefenseObligation for which check given discharged by payment. 6A Am

3:64.
AnswerDefensePayment of note. 6A Am Jur Pl & Pr Forms (Rev), Commercial


11. Other Defenses [617-621]
617 Failure to countersign
View Entire Section

If a negotiable instrument requires, as a condition to payment, a countersignature by a

person whose specimen signature appears on the instrument, the failure of that person to
countersign the instrument is a defense to the obligation of the issuer. 24
Observation: This Uniform Commercial Code provision applies to instruments, such

as traveler's checks. Suppose a thief steals a traveler's check and cashes it by skillfully
imitating the specimen signature so that the countersignature appears to be authentic.
The forged countersignature is a defense to the obligation of the issuer to pay the
instrument, but this defense may not be asserted against a holder in due course.
Whether a holder has notice of the defense is a factual question. If the
countersignature is a very bad forgery, there may be notice. But if the merchant or
bank cashed a traveler's check and the countersignature appeared to be similar to the
specimen signature, there might not be notice that the countersignature was forged.
Thus, the merchant or bank could be a holder in due course. 25
Footnotes
As to traveler's checks as negotiable instruments, see 49.
618 Rescission of negotiation
View Entire Section

Under certain circumstances and to the extent permitted by other law, the negotiation of
an instrument may be rescinded or may be subject to other remedies, but those remedies
instrument in good faith and without knowledge of facts that are a basis for rescission or
other remedy. 26 With the exception of a holder in due course and a party who pays an
instrument in good faith and without knowledge of the facts on which the rescission or
any other remedy would be based, all persons are, thus, subject to the rescission of
negotiation where permitted under the applicable law. 27
Footnotes
619 Modification of obligation by separate agreement
View Entire Section

Article 3 of the Uniform Commercial Code provides that, subject to the applicable law
regarding exclusion of proof of contemporaneous or previous agreements, the obligation
of a party to an instrument to pay the instrument may be modified, supplemented, or
nullified by a separate agreement of the obligor and a person entitled to enforce the
instrument, if the instrument is issued or the obligation is incurred in reliance on the
agreement or as part of the same transaction giving rise to the agreement. 28 To the
extent any obligation of a party to an instrument to pay the instrument is modified,
supplemented, or nullified by an agreement under the Code, the agreement is a defense to
the obligation. 29
Comment: A person might be induced to sign an instrument under an agreement that

the signer will not be liable on the instrument, unless certain conditions are met.
Suppose X requested credit from Creditor, who is willing to give the credit only if an
acceptable accommodation party will sign the note of X as comaker. Y agrees to sign
as comaker on the condition that Creditor also obtain the signature of Z as comaker.
Creditor agrees and Y signs as comaker with X. Creditor fails to obtain the signature of
Z on the note. While Y would ordinarily be obliged to pay the note, the agreement
modifies the terms of the note by stating a condition to the obligation of Y to pay the
note. This case is essentially similar to a case in which a maker of a note is induced to
sign the note by fraud of the holder. Although the agreement that Y not be liable on
the note, unless Z also signs may not have been fraudulently made, a subsequent
attempt by Creditor to require Y to pay the note in violation of the agreement is a bad
faith act. Article 3, in treating the agreement as a defense, allows Y to assert the
agreement against Creditor, but the defense would not be good against a subsequent
holder in due course of the note that took it without notice of the agreement. If there
cannot be a holder in due course under the Code, a subsequent holder that took the note
in good faith, for value and without knowledge of the agreement would not be able to
enforce the liability of Y. This result is consistent with the risk that a holder not in due
course takes with respect to fraud in inducing issuance of an instrument. 30
If non-Code law permits an obligor to raise the defense of an external modifying

agreement that modifies, supplements, or nullifies the liability arising from a written
contract, that defense may thus be raised against any person who does not have the rights

of a holder in due course. 31
Footnotes
Footnote 28. 131.
620 Payment that violates restrictive indorsement
View Entire Section

The provision in Article 3 governing restrictive indorsements states that, in an action to

enforce the obligation of a party to pay an instrument, the obligor has a defense if
payment would violate an indorsement to which the statute applies and the payment is
not permitted by the statute. 32
Comment: This provision allows a restrictive indorsement to be used as a defense by

a person obliged to pay the instrument if that person would be liable for paying in
violation of the indorsement. 33
When suit is brought against any party to enforce an obligation to pay an instrument, it is,
thus, a valid defense to show that the payment demanded by the plaintiff would violate an
indorsement coming within the scope of the statute and that the payment to the plaintiff
was prohibited by that statute. 34
The fact that a restrictive indorsement cannot be read, because it was stamped and the
stamping smeared does not free the indorsee from its terms, as inquiry would have led to
full disclosure of those terms. 35
Footnotes
Footnote 35. Larry's Mobile Homes, Inc. v Robins Federal Credit Union, 161 Ga App
822, 288 SE2d 800.

621 Breach of warranty
View Entire Section

If a drawee accepts a draft as to which the person obtaining acceptance makes the
specified warranties, breach of warranty is a defense to the obligation of the acceptor. 36
Comment: With respect to presentment of an accepted draft to the acceptor, there is

no warranty with respect to alteration or knowledge that the signature of the drawer is
unauthorized. Those warranties were made to the drawee when the draft was presented
for acceptance, and breach of that warranty is a defense to the obligation of the drawee
as acceptor to pay the draft. 37
Footnotes
C. Claims in Recoupment and Claims to an Instrument [622-626]
Research References
UCC 3-306 [1952]
UCC 3-305, 3-306 [1990 Rev]
ALR Digest: Bills and Notes 236; Uniform Commercial Code 1 et seq.
ALR Index: Bills and Notes; Checks and Drafts; Counterclaim and Setoff; Uniform
Commercial Code
1. Claims in Recoupment [622-625]
622 Generally
View Entire Section

The 1952 version of the Uniform Commercial Code (UCC) did not regulate the subject of
recoupment or counterclaims, but the 1990 version of Article 3 does regulate
recoupment; the counterclaim practice under the revised Article 3 continues as under the
pre-Code law. 38
The 1990 version of Article 3 of the Uniform Commercial Code provides that the right to
enforce the obligation of a party to pay a negotiable instrument is subject to a claim in
recoupment of the obligor against the original payee of the instrument if the claim arose
from the transaction that gave rise to the instrument. 39 Thus, by virtue of the
recoupment provision, a buyer may assert a breach-of-warranty claim to reduce his or her
liability on a note given for the purchase price. 40 This provision partly codifies
pre-Code decisions holding that the maker of an instrument who is sued by the payee or
the payee's assignee may assert matters that properly constitute a counterclaim. 41
Comment: The 1990 version of Article 3 employs the term "recoupment" in place of
the phrase "failure of consideration," because that phrase does not have a consistent
meaning in the various courts. 42
In limiting such claims to those arising from the transaction that gave rise to the
instrument, the Code provision rejects decisions allowing the obligor to use any debt or
other claim, no matter how unrelated to the instrument, to offset the amount owed on the
instrument. 43
Comment: Under current judicial authority and non-UCC statutory law, there will
be many cases in which a transferee of a note arising from a sale transaction will not
qualify as a holder in due course, and while it is reasonable to provide that the buyer
should not be denied the right to assert claims arising out of the sale transaction, it is
not reasonable to require the transferee to bear the risk that wholly unrelated claims
may also be asserted. 44 The determination of whether a claim arose from the
transaction that gave rise to the instrument is determined by law other than Article 3,
and thus, may vary as local law varies. 45
The assertion of claims in recoupment is subject to additional limitations. Only certain

claims may be asserted against a holder in due course, 46 and a claim in recoupment
against the original payee may be asserted against a transferee of the instrument only to
reduce the amount owing on the instrument at the time the action is brought. 47
Footnotes
As to the distinction between a claim in recoupment and a defense, see 623.
Footnote 41. Thurgood v Spring, 139 Cal 596, 73 P 456 (involving a counterclaim, in an
action by the assignee of a vendor of real property on a promissory note given by the
vendee, for breaches of covenants implied by law in the deed).

Footnote 46. 624
Footnote 47. 625.
623 Distinction between claim in recoupment and defense
View Entire Section

Although it treats them essentially the same, 48 the Uniform Commercial Code makes a
distinction between defenses to the obligation to pay a negotiable instrument and claims
in recoupment by the maker or drawer that may be asserted to reduce the amount payable
Comment: The distinction between a claim in recoupment and a defense is

illustrated by the following example: Buyer issues a note to the order of Seller in
exchange for a promise of Seller to deliver specified equipment. If Seller fails to
deliver the equipment or delivers equipment that is rightfully rejected, Buyer has a
defense to the note, because the performance that was the consideration for the note
was not rendered. But suppose Seller delivered the promised equipment and it was
accepted by Buyer. The equipment, however, was defective. Buyer retained the
equipment and incurred expenses with respect to its repair. In this case, Buyer does
not have a defense of nonperformance of consideration: Seller delivered the
equipment, the equipment was accepted, and Buyer is obliged to pay the price of the
equipment which is represented by the note. But Buyer may have a claim against
Seller for breach of warranty, which may be asserted against Seller as a claim in
recoupment to reduce the amount owing on the note. If Seller negotiates the note to
Holder and Holder had notice of Buyer's warranty claim at the time the note was
negotiated, Holder is not a holder in due course and Buyer may assert the claim against
Holder but only as a claim in recoupment. 50
Footnotes
Footnote 50. Official Comment 3 to UCC 3-305 [1990 Rev], further stating that the
result under UCC 3-305(a)(3)[1990 Rev] is consistent with the result reached under the
1952 version of Article 3, but the rules for reaching the result are stated differently: the

rationale under the 1952 version was failure of consideration, but this rationale does not
distinguish between cases in which the seller fails to perform and those in which the
buyer accepts the performance of seller but makes a claim against the seller, because the
performance is faulty; the term "failure of consideration" is subject to varying
interpretations and is not used in the 1990 version of Article 3, the use of the term "claim
in recoupment" in UCC 3-305(a)(3) [1990 Rev] is a more precise statement of the
nature of a buyer's right.
As to when a claim in recoupment may be asserted against a holder in due course, see
624.
624 Assertion against holder in due course
View Entire Section

Under pre-Code law, where a negotiable instrument or bill of exchange was transferred in
good faith, and on good consideration, before maturity, the holder was not subject to any
setoff existing against any prior party. 51 The Uniform Commercial Code retains this
rule, but permits a claim in recoupment to be asserted against a holder in due course if the
claim is against the holder; specifically, the Code provides that the right of a holder in
due course to enforce the obligation of a party to pay the instrument is not subject to
claims in recoupment against a person other than the holder. 52
Comment: It is not relevant whether Seller is or is not a holder in due course of the
note or whether Seller knew or had notice that Buyer had the warranty claim; the
holder-in-due-course doctrine cannot be used to allow Seller to cut off a warranty
claim that Buyer has against Seller, and the above Code provision specifically covers
this point by stating that a holder in due course is not subject to a claim in recoupment
against a person other than the holder. But if Seller negotiates the note to Holder, and
Holder had no notice of Buyer's claim and otherwise qualifies as a holder in due
course, Buyer may not assert the claim against Holder. 53
Footnotes
Footnote 51. McKenney v Ellsworth, 165 Cal 326, 132 P 75.
625 As assertable only to reduce amount owing on instrument
View Entire Section

A claim in recoupment of the obligor against the original payee of a negotiable

instrument may be asserted against a transferee of the instrument only to reduce the
amount owing on the instrument at the time the action is brought. 54
Comment: If the claim is less than the unpaid amount of the instrument, the obligor
owes the difference to the transferee. If the warranty claim is more than the unpaid
amount of the instrument, the buyer owes nothing to the transferee, but the obligor
cannot recover the unpaid amount of the claim from the transferee, and if the obligor
has already partially paid the instrument, the obligor is not entitled to recover the
amount paid; the claim can be used only as an offset to the amount owing on the
instrument. 55
Footnotes
2. Claims to an Instrument [626]
626 Generally
View Entire Section

A person taking an instrument, other than a person having the rights of a holder in due
course, is subject to a claim of a property or possessory right in the instrument or its
proceeds, including a claim to rescind a negotiation and to recover the instrument or its
proceeds. A person having the rights of a holder in due course takes free of the claim to
the instrument. 56
Comment: This section expands on the reference to "claims to" the instrument
mentioned in the corresponding sections in the 1952 version of Article 3 of the
Uniform Commercial Code. Claims covered by this section in the 1990 version
include not only claims to ownership, but also any other claim of a property or
possessory right. It includes the claim to a lien or the claim of a person in rightful
possession of an instrument who was wrongfully deprived of possession. Also
included, is a claim for rescission of a negotiation of the instrument by the claimant.
Claims to an instrument are different from claims in recoupment referred to elsewhere
in Article 3. 57
Practice guide: The Code does not affect pre-Code judicial procedure so that the
practice governing the joinder of plaintiffs in the alternative and interpleader may often
be resorted to in order to obtain a judicial determination as to the validity of a claim to
an instrument or its proceeds. 58
Caution: Under the 1952 version of Article 3, a person other than one having the
rights of a holder in due course took a negotiable instrument subject to all valid claims
to it on the part of any person, 59 which included claims of legal title and all liens,
equities, and all other claims of right against the instrument or its proceeds. 60
Footnotes
As to rights of a holder in due course, see 238.
Footnote 57. Official Comment to UCC 3-306 [1990 Rev], referring to UCC 3-202(b)
[1990 Rev], with respect to claims for rescission, and to UCC 3-305(a)(3) [1990 Rev],
with respect to claims in recoupment.
Footnote 59. UCC 3-306 [1952].
XIII. ACTIONS [627-684]
Research References
UCC 1-106, 1-201; UCC 3-201, 3-803 [1952]; UCC 3-119, 3-203, 3-316 [1990
Rev]
1 Anderson, Uniform Commercial Code 3d 1-106:3, 1-106:5, 1-106:11; 5A Anderson,
Uniform Commercial Code 3d 3-201:25, 3-201:26, 3-201:28; 6 Anderson, Uniform
Commercial Code 3d 3-305:173; 6A Anderson, Uniform Commercial Code 3d [Rev]
3-203:11, 3-305:15
627 Generally
View Entire Section


Any right or obligation declared by the Uniform Commercial Code (UCC) is enforceable
by action, unless the provision declaring it specifies a different and limited effect. 61
Definition: The term "action," as used to connote a judicial proceeding, includes

recoupment, counterclaim, setoff, suit in equity, and any other proceeding in which
rights are determined. 62
Remedies provided in the UCC are to be liberally administered to the end that the
aggrieved party may be put in as good a position as if the other party had fully
performed, but neither consequential, nor special, nor penal damages may be had, except
as specifically provided in the UCC or by other rule of law. 63
Observation: The foregoing declaration of remedies under the UCC is a restatement

of the common-law theory of contract damages; 64 to the extent permitted by the
UCC, the parties may decide to specify the remedy for breach, such as by agreeing to
submit the matter to arbitration or to limit the damages which are recoverable. 65
The UCC does not purport to alter any procedural requirements of the forum state. 66
However, Article 3 of the UCC, which governs negotiable instruments, contains
provisions concerning various procedural matters, including:
(1) the applicable periods of limitations; 67
(2) the right of a person not in possession of a lost or stolen instrument to sue on the
instrument; 68
(3) the right of a defendant sued on an instrument to vouch in a third party who might be
answerable over to the defendant; 69 and
(4) the burden of establishing the validity of signatures on instruments. 70
Footnotes
As to setoff, counterclaim, and recoupment, see 631.
As to defenses, claims in recoupment, and related claims or grounds for relief, generally,
see 546 et seq.
As to actions to compel indorsement of instruments, see 628.
As to rescission, injunctive relief, and other remedies for improper negotiation of an


Footnote 66. 1 Anderson, Uniform Commercial Code 1-106:11.
Footnote 68. 303.
Footnote 70. 659.
628 Action to compel indorsement; suit without indorsement
View Entire Section

Where the holder of an instrument which is not then payable to bearer transfers it for
value, the transferee has the specifically enforceable right to have the unqualified
indorsement of the transferor unless it is otherwise agreed. 71 By obtaining an
indorsement which is missing from an order instrument by means of an action for specific
performance, the transferee may become the holder of the instrument, 72 who is thereby
empowered to further transfer or negotiate it. 73
Observation: The right to obtain an unqualified indorsement may be barred by an

express agreement of the parties; 74 such an agreement also may be implied, as where
a written assignment makes it clear that the transferee is to receive merely a quitclaim
interest of whatever right, title, and interest the assignor has in a note. 75
When there is no proper indorsement of an instrument, but legal title is nonetheless

transferred, the owner of the paper is merely a transferee and not a holder. 76
Nonetheless, the transferee acquires legal and not merely equitable title. 77 Furthermore,
the transfer of an instrument vests in the transferee such rights as the transferor had
therein, 78 including any right of the transferor to enforce the instrument. 79 Thus, the
transferee of commercial paper may bring suit on the paper, even though an indorsement
is lacking. 80
Footnotes
Footnote 71. 243.
As to the necessity of an indorsement to the negotiation of order paper, see 214.
As to transfers for value, see 207 et seq.

Footnote 73. 203.
As to transfer of title to an instrument by assignment, see 210 et seq.
Footnote 76. American Nat'l Bank & Trust Co. v St. Joseph Valley Bank, 180 Ind App
546, 389 NE2d 379, 26 UCCRS 1174, reh den 180 Ind App 553, 391 NE2d 685;
Ballengee v New Mexico Fed. Sav. & Loan Ass'n, 109 NM 423, 786 P2d 37, 11
UCCRS2d 124.
As to the effect of a transfer, see 202.
629 Action on instrument or original obligation
View Entire Section

Ordinarily, where an action is brought by the payee or indorser of a negotiable

instrument, it is brought on the instrument itself; however, where the instrument is
dishonored, the holder of a note taken for an underlying contractual obligation has a
choice of suing on the note itself or on the contract. 81
Observation: Unless otherwise agreed, if a note, an uncertified check, or some other

negotiable instrument on which a bank is not liable as issuer or maker is taken for an
obligation, the obligation is suspended until payment or dishonor to the same extent the
obligation would be discharged if an amount of money equal to the amount of the
instrument were taken. 82 If the instrument is paid, the obligation is permanently
discharged, but if it is dishonored and the obligee of the obligation for which the
instrument was taken is the person entitled to enforce the instrument, the obligee may
enforce either the instrument or the obligation. 83
If the obligee is the person entitled to enforce the instrument but no longer has possession
of it, because it was lost, stolen, or destroyed, the obligation may not be enforced to the
extent of the amount payable on the instrument; to that extent, the obligee's rights against
the obligor are limited to enforcement of the instrument. 84
Comment: The foregoing provision applies to cases in which a check given for an
obligation was stolen from the payee, the payee's signature was forged, and the forger
obtained payment, and to cases in which a creditor takes a check of the debtor in
payment of an obligation, the creditor then loses the check, and the debtor refuses to
issue a replacement check. 85
Footnotes
Footnote 81. O'Neill v Steppat (SD) 270 NW2d 375, 24 UCCRS 1214.
A tendered check is a conditional payment only, and the underlying obligation is revived
upon the dishonor of the instrument. Rains v Lewis, 20 Wash App 117, 579 P2d 980.
Footnote 82. 139.
Footnote 83. 139.
As to the right of a person not in possession of a lost or stolen instrument to sue on the
630 Joinder and splitting of causes of action
View Entire Section

The rules applicable in civil suits, typically, allow the joinder of two or more causes of
action arising out of the same transaction or transactions. 86 Thus, for example, one
having the right to sue on a promissory note, or on the original indebtedness, such as a
book account or an account stated, may properly join these causes of action in one
complaint; the two claims are not inconsistent, and no election is required if but one
recovery is sought. 87 Likewise, no misjoinder is made by joining in one action the
principal obligor and a guarantor of the obligation, since the causes of action arise out of
the same transaction or transactions connected with the same subject matter and require
the same proof against all of the defendants. 88
The person entitled to bring a single cause of action or an entire and indivisible demand
on a bill or note, generally, cannot divide or split that cause of action or demand, so as to
make it the subject of several actions. 89 All installment payments on a note, which are
due at the time an action on the note is commenced, should be sought in a single action,
since recovery of one installment may bar the recovery of other installments which are
then due. 90 However, an action on a mortgage securing notes payable at different

times, which is brought before some of the notes are due, is not a bar to a subsequent
action on the later notes. 91
The fact that the relief sought in an action may be partly legal and partly equitable is not
decisive of the question or whether there are one or two causes of action; for example,
where the maker of a note secured by a mortgage fails to pay it, the holder's remedy is
partly legal and partly equitable, and if a court can grant both legal and equitable relief in
one action, only one cause of action arises. 92
Footnotes
Footnote 86. 1 Am Jur 2d, Actions 89
As to joinder of causes of action, see 1 Am Jur 2d, Actions 81 et seq.
Footnote 87. Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871; Blackshear
Mfg. Co. v Harrell, 191 Ga 433, 12 SE2d 328, reh den (Dec 13, 1940); Republic Nat'l
Bank v Strealy, 163 Tex 36, 350 SW2d 914, rehg of cause overr (Dec 6, 1961).
Footnote 88. Arcady Farms Milling Co. v Wallace, 242 NC 686, 89 SE2d 413, 53
ALR2d 517.
As to the joinder of parties plaintiff in actions on bills and notes, see 646.
As to the joinder of parties defendant, see 647.
As to joinder of parties, generally, see 59 Am Jur 2d, Parties 92 et seq.
Footnote 89. Grue v Hensley, 357 Mo 592, 210 SW2d 7; Blake v Weiden, 291 NY 134,
51 NE2d 677, 149 ALR 1050.
As to splitting causes of action, generally, see 1 Am Jur 2d, Actions 110 et seq.
Footnote 90. Grue v Hensley, 357 Mo 592, 210 SW2d 7.
In case of default in the payment of a note containing an acceleration clause, the entire
unpaid balance becomes due absolutely upon default and should be sued for in one
action. Banzer v Richter, 68 Misc 192, 123 NYS 678, affd 146 App Div 913, 131 NYS
1103.
Footnote 91. Anderson v Pilgram, 30 SC 499, 9 SE 587.
Footnote 92. American Sav. & Loan Ass'n v Burghardt, 19 Mont 323, 48 P 391.
631 Setoff, counterclaim, and recoupment
View Entire Section

Distinct from the question of whether Article 3 of the Uniform Commercial Code (UCC)
permits the assertion of certain defenses and adverse claims against a plaintiff suing on
commercial paper, is the question of whether the procedural law of the forum state
permits the assertion of certain matters as setoffs or counterclaims; the latter question is
not regulated by the UCC. 93
Observation: The pre-1990 version of the UCC does not purport to regulate either
recoupment or counterclaims, leaving those matters to be governed by pre-UCC law;
the 1990 Revision of the UCC likewise does not regulate counterclaims, but does
contain a recoupment provision. 94
A claim in recoupment of the obligor against the original payee may be asserted against
one seeking enforcement of an instrument, if the claim arose from the transaction that
gave rise to the instrument, to reduce the amount owing on the instrument at the time the
action is brought. 95 However, a claim in recoupment against a person other than the
holder is not available where the right to enforce the instrument is that of a holder in due
course. 96
Footnotes
As to defenses, claims in recoupment, and related claims or grounds for relief under
Article 3 of the UCC, see 546 et seq.
As to setoff, generally, see 20 Am Jur 2d, Counterclaim, Recoupment, and Setoff 32.
As to counterclaims, generally, see 20 Am Jur 2d, Counterclaim, Recoupment, and

Setoff 24 et seq.
The distinction between a setoff and recoupment is that a setoff may involve a claim
which is extrinsic to that out of which the plaintiff's claim arises, whereas recoupment in
involved when a defendant seeks to reduce his or her liability by a demand which grows
out of and forms a part of the contract in which the claim of the plaintiff has originated.
United Overseas Bank v Veneers, Inc. (DC Md) 375 F Supp 596, 14 UCCRS 1349, 14
UCCRS 1364.
B. Time For Commencement of Action [632-640]

Research References
UCC 3-122 [1952]; UCC 3-118, 3-119 [1990 Rev]
ALR Digest: Limitation of Actions 1, 73 et seq., 118 et seq.
ALR Index: Bills and Notes; Checks and Drafts; Limitation of Actions; Uniform
Commercial Code
5 Am Jur Pl & Pr Forms (Rev) Bills and Notes, Forms 41, 42
5A Anderson, Uniform Commercial Code 3d 3-122:4, 3-122:6; 6A Anderson,
Uniform Commercial Code 3d [Rev] 3-118:3, 3-118:6
632 Generally
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) does not contain any
statute of limitations governing suits on commercial paper, and therefore, non-UCC
statutes determine which period of limitations is applicable. 97 However, the 1990
Revision of the UCC sets forth specific periods of limitations which are applicable in
actions to enforce obligations arising under negotiable instruments, 98 as well as in suits
for conversion, breach of warranty, and other actions. 99
A section of the pre-1990 version of the UCC 1 declares when causes of action against
various parties to a negotiable instrument accrue. 2 Under that section, a cause of action
against a maker or acceptor of a time instrument accrues on the day after its maturity. 3
Comment: The 1990 Revision of the UCC does not contain a separate section
similar to the provisions of the pre-1990 version which define when a cause of action
accrues on an instrument; rather, accrual of a cause of action is stated in various
sections dealing with the obligations of parties to an instrument. 4
A default does not necessarily start the running of the applicable statute of limitations as
to the entire debt; rather, in the absence of an acceleration clause, the statute begins to
run only as to the installment or interest which is in default. 5 Where a note provides
that it is to become due and payable immediately, at the option of the payee, upon default
in the payment of any installment, the statute of limitations does not begin to run upon
the maker's default on an installment; instead, the applicable period of limitations starts
from the time that the payee elects to exercise the option to accelerate. 6
Footnotes
In Texas, the four-year statute of limitations applicable to actions for debt generally
covered actions brought on negotiable instruments. Leinen v Buffington's Bayou City
Service Co. (Tex App Houston (14th Dist)) 824 SW2d 682 (decided prior to the adoption
of the 1990 Revision of the UCC in Texas).

The four-year statute of limitations applicable to common-law conversion actions applied
to a suit alleging that a bank was liable for conversion for paying a check on a forged
indorsement. Palmer Mfg. & Supply v BancOhio Nat'l Bank (Clark Co) 93 Ohio App 3d
17, 637 NE2d 386, 25 UCCRS2d 190, dismd, motion overr 69 Ohio St 3d 1488, 635
NE2d 43 (noting that the 1990 Revision of the UCC, which contains a three-year statute
of limitations for conversion and leaves tolling issues to other laws, had not yet been
adopted by Ohio when the case arose).
As to statutes of limitations, generally, see 51 Am Jur 2d, Limitation of Actions 1 et

seq.
As to the periods of limitations applicable to actions on negotiable instruments under the

1990 Revision of the UCC, see 634.
Footnote 98. 634.
Footnote 99. 636.
Footnote 1. UCC 3-122 [1952].
Footnote 3. 191.
Footnote 5. Becker v Lammers, 193 Neb 839, 229 NW2d 557.
The statute of limitations begins to run on an installment obligation when each

installment falls due. Toomey v Cammack (Dist Col App) 345 A2d 453.
As to the effect of an acceleration clause on the time of payment of an instrument, see

110.
Footnote 6. Kehoe v Lambert (Tex App Houston (14th Dist)) 633 SW2d 576, writ ref n r
e (Sep 15, 1982).
633 Accrual of action on demand instrument
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) specifies that a cause of
action against a maker or an acceptor of a demand instrument accrues on the date of the
instrument or, if no date is stated, on the date of its issue. 7

Comment: The 1990 Revision of the UCC does not contain a separate section
similar to the foregoing provision defining when a cause of action accrues on an
instrument; rather, accrual of a cause of action is stated in various sections dealing with
the obligations of parties to an instrument. 8
Thus, an action to recover on a demand promissory note executed in 1966 and presented
for payment in 1976 was barred by the applicable six-year statute of limitations, where
the instrument contained no due date and, therefore, a cause of action accrued thereon on
the date of its issue. 9
No demand normally need be made prior to the filing of an action on a demand

instrument, unless a special statute so provides. 10 However, where the transaction
shows an intent that the cause of action is not to accrue until actual demand, the court
will give effect to that intention. 11 Likewise, where a note provides that it is payable on
demand after the happening of a specified event, the statute of limitations does not begin
to run upon the execution and delivery of the note. 12
Footnotes
Footnote 7. UCC 3-122(1)(b) [1952].
Footnote 9. Woodall v Hixon, 154 Ga App 844, 270 SE2d 65, revd on other grounds 246
Ga 758, 272 SE2d 727 and subsequent app 157 Ga App 120, 276 SE2d 912.
Where five notes were payable on demand and were dated approximately two weeks
prior to their execution, the cause of action on the notes accrued on the stated date of the
notes. Cantonwine v Fehling (Wyo) 582 P2d 592, 24 UCCRS 904 (criticized on other
grounds by Stanbury v Larsen (Wyo) 803 P2d 349).
Annotation: When statute of limitations begins to run against note payable on

demand, 71 ALR2d 284.
Footnote 10. Clark v Gibbs (CA5 Fla) 69 F2d 364.
The specific provisions of a non-UCC statute, providing that a cause of action on a

demand note accrued on the first written demand for payment, were controlling, as
against the provision of the UCC concerning the accrual of such a cause of action.
Wetmore v Brennan (Fla App D3) 378 So 2d 79, cert den (Fla) 388 So 2d 1119.
Footnote 11. In re Estate of Fauskee (Minn App) 497 NW2d 324, 22 UCCRS2d 785,
review den (Minn) 1993 Minn LEXIS 358.
Despite the general rule that a promissory note which does not contain a time for
repayment is a demand note and is actionable immediately, the trial court can accept and
rely upon testimony that such a note is not to become due until demand for payment is
made. Martin v Ford (Tex App Texarkana) 853 SW2d 680, writ den (Aug 26, 1993).
Footnote 12. Richman v Kauffman (3d Dept) 48 App Div 2d 988, 369 NYS2d 565,

appeal after remand (3d Dept) 54 App Div 2d 807, 388 NYS2d 147, app den 41 NY2d
807.
A note dated July 30, 1976, which provided that it was payable on demand or, if no
demand was made, on January 31, 1977, was not a demand note; rather, the note matured
on January 31, 1977, so that a suit filed thereon on January 28, 1981 was brought within
the four-year statute of limitations. Loomis v Republic Nat'l Bank (Tex App Dallas) 653
SW2d 75, 39 UCCRS 915, writ ref n r e (Sep 14, 1983) and rehg of writ of error overr
(Oct 19, 1983).
634 Periods of limitations; actions to enforce obligations
View Entire Section

A section of the 1990 Revision of the Uniform Commercial Code (UCC) 13 sets forth
specific periods of limitation which are applicable in actions to enforce obligations
arising under negotiable instruments, 14 including:
(1) a six-year period after the due date or dates stated in instruments, other than
certificates of deposit, which are payable at a definite time; 15 and
(2) except as provided for certain bank checks and certificates of deposit, a six-year
period after demand for payment is made to the maker of a demand note, or within 10
years after the last payment of principal or interest if no demand has been made. 16
Comment: The section of the 1990 Revision which sets forth the time periods within
which actions to enforce obligations, duties, or rights arising under Article 3 of the
UCC must be brought does not attempt to state all rules with respect to the applicable
statute of limitations; for example, the circumstances under which the running of a
limitations period may be tolled is left to other law. 17
Except as provided by statute 18 in the case of certain bank checks, an action to enforce
the obligation of a party to an unaccepted draft to pay the draft must be commenced
within three years after dishonor of the draft, or within 10 years after the date of the draft,
whichever period expires first. 19
Comment: The foregoing provision applies primarily to personal uncertified checks,

which are payment instruments rather than credit instruments; teller's checks, cashier's
checks, certified checks, and traveler's checks are treated differently, because they are
commonly dealt with as cash equivalents. 20
An action to enforce the obligation of an acceptor of a certified check, or the issuer of a

teller's check, cashier's check, or traveler's check, must be commenced within three years
after demand for payment is made to the acceptor or issuer, as the case may be. 21 On
the other hand, an action to enforce the obligation of a party to pay an accepted draft,
other than a certified check, must be commenced within six years after:

(1) the due date or dates stated in the draft or acceptance, if the obligation of the acceptor
is payable at a definite time; or
(2) the date of the acceptance, if the obligation of the acceptor is payable on demand. 22
Likewise, an action to enforce the obligation of a party to a certificate of deposit to pay
the instrument must be commenced within six years after demand for payment is made to
the maker; however, if the instrument states a due date and the maker is not required to
pay before that date, the six-year period begins when a demand for payment is in effect
and the due date has passed. 23
Footnotes
As to the acceleration of the date of maturity of an instrument, see 194 et seq.
As to the tolling of a period of limitations, see 51 Am Jur 2d, Limitation of Actions

138 et seq.
As to the acceptance of drafts, see 381 et seq.
As to presentment and dishonor of drafts, see 313 et seq.
Comment: When a draft is accepted it is, in effect, turned into a note of the acceptor.
635 --Time instruments

View Entire Section
Except as provided by statute for certificates of deposit, 24 an action to enforce an

obligation of a party to pay a note payable at a definite time must be commenced within
six years after the due date or dates stated in the note. 25 If a due date is accelerated,
any enforcement action must be brought within six years after the accelerated due date.
26
Under the 1952 version of the Code, a cause of action against a maker or acceptor of a
time instrument accrues on the day after its maturity. 27
Observation: The 1990 Revision of the UCC does not contain a separate section
similar to the foregoing provision defining when a cause of action accrues on an
instrument; rather, accrual of a cause of action is stated in various sections dealing with
the obligations of parties to an instrument. 28
Footnotes
Footnote 27. UCC 3-122(1)(a) [1952].
Footnote 28. 190.
636 --Conversion, breach of warranty, and other actions
View Entire Section

The 1990 Revision of the Uniform Commercial Code (UCC) specifies that, unless
governed by other laws regarding claims for indemnity or contribution, the following
actions must be commenced within three years after the cause of action or claim for relief
accrues:
(1) an action for conversion of an instrument, for money had and received, or a like
action based on conversion; 29
(2) a suit for breach of warranty; 30 or

(3) an action to enforce an obligation, duty, or right arising under Article 3 and not
otherwise governed by the section of the UCC specifying the time for commencing
actions on negotiable instruments. 31
Comment: The statutes of some states may use the term "claim for relief," instead of
the more traditional term "cause of action." 32
Observation: The effect of the foregoing catchall provisions is that, if there is any
cause of action arising under Article 3 of the UCC that is not governed by specific
statutory provisions, 33 the applicable statute of limitations may be found in the
pre-UCC law governing claims for indemnity and contribution; if no such law exists,
the action to enforce any obligation, duty, or liability arising under Article 3 must be
commenced within three years after accrual of the cause of action. 34
In the absence of fraud by the party invoking the statute of limitations, a cause of action
for conversion of a negotiable instrument accrues when the defendant wrongfully
exercises dominion over it; the discovery rule, under which the cause of action does not
accrue until the plaintiff acquires knowledge or reason to know of the wrongful conduct,
normally does not apply in such a case. 35 For example, the discovery rule does not
apply in computing the statute of limitations in an action against a drawee bank for
conversion resulting from payment of a check with a forged indorsement. 36
Footnotes
Footnote 29. UCC 3-118(g)(i).
Footnote 30. UCC 3-118(g)(ii).
Footnote 31. UCC 3-118(g)(iii) [1990 Rev], referring to UCC 3-118 [1990 Rev].
Footnote 33. UCC 3-118(a)-(f) [1990 Rev].
Footnote 35. Menichini v Grant (CA3 Pa) 995 F2d 1224, 20 UCCRS2d 959; Palmer Mfg.
& Supply v BancOhio Nat'l Bank (Clark Co) 93 Ohio App 3d 17, 637 NE2d 386, 25
UCCRS2d 190, dismd, motion overr 69 Ohio St 3d 1488, 635 NE2d 43 (stating that a
refusal to apply the discovery rule furthers the UCC objectives of negotiability, finality,
and uniformity in commercial transactions); Wang v Farmers State Bank (SD) 447 NW2d
516, 13 UCCRS2d 459, related proceeding (SD) 447 NW2d 519, 10 UCCRS2d 890.
As to postponement of the running of the statute of limitations by reason of fraudulent

concealment of a cause of action and the discovery rule, see 51 Am Jur 2d, Limitation of
Actions 147.
Footnote 36. Husker News Co. v Mahaska State Bank (Iowa) 460 NW2d 476, 13
UCCRS2d 46 (stating that the states which have considered the question are nearly
unanimous in refusing to apply the discovery rule in this context).
637 Postponement or suspension of statute of limitations
View Entire Section

The running of the statute of limitations against a cause of action on a bill or note may be
tolled in certain situations, or by certain acts of the party to be charged, and in such cases
the time during which the statute is tolled is not counted in determining whether the
action has become barred. 37 For example, a statute in a particular jurisdiction may
provide that, if a cause of action accrues against a person while he or she is out of state,
the statute of limitations will not begin to run until he or she returns to the state, 38 or
that an action may be commenced within a certain period of time thereafter. 39
Likewise, under the discovery rule the applicable statute of limitations begins to run
when a plaintiff knows or reasonably should know of the injury and the cause thereof; the
rule, thus, creates an equitable exception to the general principle that the statute of
limitations begins to run when the underlying cause of action accrues. 40
Footnotes
Footnote 37. Wester v Rigdon (Fla App D1) 110 So 2d 470.
Footnote 38. Lips v Egan, 178 Kan 378, 285 P2d 767.
Footnote 39. Merchants & Planters Nat'l Bank v Appleyard, 238 NC 145, 77 SE2d 783;
Raymond v Barnard, 71 SD 630, 28 NW2d 700.
Footnote 40. Menichini v Grant (CA3 Pa) 995 F2d 1224, 20 UCCRS2d 959 (holding the
discovery rule to be inapplicable in an action for conversion of a negotiable instrument in
the absence of fraudulent concealment by the defendant).
638 --Acknowledgment or new promise; partial payment
View Entire Section

An admission or acknowledgment by a debtor of a subsisting debt, from which a promise

to pay can be implied, may take a case out of the operation of the statute of limitations;
although no particular form is necessary, such an acknowledgment must be clear, distinct,
and unequivocal. 41 As a general rule, it makes no difference whether the
acknowledgment or new promise is made before or after the statute of limitations has run.
42 If made before the statute has run, the acknowledgment will fix a new date from
which the applicable period of limitations will run on the same cause of action; 43 if

made after the statute has run, it will revive the cause of action and start the statute
running anew. 44
The limitations period on an action on a promissory note also will begin anew when a
partial payment is made by the debtor before the statute of limitations has expired, 45
because the partial payment has the same general effect as that resulting from an
acknowledgment of or new promise to pay a debt. 46
Footnotes
Footnote 41. Kojro v Sikorski (Del Super Ct) 267 A2d 603.
As to a renewal note as an acknowledgment or new promise to pay, see 639.
Footnote 42. Golden Rule Oil Co. v Liebst, 153 Kan 123, 109 P2d 95.
Footnote 43. Barnwell v Hanson, 80 Ga App 738, 57 SE2d 348.
Footnote 44. Barnwell v Hanson, 80 Ga App 738, 57 SE2d 348; Wentland v Stewart, 236
Iowa 661, 19 NW2d 661, 161 ALR 1206; McMahan v Dorchester Fertilizer Co., 184 Md
155, 40 A2d 313; Stone v Smoot, 191 Okla 512, 131 P2d 85, 143 ALR 1426; In re
Schultz's Estate, 252 Wis 126, 30 NW2d 714.
Footnote 45. Wells v Barefoot, 55 NC App 562, 286 SE2d 625 (stating that each payment
on a current account starts the running of the statute of limitations anew as to all items
not barred at the time of payment, nothing else appearing).
Footnote 46. Conn v Atkinson, 227 Ky 594, 13 SW2d 759; McMahan v Dorchester
Fertilizer Co., 184 Md 155, 40 A2d 313.
639 --Extension of time; renewal
View Entire Section

A binding promise by the holder of a note to extend the time for payment tolls the statute
of limitations until the expiration of the extended period. 47 A renewal note
constitutes a specific form of acknowledgment and a new promise, such as will take the
case out of the statute of limitations. 48
Footnotes
Footnote 47. Credit Service Corp. v Barker, 308 Mass 476, 33 NE2d 293.
As to extensions and renewals of negotiable instruments, generally, see 198 et seq.

Forms: AnswerDefenseExtension agreement between maker and payee. 5 Am Jur
Pl & Pr Forms (Rev) Bills and Notes, Form 41.
Instruction to juryAcceptance of interest in advance as prima facie evidence of

extension of time. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 42.
Footnote 48. Easton v Ash, 18 Cal 2d 530, 116 P2d 433; Clarke v Clarke, 194 Okla 455,
152 P2d 908.
640 Laches
View Entire Section

The doctrine of laches does not apply where there is a specific statute of limitations
which is applicable and an action is brought within the period set by statute. 49 Thus, a
holder of commercial paper who brings suit thereon within the applicable period of
limitations is not barred from pursuing the suit by laches principles. 50
Footnotes
Footnote 49. Landreth v First Nat'l Bank (CA8 Ark) 45 F3d 267, 25 UCCRS2d 1167
(involving an action on a certificate of deposit).
Footnote 50. Beathune v Cain, 30 Colo App 321, 494 P2d 603; Kay v Fernandez (Fla
App D3) 373 So 2d 946; UAW-CIO Local # 31 Credit Union v Royal Ins. Co. (Mo) 594
SW2d 276, 28 UCCRS 1435.
C. Parties [641-649]
Research References
UCC 3-803 [1952]; UCC 3-119, 3-301 [1990 Rev]
ALR Digest: Bills and Notes 232 et seq.; Parties 1 et seq.
ALR Index: Bills and Notes; Parties; Uniform Commercial Code
3:149, 3:259
Commercial Code 3d 3:117:5, 3-118:12; 6A Anderson, Uniform Commercial Code 3d
3-803:4; 6A Anderson, Uniform Commercial Code 3d [Rev] 3-301:9
1. Plaintiffs [641-646]

641 Generally
View Entire Section

The holder of a negotiable instrument is a person entitled to enforce the instrument. 51

Moreover, a person may be entitled to enforce an instrument, even though he or she is not
the owner thereof or is in wrongful possession of the instrument. 52 However, a person
who has no interest in an instrument as either a holder or an owner cannot sue thereon
without the owner's assent. 53
Observation: Whether a person has lawfully come into possession of an instrument

is irrelevant in determining whether that person is a holder; thus, a finder or thief of a
lost or stolen bearer instrument is the holder. 54
Statutes requiring that an action be brought by the real party in interest do not supersede
the provision of the Uniform Commercial Code which allows a person in possession of
an instrument to enforce it, as a holder, even though he or she is not the owner. 55
Thus, the holder of an instrument may sue thereon in his or her own name, even though
someone else is the beneficial owner. 56
Footnotes
Footnote 51. 238.
Footnote 53. Sheiman v Lafayette Bank & Trust Co., 4 Conn App 39, 492 A2d 219, 40
UCCRS 1789.
Footnote 54. 1 Anderson, Uniform Commercial Code 3d 1-201:277; 6A Anderson,

As to the right of a person not in possession of a lost or stolen instrument to enforce it,
see 303.
Footnote 55. Howell v Flora, 155 Kan 640, 127 P2d 721 (interpreting a statute which
provided that every action was to be prosecuted in the name of the real party in interest
except as otherwise expressly provided by law).
It is not a defense to an action brought by the holder of a bearer note or bond that he or
she is not, in fact, the real party in interest. Wick v Cleveland Sec. Corp. (Cuyahoga Co)
71 Ohio App 393, 26 Ohio Ops 324, 38 Ohio L Abs 473, 50 NE2d 351.
As to the requirement imposed by real-party-in-interest statutes that an action be brought

by the real or beneficial owner of the chose in action, see 59 Am Jur 2d, Parties 34.

Footnote 56. Hubby v Willis Agency, Inc., 131 Colo 565, 283 P2d 1080; Kirk v
Schumeth (Montgomery Co) 92 Ohio App 442, 50 Ohio Ops 18, 110 NE2d 803.
642 Payees and indorsees
View Entire Section

A payee who is in possession of an instrument is presumed to own it and may sue on it.
57 The payee of an instrument may sue thereon in his or her own name, as a holder,
even though the payee does not have the entire interest in the instrument. 58
Observation: An instrument payable to the order of two or more persons in the

alternative is payable to any one of them and may be negotiated, discharged, or
enforced by any of them who has possession of it; if an instrument is payable to two or
more persons other than in the alternative, it is payable to all of them and may be
negotiated, discharged, or enforced only by all of them. 59
An indorsee in possession of a negotiable instrument, likewise, is a holder who has a

right to sue on the instrument in his or her own name. 60 A special indorsement,
meaning one specifying the person to whom or to whose order the instrument is payable,
confers upon the special indorsee the right to sue on the instrument as the holder. 61
Likewise, the right of the holder of a negotiable instrument payable to bearer, or payable
to order and indorsed in blank, to sue cannot be rebutted by proof that he or she has no
beneficial interest in the instrument. 62 However, the right of a restrictive indorsee for
collection to sue is dependent upon the right of the indorser, and the indorsee therefore
may not bring an action which the indorser could not. 63
Footnotes
Footnote 57. Monahan v Watson, 61 Cal App 417, 214 P 1001 (holding that the payee's
title to the instrument may not be inquired into unless it is necessary for the protection of
the defendant); Hubby v Willis Agency, Inc., 131 Colo 565, 283 P2d 1080; Hutchings v
Reinalter, 23 RI 518, 51 A 429.
Footnote 58. Hubby v Willis Agency, Inc., 131 Colo 565, 283 P2d 1080; West &
Wheeler v Longtin, 118 Wash 575, 204 P 183.
Footnote 59. 205.
Footnote 60. ABC Money Exchange v Public Employees Retirement System (Cuyahoga
Co) 70 Ohio App 3d 732, 591 NE2d 1359, 18 UCCRS2d 202.
Holder status depends upon delivery of an order instrument with a proper indorsement.
Northwestern Nat'l Ins. Co. v Crockett (Tex App Beaumont) 857 SW2d 757.

An indorsee to whom a note is indorsed by the payee may maintain an action on the note
in the indorsee's own name as the legal owner and holder, regardless of the consideration
given for the note. Burkett v Doty, 176 Cal 89, 167 P 518.
Footnote 61. A. J. Colson & Sons v Ellis, 40 Ga App 768, 151 SE 654; Southard v
Latham, 18 NM 503, 138 P 205.
Footnote 62. Collins v Gilbert, 94 US 753, 94 Otto 753, 24 L Ed 170 (stating that
nothing short of fraud, if unattended with mala fides, is sufficient to allow such a
rebuttal).
As to blank indorsements, see 227.
Footnote 63. Follett v Clark, 19 Wash 2d 518, 143 P2d 536.
The fact that the purpose of a transfer is to enable the holder to collect for the benefit of
the transferor does not destroy the effect of the transfer. Meyer v Foster, 147 Cal 166, 81
P 402.
As to restrictive indorsements, see 230 et seq.
643 Transferees without indorsement
View Entire Section

If a transferee of an instrument is not a holder, because the transferor did not indorse it,
the transferee is, nevertheless, a person entitled to enforce the instrument as a nonholder
in possession thereof who has the rights of a holder, provided that the transferor was a
holder at the time of transfer. 64 Moreover, a person to whom a note has been
assigned, but not negotiated, can sue on the note as a transferee with the same right as the
transferor to enforce the instrument. 65 Thus, a mere assignee may bring action on the
instrument as its owner, even though the assignee is not a holder. 66
Footnotes
Footnote 64. 202.
As to actions to compel indorsement, see 628.
Footnote 65. Financial Management Task Force, Inc. v Altberger (Colo App) 807 P2d
1230, 17 UCCRS2d 496; Pay Center, Inc. v Milton (Colo App) 632 P2d 642, 33 UCCRS
602.
The Uniform Commercial Code changed the common-law rule by allowing a transferee
for valuable consideration to sue in his or her own name without a written indorsement.
Fleming v Caras, 170 Ga App 579, 317 SE2d 600, 39 UCCRS 211.
As to transfer of title to instruments by assignment, see 210.
Footnote 66. Lack v Akins, 6 Cal App 2d 194, 44 P2d 424.
644 Pledgees and pledgors
View Entire Section

A pledgee can sue in that capacity to enforce an instrument, since persons who hold a
security interest in negotiable instruments can be holders in due course to the extent of
the interest that they hold. 67
Observation: A transfer of a security interest in an instrument generally vests the

rights of the transferor in the transferee to the extent of the interest transferred and, for
the purpose of determining whether the transferee of an instrument is a holder, an
indorsement that transfers a security interest in the instrument is effective as an
Since the pledgee is a holder for value only to the extent of the amount of the debt for
which a note or other instrument is pledged as security, the pledgee cannot recover
anything in excess of that amount in an action against the obligor of the note if the
defendant has a defense against the pledgor. 69
Comment: A pledgee in a security transaction may become a holder in due course,

but the pledgee may enforce the instrument over defenses only to the extent of its
interest; defenses good against the pledgor remain available insofar as the pledgor
retains an equity in the instrument. 70
The right of a pledgee to bring suit on a bill or note does not preclude the pledgor from
doing so. 71 Thus, the payee of a note pledged as collateral has legal title to the
instrument and is entitled to maintain an action to collect on it. 72
Footnotes
Footnote 67. 272.
Footnote 68. 202.
Footnote 69. Adolph Ramish, Inc. v Woodruff, 2 Cal 2d 190, 40 P2d 509, 96 ALR 1146.
As to transfers for value, generally, see 207 et seq.

Annotation: Duty of pledgee of commercial paper as to its enforcement or collection,
45 ALR3d 248.
Footnote 71. Walmer v First Acceptance Co., 192 Wis 300, 212 NW 638, 51 ALR 605.
Annotation: Right of pledgor of commercial paper to maintain action thereon in his

own name, 43 ALR3d 824.
Footnote 72. Malone v Price, 138 Ga App 514, 226 SE2d 623.
The payee of a note who has pledged it, but who still has a substantial interest in the note
above the amount for which it is pledged, is entitled to maintain an action to enforce his
or her rights as payee. Rissman v National Thrift Corp., 139 Cal App 447, 34 P2d 230.
645 Agents or officers; other fiduciaries
View Entire Section

An instrument describing the payee as an agent or officer of a specified person is payable

to the principal, but the agent or officer may act as a holder. 73 Thus, an agent who has
received a note by indorsement holds the title as against all others, except the agent's
principal, and may maintain an action on the note in the agent's own name. 74
When an instrument is made payable to a named person who is also described in the
instrument as any type of fiduciary for a specified person or purpose, other than an agent
or officer, the payee in possession is a holder who may enforce the instrument. 75
Footnotes
Footnote 73. 204.
Footnote 74. Western Title Ins. & Guaranty Co. v Bartolacelli, 124 Cal App 2d 690, 269
P2d 165.
646 Joinder of parties plaintiff
View Entire Section

The propriety of two or more persons joining as plaintiffs in a judicial proceeding

depends primarily upon the fact that each possesses some remedial right in the cause of
action asserted. 76 In actions on bills and notes, the proper and necessary parties
plaintiffs are determined by the statutes and rules applicable to contract actions, but the
provisions of the Uniform Commercial Code (UCC) may govern in case of a conflict. 77
Under the UCC, if a negotiable instrument is payable to two or more persons other than
in the alternative, it is payable to all of them and may be enforced only by all of them. 78
Thus, when suit is brought against the maker of a note by one payee, the copayee may be
joined as an unwilling plaintiff in order to protect the maker from the danger of multiple
liability. 79 On the other hand, a negotiable instrument payable to the order of two or
more persons in the alternative is payable to any one of them and may be enforced by any
one of them who has possession of it. 80
An action may be brought by the pledgee of a note without the joinder of the pledgor as a
party plaintiff. 81 Likewise, an assignor is neither a necessary nor an indispensable
party to an action brought by the assignee of a note, where any defense which is available
against the assignor can be asserted against the assignee. 82
Footnotes
Footnote 76. 59 Am Jur 2d, Parties 103.
Footnote 77. Sheiman v Lafayette Bank & Trust Co., 4 Conn App 39, 492 A2d 219, 40
UCCRS 1789.
Parties having an interest in an instrument may be joined as plaintiffs, in an action that

would afford relief to each, even though the relief sought by one is not identical with that
sought by the other. Gartler v First Nat'l Bank, 88 Cal App 411, 263 P 566 (also stating
that parties may not be joined as plaintiffs where the relief of one is inconsistent with that
of the other).
As to required or permissive joinder of parties, see 59 Am Jur 2d, Parties 92 et seq.
Footnote 78. 205.
Footnote 79. Vance v Vance, 124 Ariz 1, 601 P2d 605, 27 UCCRS 728.
The trial court erred in failing to set aside a default judgment against one of two payees
of a note, where the note was not payable in the alternative and one of the payees was not
made a party to the suit. Johnson v Cox (Tex App Corpus Christi) 630 SW2d 492, 33
UCCRS 988, writ ref n r e (Tex) 638 SW2d 867, rehg of writ of error overr (Oct 6, 1982).
Footnote 80. 205.
Footnote 81. Fontainebleau Hotel Corp. v James Talcott, Inc. (Fla App D3) 164 So 2d
264, cert den (Fla) 169 So 2d 385.

Footnote 82. Bank of Boston International v Arguello Tefel (ED NY) 644 F Supp 1423, 3
UCCRS2d 1069.
2. Defendants [647-649]
647 Generally
View Entire Section

Except as otherwise provided in the instrument, two or more persons who have the same
liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint
payees, or anomalous indorsers are jointly and severally liable in the capacity in which
they sign. 83
Observation: To avoid the joint and several liability imposed by the foregoing
provision, there must be express language in the instrument which reveals an intention
to create joint liability. 84
Joint and several obligations create separate liability on the part of each obligor, and each
may be sued separately. 85 Thus, where the obligations arising under a promissory note
signed by two individuals are joint and several, the holder of the note is entitled to sue
either of the comakers, or both. 86 On the other hand, where there is no several liability,
all joint obligors of a note are necessary parties in a suit brought on the note 87 who
must be joined as defendants. 88
Footnotes
Footnote 83. 439.
As to anomalous indorsements, see 234.
Footnote 85. American Sec. Bank v Nishihara, 3 Hawaii App 594, 656 P2d 1347,
reconsideration den 3 Hawaii App 682.
Forms: Instruction to juryLiability of party signing instrument. 6A Am Jur Pl & Pr

Footnote 86. Hubert v Lawson, 146 Ga App 698, 247 SE2d 223; Badour v Zifkin, 96
Mich App 325, 292 NW2d 201; Hooper v Ryan (Tex Civ App Waco) 581 SW2d 237, 26
UCCRS 982 (disapproved on other grounds by Crimmins v Lowry (Tex) 691 SW2d 582,
40 UCCRS 1779).

Footnote 87. First Nat'l Bank v Crawford (La App 2d Cir) 426 So 2d 1348, appeal after
remand (La App 2d Cir) 455 So 2d 1209, cert den (La) 459 So 2d 538.
Footnote 88. Farmers' Exchange Bank v Morse, 129 Cal 239, 61 P 1088.
648 In actions involving primary and secondary obligors
View Entire Section

The liability of a payee of a promissory note, as an indorser of the instrument, is separate

and distinct from that of the maker or an accommodation party; thus, the payee is not a
necessary party defendant in an action by the holder of the note against the maker and
accommodation party, but is merely a proper party who may be joined at the holder's
option. 89 Moreover, where the terms of a guaranty contract provide that the liability of
the guarantors is absolute and unconditional and that the creditor may bring suit against
any guarantor without regard to whether suit has been brought against the principal, the
principal obligor is not an indispensable party defendant. 90
Footnotes
Footnote 89. InlandWestern Inv. Co. v Winkler Realty Corp. (SD NY) 65 FRD 515, 19
FR Serv 2d 1001, 16 UCCRS 450.
Footnote 90. Johnson v First Nat'l Bank, 143 Ga App 384, 238 SE2d 747, 22 UCCRS
1205.
649 Notice to third party of litigation
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) provides that, where a
defendant is sued for breach of an obligation for which a third person is answerable over
under Article 3 of the UCC, the defendant may give the third person written notice of the
litigation, and the person notified may then give similar notice to any other person who is
answerable over to him or her. 91 The 1990 Revision allows such written notice to be
given when the third person is answerable over pursuant to either Article 3 or Article 4 of
the UCC. 92
Observation: Whether notice is given to or by a third person, the person notified

must be one who is liable over to the person giving notice, as opposed to being liable to
someone else in connection with the instrument. 93
If the notice states that the person notified may come in and defend and that a failure to
do so will bind the person notified in an action later brought by the person giving the
notice as to any determination of fact common to the two litigations, the person notified
is so bound, unless, after seasonable receipt of the notice, he or she does come in and
defend. 94
Comment: The provision of the UCC allowing for notice to be given to third persons
is intended to supplement, not to displace, existing procedures for interpleader or
joinder of parties. 95
Footnotes
Footnote 91. UCC 3-803 [1952].
Forms: NoticeTo third partyRight to intervene and defend action. 6A Am Jur Pl &
Notice of litigation to third person answerable over on negotiable instrument. 19 Am

253:2594.
D. Pleading [650-657]
Research References
ALR Digest: Pleading 1 et seq.
ALR Index: Bills and Notes; Checks and Drafts; Pleadings; Uniform Commercial Code
Forms (Rev), Commercial Code : Article 3Negotiable Instruments 3:117, 3:153
9 Am Jur Proof of Facts 573, Promissory Notes and other Negotiable Instruments, Proof
1
1. Complaint or Petition [650-654]
650 Generally
View Entire Section

In an action brought on a negotiable instrument, such as a promissory note, the petition

must allege facts on which the plaintiff's right to recover from the defendant on the
instrument depends. 96 A cause of action is stated by averments that the note has been
executed, the terms of which are shown by incorporation or by attachment of a copy of
the note, and that the note has not been paid when due. 97 Allegations of a petition
that the plaintiff is the holder and owner of a note, the terms of which are described, and
that the note is in default, because no payments have been made likewise are sufficient to
state a cause of action. 98
An amendment of a complaint on a bill or note may be allowed, as in other cases where

the defendant is not placed at any disadvantage by the amendment. 99 However, a
petition which fails to state a valid cause of action may not be amended after the running
of the applicable statute of limitations. 1
Footnotes
Footnote 96. Retamco, Inc. v Dixilyn-Field Drilling Co. (Tex App Houston (14th Dist))
693 SW2d 520.
The issues in actions on bills and notes are only those that are properly raised by the
pleadings. Allin v Williams, 97 Cal 403, 32 P 441.
Cal Rptr 508, 91 CDOS 4707, 91 Daily Journal DAR 7396.
A person suing on a promissory note is generally not required to plead or prove the
contractual relationship giving rise to the execution and delivery of the note. Fellom v
Adams (1st Dist) 274 Cal App 2d 855, 79 Cal Rptr 633.
As to the sufficiency of averments of nonpayment, see 653.
Practice References Proving a prima facie case on note or check. 9 Am Jur Proof of
Facts 573, Promissory Notes and Other Negotiable Instruments, Proof 1.
Forms: Complaint, petition, or declarationOn note pleaded according to legal

effectAgainst maker. 5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Form 1.
Footnote 98. Gravois v Helicopter Charter, Ltd. (La App 4th Cir) 416 So 2d 609.
Allegations by holders of a note that the maker and guarantors were jointly and severally
liable would allow a reasonable person to infer that a default had occurred and, thus, the
complaint was sufficient. Capitol Neon Signs, Inc. v Indiana Nat'l Bank (Ind App) 501
NE2d 1082.
Footnote 99. Snyder v Miller, 29 Cal App 566, 157 P 22; Francis v Western Screen Co.,
22 Cal App 32, 133 P 327.

As to amendment of pleadings, generally, see 61A Am Jur 2d, Pleading 306 et seq.
Footnote 1. Fisher v Pendleton, 184 Kan 322, 336 P2d 472, 74 ALR2d 1274.
As to the statutes of limitations applicable to actions on bills and notes, see 634 et
seq.
651 Allegations concerning status of holder
View Entire Section

In an action on a negotiable instrument, the plaintiff, generally, must allege that he or she
is the holder or owner of the instrument. 2 The provisions of the Uniform Commercial
Code (UCC) concerning the evidentiary burden of proving entitlement to enforce a
negotiable instrument, thus, also are determinative of the sufficiency of allegations
required to state a claim for relief in an action to recover on the instrument. 3
Under the pre-1990 version of the UCC, when the signatures on an instrument are
admitted or established, production of the instrument entitles a holder to recover on it,
unless the defendant establishes a defense. 4 The 1990 Revision of the UCC similarly
provides that, if the validity of the signatures is admitted or proved and there is
compliance with specified statutory requirements, a plaintiff who produces the instrument
is entitled to payment if he or she proves entitlement to enforce the instrument, unless the
defendant proves a defense or claim in recoupment. 5
Comment: Once the signatures on an instrument are proved or admitted, a holder

proves entitlement to enforce the instrument by mere production of it. 6
In an action to recover on a check brought by an assignee of the instrument, allegations to

the effect that the assignor was a holder in due course and the instrument was regularly
transferred are sufficient to establish the holder-in-due-course status of the plaintiff. 7
Footnotes
Footnote 2. Albergo v Gigliotti, 96 Utah 170, 85 P2d 107, 129 ALR 967.
As to holders who are entitled to enforce negotiable instruments, see 238 et seq.
Footnote 3. Blake v Samuelson, 34 Colo App 183, 524 P2d 624, 15 UCCRS 131.
Observation: The matters offered in the discharge of a party's burden of proof

should ordinarily be confined to the case as presented by the facts pleaded upon which
issue is joined; as a result, a party generally will be precluded from proving any fact
which has not been alleged. 658.

Footnote 4. UCC 3-307(2) [1952].
As to the burden of establishing the validity of signatures on an instrument, see 659.
As to the defendant's burden of proving defenses, see 662.
As to the burden of proving holder in due course status, see 665.
Footnote 7. Blake v Samuelson, 34 Colo App 183, 524 P2d 624, 15 UCCRS 131.
652 Conditions precedent
View Entire Section

Where payment of an instrument is made conditional on its face, the happening of the
condition or contingency which entitles the plaintiff to recover should be averred. 8 On
the other hand, where the instrument sued on is unconditional by its terms, the complaint
may state a good cause of action without alleging the happening of an extrinsic condition
on which the payment of the note is dependent; in such a case, if the defendant alleges
the existence of the condition as a defense, the plaintiff may prove that the condition has
been fulfilled, and thus, show the liability of the defendant. 9
Footnotes
Footnote 8. Thompson v Koeller, 183 Cal 476, 191 P 927; Johnson v Clements, 23 Tex
Civ App 112, 54 SW 272.
As to instruments payable upon the happening of a contingency, see 192.
Footnote 9. Thompson v Koeller, 183 Cal 476, 191 P 927.
653 Nonpayment
View Entire Section

An allegation of nonpayment is material to a cause of action on a negotiable instrument,

such as a note, because without nonpayment no breach of the contract evidenced by a

note appears. 10 However, a complaint may be sufficient without a direct allegation of
nonpayment where the plaintiff alleges the execution, maturity, and ownership of the
note, and avers that a certain sum is due and owing thereon; that is, the fact of
nonpayment is sufficiently pleaded if facts are stated from which a default in payment
can fairly be inferred. 11
Footnotes
Footnote 10. Lincoln County Bank v Fetterman, 170 Cal 357, 149 P 811.
Footnote 11. House v Isaacson, 102 Ga App 377, 116 SE2d 520.
654 Presentment; notice of dishonor
View Entire Section

Where presentment of an instrument is required under Article 3 of the Uniform

Commercial Code (UCC), a draft or note is dishonored if payment is not made in
accordance with its terms at or following the time of presentment; presentment and notice
of dishonor may be a prerequisite to the liability of a drawer or indorser, unless such
notice is excused. 12 In an action against an indorser, the complaint must allege either
presentment to the principal debtor within the requisite time in accordance with
applicable statutory provisions and a demand for payment, 13 or a sufficient excuse for
lack of presentment and notice. 14
Observation: Although a complaint against indorsers may be insufficient where it

lacks any allegation regarding notice of dishonor to them, this objection may be waived
if the indorsers do not, in their answer or on the trial, interpose any defense or
objection on account of that infirmity. 15
Where notice of dishonor is required to charge the drawer of a check with liability,
presentment to the drawee for payment and the giving of notice of dishonor, or facts
excusing the notice requirement, must be alleged. 16
Comment: Under the 1990 Revision of the UCC, notice of dishonor is no longer
relevant to the liability of a drawer, except for the case of a draft accepted by an
acceptor other than a bank. 17
Footnotes
Footnote 12. 314.
Footnote 13. Merchants Nat'l Bank v Bentel, 166 Cal 473, 137 P 25.

Footnote 14. Merchants Nat'l Bank v Bentel, 166 Cal 473, 137 P 25.
Footnote 15. Trout v Lane, 120 Cal App 626, 8 P2d 211.
Footnote 16. Sadow v King, 96 Ga App 899, 101 SE2d 878 (sustaining a general
demurrer to a petition not containing such allegations, as required under former law).
Annotation: Necessity of pleading that maker or drawer of check was given notice of
its dishonor by bank, 6 ALR2d 985.
2. Answer [655-657]
655 Generally
View Entire Section

The purpose of an answer on the merits of an action is to bring forward whatever

defenses the defendant may have or may wish to interpose as a bar to the plaintiff's claim.
18 As in other actions, the defendant in an action on a bill or note, generally, may
plead as many defenses and counterclaims as he or she may have, whether legal or
equitable, or both. 19
A defendant in an action on a bill or note may, under proper circumstances, make a

denial for want of information or belief. 20 Thus, for example, the maker of a note may
be entitled to deny, upon information and belief that the instrument has been indorsed
and delivered to the plaintiff. 21 However, such a denial may not be made as to a matter
which is presumptively within the knowledge of the defendant; 22 for example, it is
insufficient to deny execution of the instrument for want of information and belief. 23
Footnotes
Footnote 18. 61A Am Jur 2d, Pleading 133.
As to defenses in actions on negotiable instruments, generally, see 546 et seq.
Footnote 19. Harshbarger v Eby, 28 Idaho 753, 156 P 619; L. W. Wentzel Implement Co.
v State Fin. Co. (ND) 63 NW2d 525.
Notes, Form 7.
AnswerDefenseExtension agreement between maker and payee. 5 Am Jur Pl & Pr

Footnote 20. In re Estate of Herr (2d Dist) 16 Ill App 2d 534, 148 NE2d 815.
Footnote 21. Cuneo v Lawson, 203 Cal 190, 263 P 530; Nunnemacker v Johnson, 38
Minn 390, 38 NW 351.
Footnote 22. Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871.
Footnote 23. Greene v Osceola Mines Gold Mining Co., 3 Cal App 427, 86 P 733.
656 Affirmative defenses
View Entire Section

Affirmative defenses to an action on a negotiable instrument, such as fraud or coercion,

may be waived if they are not pleaded. 24 Other affirmative defenses or matters in
avoidance that must be pleaded in order to provide a defense to an action on a negotiable
instrument include those based upon the applicable statute of limitations, 25 accord and
satisfaction, estoppel, failure of a condition precedent to liability, 26 illegality of
consideration, 27 duress, and failure of consideration. 28 Want of consideration for an
indorsement or assignment also is a defense 29 which, like failure of consideration, may
be asserted against anyone who does not have the rights of a holder in due course. 30
Footnotes
Footnote 24. Thompson Trading, Ltd. v Allied Breweries Overseas Trading, Ltd. (DC RI)
748 F Supp 936.
Footnote 25. Rye v Phillips, 203 Minn 567, 282 NW 459, 119 ALR 1120.
As to the statutes of limitations which are applicable in actions to enforce obligations

created by negotiable instruments, see 634.
Footnote 26. First Nat'l Bank & Trust Co. v Jacobsen (ND) 431 NW2d 284, related
proceeding (ND) 529 NW2d 882.
Footnote 27. First Nat'l Bank v Hunter, 22 Tenn App 626, 125 SW2d 183.
Footnote 28. In re Hinkley (SD Tex) 89 BR 608, affd without op (CA5 Tex) 875 F2d
859.
The signer of a note who asserted that he had signed in a representative capacity and that
he had disclosed that fact to the lender was raising a defense of avoidance or affirmative
defense. Federal Deposit Ins. Corp. v K-D Leasing Co. (Tex App El Paso) 743 SW2d
774, 6 UCCRS2d 156.

note, 79 ALR3d 598.
Footnote 29. Sapp v Lifrand, 44 Ariz 321, 36 P2d 794; Modern Industrial Bank v Taub,
134 NJL 260, 47 A2d 348.
Footnote 30. 557.
657 Execution of instrument
View Entire Section

In an action on a negotiable instrument, the validity of each signature on the instrument is

admitted unless specifically denied in the pleadings. 31 If only a general denial or no
denial is made, therefore, the signatures on an instrument are admitted. 32
Comment: The purpose of requiring a specific denial in the pleadings is to give the
plaintiff notice that he or she must meet a claim of forgery or lack of authority as to a
particular signature, and to give the plaintiff an opportunity to investigate and obtain
evidence; however, where local rules permit, the denial may be on information and
belief, or it may be a denial of knowledge or information sufficient to form a belief. 33
Footnotes
Footnote 31. 659.
Footnote 32. Lipton v Southeast First Nat'l Bank (Fla App D3) 343 So 2d 927.
3-308 [1990 Rev].
E. Burden of Proof [658-667]
Research References
UCC 1-201; UCC 3-307, 3-403, 3-415 [1952]; UCC 3-103, 3-301, 3-308, 3-402,
3-406 [1990 Rev]
ALR Digest: Trial 8 et seq.
ALR Index: Bills and Notes; Checks and Drafts; Presumptions and Burden of Proof;

3:179
7 Am Jur POF2d 283, Status as Accommodation Party
6 Anderson, Uniform Commercial Code 3d 3-307:3, 3-307:61, 3-415:17
658 Generally
View Entire Section

The rules and principles of evidence applicable to civil actions, generally, pertain in
actions brought on negotiable instruments, and a plaintiff, thus, must prove, as well as
allege, facts sufficient to establish a cause of action. 34
Observation: The matters offered in the discharge of a party's burden of proof

should ordinarily be confined to the case as presented by the facts pleaded upon which
issue is joined; as a result, a party generally will be precluded from proving any fact
which has not been alleged. 35
Article 3 of the Uniform Commercial Code (UCC) contains various provisions

concerning the burden of establishing facts, defenses, and holder-in-due-course status in
actions brought on negotiable instruments. 36
Definitions: The burden of establishing a fact is the burden of persuading the triers
of fact that the existence of the fact is more probable than its nonexistence. 37 To
prove a fact means to meet the burden of establishing the fact. 38
The plaintiff, generally, must produce the instrument sued upon to show that he or she is
the holder who is entitled to recover on it 39 and to protect the defendant from double
liability. 40 However, under the pre-1990 version of the UCC, the owner of a lost,
destroyed, or stolen instrument may recover by proving that he or she is the owner of the
instrument, the facts preventing production of the instrument, and the terms thereof. 41
Under the 1990 Revision of the UCC, the person seeking to enforce a lost, stolen, or
destroyed instrument which he or she does not possess has the burden of proving both the
terms of the instrument and the right to enforce it. 42 Similarly, when a copayee of an
instrument who is not in possession of it brings suits against the copayee in possession
and the maker, the plaintiff has the burden of proving that he or she is the owner of the
instrument and is entitled to its proceeds. 43
Footnotes
Footnote 34. Plains State Bank v Ellis, 174 Kan 653, 258 P2d 313.
Footnote 35. 61A Am Jur 2d, Pleading 366.
As to the burden of proving defenses, generally, see 662.

As to the burden of establishing the validity of signatures on negotiable instruments, see
659.
As to the burden of establishing holder-in-due-course status, see 665 et seq.
Footnote 39. James Talcott, Inc. v Allahabad Bank, Ltd. (CA5 Ga) 444 F2d 451, 15 FR
Serv 2d 6, 9 UCCRS 264, cert den 404 US 940, 30 L Ed 2d 253, 92 S Ct 280.
Footnote 41. 303.
Footnote 42. 658.
Footnote 43. Hattaway v Keefe, 191 Ga App 315, 381 SE2d 569, 10 UCCRS2d 143.
659 Burden of establishing signatures
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), each signature on a
negotiable instrument is admitted, unless specifically denied in the pleadings. 44 A
general denial, therefore, does not raise the issue of the genuineness of a signature. 45
But, when the effectiveness of a signature is put in issue, the burden of establishing it is
on the party claiming under the signature. 46
The 1990 Revision of the UCC similarly provides that the authenticity of, and authority
to make, each signature on a negotiable instrument is admitted, unless specifically denied
in the pleadings. 47 If the validity of a signature is denied in the pleadings, the burden
of establishing validity, likewise, is on the party claiming under the signature. 48
However, under both the pre-1990 version of the UCC and the 1990 Revision, a signature
on an instrument is presumed to be genuine and authorized, unless the action is to enforce
the liability of a purported signer who is dead or incompetent before proof is required on
the issue of the validity of the signature, 49 or at the time of trial on that issue. 50
Comment: The foregoing presumption means that, until some evidence is introduced
which would support a finding that the signature is forged or unauthorized, the plaintiff
is not required to prove that it is valid. 51
Footnotes

Footnote 44. UCC 3-307(1) [1952].
The foregoing provision, relating to the burden of establishing the validity of a signature,
is applicable only where the validity of the signature is at issue; it should not be used to
burden unnecessarily a party bringing an action in conversion resulting from the payment
of an instrument over an indorsement which all parties conceded was forged. Petty v
First Nat'l Bank (Summit Co) 50 Ohio App 2d 365, 4 Ohio Ops 3d 318, 363 NE2d 599,
21 UCCRS 1375.
Footnote 45. Ferris v Nichols (Fla App D4) 245 So 2d 660, 8 UCCRS 1284; Missouri
Farmers Asso. v Todd (Mo App) 667 SW2d 736; Dryden v Dryden (Adams Co) 86 Ohio
App 3d 707, 621 NE2d 1216.
As to the effect of a failure to deny specifically the validity of a signature, see 660.
Footnote 46. UCC 3-307(1) [1952].
Annotation: Mode and degree of proof required to establish genuineness of

handwriting offered as standard or exemplar for comparison with a disputed writing or
signature, 41 ALR2d 575.
Footnote 49. UCC 3-307(1)(b) [1952].
Forms: Instruction to juryPresumption of authenticity of and authorization for

Instruments 3:179.
660 --Effect of failure to deny validity of signature
View Entire Section

When the signature on an instrument is admitted by a failure to deny, specifically, the

validity of the signature, or when its validity is otherwise admitted or established,
production of the instrument entitles the holder to recover on it, unless the defendant
establishes a defense 52 or a claim in recoupment. 53
Comment: A holder proves entitlement to recover on an instrument by mere

production of it, because, as provided by statute, 54 a holder is a person entitled to
enforce the instrument; any other person in possession of an instrument may recover
only if that person has the rights of a holder. 55
In the absence of a specific denial, production of the note sued on is sufficient to prove
both the signature and authority of the agent who executed it. 56
Footnotes
Where a corporation's principals fail to deny specifically that an indorsement of a check

in their designated trade name is not an authorized signature, the signature is deemed
admitted as theirs. Azalea City Motels v First Ala. Bank (Ala) 551 So 2d 967, mod on
other grounds, reh overr (Ala) 9 UCCRS2d 1009.
The plaintiff, in an action on two promissory notes, was entitled to summary judgment
where the execution and delivery of the notes was conceded and the answer did not
specifically deny the signatures. Center Bank v Mid-Continent Meats, Inc., 194 Neb 665,
234 NW2d 902.
As to the burden of proving defenses, generally, see 662.
Footnote 56. Holland v First Nat'l Bank (Tex Civ App Dallas) 597 SW2d 406, 29
UCCRS 133.
661 --Where instrument signed by representative
View Entire Section

No particular form of appointment is necessary to establish the authority of an agent to

sign his or her principal's name to a negotiable instrument. 57 Therefore, the authority to
sign can be established in the same manner as any other kind of agency authority. 58
One who intends to sign an instrument in a representative capacity, normally, must

identify the true maker by name and indicate the capacity in which the instrument is
being signed. 59 An authorized representative who signs his or her own name to an
instrument without naming the person represented will be held personally liable, unless
he or she sustains the burden showing that the parties intended otherwise. 60 If an action
to enforce a negotiable instrument is brought against a person as the undisclosed
principal of a person who signed the instrument as a party to the instrument, however, the
plaintiff has the burden of establishing that the defendant is liable on the instrument as a
represented person under the provision of the Uniform Commercial Code 61 which
allows a represented person to be held liable on an instrument signed by an authorized
representative of that person. 62
Footnotes
Footnote 57. UCC 3-403(1) [1952].
Footnote 58. Moehlenkamp v Shatz (Ind App) 396 NE2d 433.
Footnote 59. Mentesana v Fabricators Int'l, Inc. (Tex Civ App Dallas) 599 SW2d 694,
writ ref n r e (Sep 10, 1980).
Footnote 60. Haskell v Border City Bank (Tex App El Paso) 649 SW2d 133.
662 Burden of proving defenses
View Entire Section

Once the holder of a note or other negotiable instrument establishes a prima facie case by
proof of the execution of the instrument, the burden shifts to the obligor to establish some
defense in order to avoid liability. 63
Comment: The defendant has the burden of establishing any and all defenses, not
only in the first instance, but by a preponderance of the total evidence. 64
In order to challenge the right of a holder to recover, any defense normally must be
affirmatively pleaded. 65 Thus, for example, cancellation or discharge of the obligation
is an affirmative defense to an action to collect the amount owing on a promissory note.
66 The defendant, likewise, has the burden of proving a defense based upon a
contention that there has been no default on the instrument, 67 or that the obligation has
been paid. 68 Proof of payment to an agent of the holder of an instrument is insufficient
if it does not establish that the agent was duly authorized to accept the payment. 69
Comment: A defendant has the full burden of establishing the defenses of

nondelivery, conditional delivery, and delivery for a special purpose. 70
Footnotes

Footnote 63. Citicorp Int'l Trading Co. v Western Oil & Refining Co. (SD NY) 790 F
Supp 428, 19 UCCRS2d 499; A. C. Davenport & Son Co. v United States (ND Ill) 538 F
Supp 730, 30 CCF P 70241, 34 UCCRS 198, affd (CA7 Ill) 703 F2d 266, 30 CCF P
70981, 35 UCCRS 1195; Bashir v Moayedi (Dist Col App) 627 A2d 997; Commodity
Traders v Finn, 1 Neb App 39, 487 NW2d 297; First City Nat'l Bank & Trust Co. v
Heaton (1st Dept) 165 App Div 2d 710, 563 NYS2d 783.
A promissory note maker who stipulated that his signature appeared on a note had the
burden of proving any applicable defense. Ashland State Bank v Elkhorn Racquetball,
246 Neb 411, 520 NW2d 189, 24 UCCRS2d 968.
As to defenses to obligations on negotiable instruments, generally, see 546 et seq.
Footnote 65. Newman Grove Creamery Co. v Deaver, 208 Neb 178, 302 NW2d 697, 31
UCCRS 624.
Footnote 66. Almond v Rhyne, 108 NC App 605, 424 SE2d 231, review den 333 NC
536, 429 SE2d 552.
As to discharge of an obligation by cancellation or renunciation, see 394.
Footnote 67. Hagar v Texas Distributors, Inc. (Tex Civ App Tyler) 560 SW2d 773, writ
ref n r e (Apr 5, 1978).
Footnote 68. People v Lester (1st Dist) 102 Ill App 3d 761, 58 Ill Dec 416, 430 NE2d
358; Mercantile Bank & Trust Co. v Vilkins (Mo App) 675 SW2d 673, 39 UCCRS 532
(holding that the trial court improperly shifted the burden of proof regarding the
affirmative defense of payment from the maker to the payee).
There is no requirement that the payee present evidence, as part of the payee's case in
chief, that the notes sued upon remain unpaid. Jacobs v Becks (Fla App D1) 355 So 2d
1241, cert den (Fla) 362 So 2d 1050.
Footnote 69. Snidow v Woods, 198 Va 692, 96 SE2d 157.
Where there is a delivery of an instrument subject to a condition precedent which has not
occurred, the transferee of the instrument has the burden of showing that he or she is a
holder in due course. Bramante v Krug (1st Dist) 143 Cal App 2d 771, 300 P2d 71.
As to nondelivery as a defense, see 187.
663 --Want, failure, or illegality of consideration

View Entire Section
Consideration is presumed to exist for a note given for an antecedent obligation, 71 and
the defendant has the burden of showing a lack of consideration for the note sued on, 72
as well as of proving that a failure of consideration has occurred, 73 where such
defenses are relied upon.
Observation: Want of consideration and failure of consideration are different

defenses; a lack or want of consideration constitutes a bar to the action, while a partial
failure of consideration goes only to reduce recovery and concedes consideration
sufficient to sustain the instrument. 74
The defendant, likewise, has the ultimate burden of establishing any defense based upon
a contention that the consideration for a negotiable instrument was illegal. 75
Footnotes
Footnote 71. Northlake Community Hospital v Cadkin (1st Dist) 55 Ill App 3d 344, 13 Ill
Dec 67, 370 NE2d 1094.
Footnote 72. Wallace v Ralph Pillow Motors, Inc. (Fla App D1) 344 So 2d 949;
Northlake Community Hospital v Cadkin (1st Dist) 55 Ill App 3d 344, 13 Ill Dec 67, 370
NE2d 1094; Kreutz v Wolff (Mo App) 560 SW2d 271.
Lack of consideration is a valid affirmative defense to a suit on a promissory note.

Lambert v Weeks (Fla App D4) 554 So 2d 634, 15 FLW D63.
Footnote 73. Oak Trust & Sav. Bank v Annerino (1st Dist) 64 Ill App 3d 1030, 21 Ill Dec
704, 381 NE2d 1389; Crider v State Exchange Bank (Ind App) 487 NE2d 1345; Poelcher
v Zink, 375 Pa 539, 101 A2d 628.
As to want, failure, or illegality of consideration as a defense, see 557 et seq.
Footnote 74. First Nat'l Bank v Luverne, 235 Ala 606, 180 So 283.
Footnote 75. Benjamin v Blake, 121 NJL 10, 1 A2d 263; Great Am. Indem. Co. v
Berryessa, 122 Utah 243, 248 P2d 367.
664 Unauthorized completion or alteration of instrument
View Entire Section

The burden of establishing that any completion of an instrument is unauthorized, or that

words or numbers have been added to an incomplete instrument without authority of the
signer, is on the person asserting the lack of authority. 76
Comment: The foregoing provision places the full burden of proof by a

preponderance of the evidence on a party who attacks a completed instrument. 77
A person whose failure to exercise ordinary care has contributed to the alteration of a
negotiable instrument, or to the making of a forged signature on the instrument, is
precluded from asserting the alteration or the forgery against a person who, in good faith,
pays the instrument or takes it for value or for collection. 78 The burden of proving
such a failure to exercise ordinary care, in such a case, is on the person asserting the
preclusion. 79 However, if the person asserting preclusion fails to exercise ordinary care
in paying or taking the instrument, and that failure contributes to a loss, the loss is
allocated between the person precluded and the person asserting the preclusion according
to the extent to which the failure of each to exercise ordinary care contributed to the loss.
80 In that event, the burden of proving failure to exercise ordinary care is on the person
precluded. 81
Footnotes
Footnote 76. 120.
As to the alteration or unauthorized completion of an instrument as a defense, generally,

see 596 et seq.
Footnote 78. 120.
665 Proof of holder-in-due-course status
View Entire Section

The pre-1990 version of the Uniform Commercial Code (UCC) provides that, after it is
shown that a defense to the obligation created by a negotiable instrument exists, a person
claiming the rights of a holder in due course has the burden of establishing that he or she,
or some person under whom he or she claims, is in all respects a holder in due course. 82
Comment: The burden of establishing holder-in-due-course status must be sustained

by affirmative proof that the instrument has been taken for value, in good faith, and
without notice of any claim to, or defense against, the instrument. 83
Under the 1990 Revision of the UCC, if a defense or claim in recoupment is proved, the
right to payment is subject to the defense or claim, except to the extent that the plaintiff
proves that he or she has rights of a holder in due course which are not subject to the
defense or claim. 84
Comment: The foregoing provision means only that if the plaintiff claims the rights
of a holder in due course against the defense or claim in recoupment, the plaintiff has
the burden of proof on that issue; a plaintiff is not required to assert
holder-in-due-course status. 85 Moreover, until proof of a defense or claim in
recoupment is made, the issue as to whether the plaintiff has rights of a holder in due
course does not arise, because any person who is entitled to enforce the instrument is
entitled to recover on it in the absence of any such defense or claim. 86
When the burden is cast on the plaintiff to establish that he or she has the rights of a
holder in due course, the plaintiff must produce evidence from which the trier of fact is
able to conclude that each element of holder-in-due-course status has been satisfied by
the plaintiff or by a former holder whose rights are now possessed by the plaintiff. 87
General statements in an affidavit which are merely conclusions of law do not satisfy the
requirement that the holder establish that he or she is a holder in due course. 88
Although the mere fact that an instrument has been purchased at a discount does not
prevent the purchaser from being a holder in due course, 89 the sum paid by one
purchasing an instrument at a discount may be so disproportionate to the face amount of
the instrument as to raise a presumption that there was a want of good faith on the part of
the purchaser. 90 Likewise, while the defense that an instrument is stolen does not
defeat the claim of a bona fide purchaser, it does shift the burden of proof to the
purchaser of proving that he or she is bona fide. 91
Footnotes
Footnote 82. UCC 3-307(3) [1952].
The proper time for determining whether the recipient of an instrument has notice of a
claim or defense is the time of negotiation of the instrument. Allison-Kesley AG Center,
Inc. v Hildebrand (Iowa) 485 NW2d 841, 19 UCCRS2d 480.
If the maker of a note shows that a valid defense exists, the plaintiff in an action on a
negotiable instrument has the burden of proving his or her status as a holder in due
course. Lewis v Opstein, 1 Neb App 698, 510 NW2d 382, 23 UCCRS2d 767; DH Cattle
Holdings Co. v Reno (3d Dept) 196 App Div 2d 670, 601 NYS2d 714, 21 UCCRS2d
310.

As to what requirements must be met to establish holder-in-due-course status, see 247
et seq.
ALR4th 212.


3:117.
When the obligor does not plead a defense that could not be raised against a holder in due
course, it is unnecessary to determine whether the plaintiff is a holder in due course, as
opposed to an ordinary holder or mere assignee. Bean v Bluebonnet Sav. Bank FSB (Tex
App Dallas) 884 SW2d 520.
The issue of whether the payee is a holder in due course does not arise until the defendant
establishes that a defense exists which is capable of being asserted against a mere holder.
Thrift Credit Corp. v American Overseas Trading Corp. (3d Dept) 54 App Div 2d 994,
387 NYS2d 930.
Footnote 88. Seinfeld v Commercial Bank & Trust Co. (Fla App D3) 405 So 2d 1039, 32
UCCRS 1137.
A conclusory statement that instruments had been obtained as partial consideration for
goods sold and delivered to a third party was insufficient to show that the plaintiff had
taken the instruments for value, as required to show holder-in-due-course status, such as
would prevent the assertion of the defense of failure of consideration. Rubin v Hochstein
(2d Dept) 89 App Div 2d 621, 452 NYS2d 673.
Footnote 89. 281.
Footnote 90. King v Doane, 139 US 166, 35 L Ed 84, 11 S Ct 465.
As to the necessity that one claiming holder-in-due-course status have acted in good
faith, see 276.
Footnote 91. Hollywood Nat'l Bank v International Business Machines Corp. (2nd Dist)
38 Cal App 3d 607, 113 Cal Rptr 494, 14 UCCRS 782.

666 --Effect of failure to establish
View Entire Section

Only a holder in due course can recover on a negotiable instrument without regard to the
maker's assertion of a personal defense, such as fraud in the inducement. 92 If the
plaintiff fails to sustain the burden of showing holder-in-due-course status, his or her
claim is subject to all defenses that would be available on a simple contract. 93
Comment: Rather than asserting holder-in-due-course status, a plaintiff may elect to

introduce no further evidence, in which case a verdict may be directed for the plaintiff
or the defendant, or the issue of the defense or claim in recoupment may be left to the
trier of fact, according to the weight and sufficiency of the defendant's evidence; the
plaintiff also may elect to rebut the defense or claim in recoupment by proof to the
contrary, in which case a verdict may be directed for either party or the issue may be
for the trier of fact. 94
Footnotes
Footnote 92. Funding Consultants, Inc. v Aetna Casualty & Surety Co., 187 Conn 637,
447 A2d 1163, 34 UCCRS 591; Seinfeld v Commercial Bank & Trust Co. (Fla App D3)
405 So 2d 1039, 32 UCCRS 1137.
A holder who satisfied the burden of showing that it was a holder in due course was not
subject to the defense of fraud in the inducement. Federal Nat'l Mortg. Asso. v Gregory
(ED Wis) 426 F Supp 282.
As to the use of parol evidence to establish fraud in the inducement, see 673.
As to personal defenses, generally, see 549.
Footnote 93. Seamans v Miller, 142 Ga App 147, 235 SE2d 542, 21 UCCRS 1378.
Where a holder of notes sued on failed to establish that he had given value therefor, and
thus, was not a holder in due course, the maker and an indorser of the notes were entitled
to assert against the holder the defense of payment, as garnishees, to a creditor of the
payee. Stone v Star Amusement, Inc. (La App 4th Cir) 371 So 2d 367, 26 UCCRS 968.
Where the record showed that the plaintiff was not a holder in due course, because it had
acquired the note with notice that it was overdue, the maker could assert the defense of
accord and satisfaction. Foskey v International Realty Sales & Exchanges, Inc., 180 Ga
App 858, 350 SE2d 841.

667 Burden of proving accommodation status
View Entire Section

A person claiming to be merely an accommodation party has the burden of proving that
status. 95
Footnotes
Footnote 95. Riegler v Riegler, 244 Ark 483, 426 SW2d 789, 5 UCCRS 150;
Madison-Hunnewell Bank v Hurt (Mo App) 903 SW2d 175, 26 UCCRS2d 166; Marvin
E. Jewell & Co. v Thomas, 231 Neb 1, 434 NW2d 532, 9 UCCRS2d 646; Federal Land
Bank v Taggart, 31 Ohio St 3d 8, 31 Ohio BR 6, 508 NE2d 152, 3 UCCRS2d 1836.
A party opposing a contribution claim on the ground that he is an accommodation party

has the burden of proving that status. Glimcher v Reinhorn (Franklin Co) 68 Ohio App
3d 131, 587 NE2d 462, 18 UCCRS2d 511, dismd, motion overr 62 Ohio St 3d 1475, 581
NE2d 1097.
As to the liability of accommodation parties, generally, see 472.
Practice References Proof that party signed negotiable instrument as accommodation

party. 7 Am Jur POF2d 283, Status as Accommodation Party 8-23.
F. Evidence [668-677]
Research References
UCC 3-510 [1952]; UCC 3-505 [1990 Rev]
ALR Digest: Evidence 1 et seq.
ALR Index: Bills and Notes; Checks and Drafts; Uniform Commercial Code 6A
Anderson, Uniform Commercial Code 3d 3-505:4, 3-510:3, 3-510:5, 3-510:6
1. Admissibility [668-675]
668 Generally

View Entire Section
As is true in civil actions, generally, any competent evidence which is relevant to a

material issue raised in an action brought on a negotiable instrument is admissible. 96
The instrument itself is usually admissible, since production of the instrument entitles the
holder to recover on it, unless the defendant establishes a defense. 97 Moreover, where
the agreement between the parties consists of several instruments, it is proper to insist
that all of the documents be placed before the court as establishing the rights of the
parties. 98
As in other cases, self-serving statements or declarations are not admissible on behalf of

the party making them. 99 On the other hand, admissions or declarations against the
proprietary or pecuniary interest of the declarant are admissible. 1 Furthermore,
declarations and admissions made by the former holder of a note during the time of his or
her ownership of the instrument may be admissible as primary evidence against a
successor in interest of that holder. 2
Footnotes
Footnote 96. Lee v Mitcham, 69 App DC 17, 98 F2d 298, 117 ALR 1427; Shammas v
Boyett, 114 Cal App 2d 139, 249 P2d 880; In re Shama's Estate, 245 Iowa 1039, 65
NW2d 360.
Footnote 97. 660.
As to the necessity of producing the original of the instrument under the best evidence
rule, see 677.
Footnote 98. Johnson v Smith (Fla) 84 So 2d 722.
Footnote 99. Farris v Sturner (CA10 Okla) 264 F2d 537.
Footnote 1. In re Andrews' Estate, 245 Iowa 819, 64 NW2d 261.
Footnote 2. Trudeau v Lussier, 123 Vt 358, 189 A2d 529, 10 ALR3d 1188.
669 Evidence of dishonor
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code (UCC), the following are
admissible as evidence and create a presumption of dishonor and of any notice of
dishonor shown therein:

(1) a document regular in form which purports to be a protest; 3
(2) the purported stamp or writing of the drawee, payor bank, or presenting bank, made
on the instrument or on a writing accompanying it, stating that acceptance or payment
has been refused for reasons consistent with dishonor; 4 or
(3) any book or record of the drawee, payor bank, or any collecting bank kept in the usual
course of business which shows dishonor, even though there is no evidence as to who
made the entry. 5 No priority or best evidence rule is established as between the
foregoing classes of evidence; therefore, each is equally as admissible and probative as
the others. 6
Observation: Although evidence other than the three types listed by statute may be
admissible, such other evidence does not create a presumption of dishonor and of any
notice of dishonor. 7
Footnotes
A notation on a check that the account had been closed was admissible as primary
evidence to establish the fact stated in that notation. Serve v First Nat'l Bank, 143 Ga
App 239, 237 SE2d 719, 22 UCCRS 1001.
Observation: If the stamp or writing does not state any reasons for the dishonor, or if
the reasons stated are not consistent with dishonor, the stamp or writing is not
admissible. 6A Anderson, Uniform Commercial Code 3d 3-510:5.
Annotation: Admissibility of extrinsic evidence to explain or contradict bank deposit

slips, deposit entries in passbooks, certificates of deposit, or similar instruments, 42
ALR2d 600.
Observation: Although it is not necessary to show who made the entry relied upon,
it is necessary to establish that the books or records are those of the particular party and
that they were kept by it in the usual course of business. 6A Anderson, Uniform
Commercial Code 3d 3-510:6.

670 Transactions with deceased persons
View Entire Section

Under the laws commonly known as "dead man statutes," an interested person, generally,
is incompetent to testify as to transactions with a deceased individual for the purpose of
establishing a claim or defense against the decedent's estate. 8 Thus, the maker of a
note ordinarily is precluded from offering testimony as to payments made to the deceased
payee of the instrument. 9 However, the incompetency of the maker to testify as to
payments may be waived, as where the plaintiff calls and examines the defendant maker
as a witness. 10
Footnotes
Footnote 8. 81 Am Jur 2d, Witnesses 558.
Footnote 9. Broward Nat'l Bank v Bear (Fla App D2) 125 So 2d 760, 84 ALR2d 1352;
Jenkins v Jenkins, 229 Miss 499, 91 So 2d 708, later app 232 Miss 879, 100 So 2d 789.
In an action on a promissory note brought by the widow of a deceased payee, who was
not a party to the transaction giving rise to execution of the note, the defendant is barred
from testifying as to the defense of payment and from identifying and introducing into
evidence canceled checks, bank statements, and check stubs. Bradley v Buffington (Mo
App) 534 SW2d 571.
Footnote 10. Stankey v Palmer, 6 Cal App 2d 215, 44 P2d 382.
b. Parol or Extrinsic Evidence [671-675]
671 Generally
View Entire Section

The principle that extrinsic evidence is not admissible to add to, contradict, or vary the
terms of a written instrument is applicable to bills and notes as well as to other
instruments. 11 Thus, evidence offered by the makers of a note to show that they were
induced to sign the instrument by the plaintiff's promise to advance them additional funds
is inadmissible under the parol evidence rule, since it would alter the terms of the note.
12 Likewise, in a suit brought against the corporate maker of a note and its president,
parol evidence cannot be used to show that the president of the corporation signed the
instrument in a representative capacity, where the president's signature appears on the

reverse side of the note without any identifying or limiting designation of any kind; in
such a case, the president is an indorser upon whom personal liability is imposed. 13
Comments: A disclaimer of liability on a contract of indorsement must be written on

the instrument and cannot be proved by parol evidence; 14 however, parol evidence is
admissible to show what multiple indorsers have agreed concerning their liability to
one another. 15
Parol evidence may be introduced to show that no contract exists between the parties,
because an instrument was delivered subject to a condition precedent which has not been
performed, 16 or that an instrument should not be enforced because of fraud, accident,
or mistake. 17 Furthermore, the parol evidence rule does not apply if the instrument is
ambiguous. 18 In such a case, parol evidence may be introduced to explain the
ambiguity 19 and bring out the true intention of the parties. 20 Furthermore, if an
instrument is incomplete on its face, extrinsic evidence may be admitted to show the part
which is missing. 21
Comment: The signature on an instrument may be made in any name, including any
trade or assumed name, and may be made by mark, or even by a thumb print; in such
cases, parol evidence is admissible to identify the signer of the instrument. 22
Except as against a holder in due course without notice of any limitation, thus imposed,
the obligation of a party to a negotiable instrument to pay the instrument may be
modified, supplemented, or nullified by a separate agreement of the obligor and a person
entitled to enforce the instrument, if the instrument is issued or the obligation is incurred
in reliance on the agreement or as part of the same transaction giving rise to the
agreement. 23 Thus, where various documents pertain to the same transaction, they
may be read together as one contract notwithstanding a claim that the terms thus adduced
contradict a clause of a related note in violation of the parol evidence rule. 24
Footnotes
Footnote 11. Montgomery v Riess (2nd Dist) 176 Cal App 2d 711, 1 Cal Rptr 550.
Footnote 12. Marine Midland Bank, N.A. v Mattioli (1st Dept) 180 App Div 2d 406, 579
NYS2d 78.
A note payable at a certain date may not be shown to be a demand note by parol
evidence. Nesbit v MacDonald, 203 Cal 219, 263 P 1007.
Footnote 13. New York Financial, Inc. v J & W Holding Co. (Fla App D3) 396 So 2d
802.
As to indorsements without recourse, see 233.
Footnote 16. 672.

Footnote 17. 673.
Footnote 18. GTE Directories Corp. v McKinnon (Tex App Fort Worth) 734 SW2d 429.
Footnote 19. Talbot v Gadia, 123 Cal App 2d 712, 267 P2d 436; Southeastern Home
Mortg. Co. v Roll (Fla App D3) 171 So 2d 424 (involving an ambiguity created by the
striking out of a provision for interest).
Where an ambiguity exists as to whether a person signed a promissory note in an

individual capacity or as a representative, parol evidence may be introduced only if the
action is between the immediate parties to the instrument and if there is some indication
of a principal-agent relationship. Wise v Duker (Summit Co) 57 Ohio App 3d 62, 566
NE2d 1248.
Footnote 20. Kerwin v Bank of Douglas, 93 Ariz 269, 379 P2d 978, 13 ALR3d 398.
Footnote 21. Martin v Ford (Tex App Texarkana) 853 SW2d 680, writ den (Aug 26,
1993).
Annotation: Mode and degree of proof required to establish genuineness of

handwriting offered as standard or exemplar for comparison with a disputed writing or
signature, 41 ALR2d 575.
Footnote 23. 131.
Footnote 24. Pendleton Green Associates v Anchor Sav. Bank (Tex Civ App Corpus
Christi) 520 SW2d 579.
672 Showing of conditions
View Entire Section

When a promissory note is unconditional on its face, a condition may not be added to it
by parol evidence in the absence of fraud, accident, or mistake. 25 Likewise, where a
defendant has unconditionally given a guarantee of a note, a claimed defense based upon
an alleged condition subsequent pursuant to which the note is to be canceled on payment
of certain insurance proceeds cannot be substantiated by parol evidence. 26 However,
parol or extrinsic evidence is admissible on behalf of a plaintiff to show that conditions
upon which an instrument was to be effective have been performed. 27 Conversely,
parol evidence may be used by a defendant to show that a condition precedent to liability
has not been satisfied. 28 Thus, for example, such evidence is admissible against one
who is not a holder in due course to show the delivery of the instrument sued upon was
for a special purpose only. 29
Footnotes
Footnote 25. Gitt v Myers, 273 Pa Super 310, 417 A2d 664.
Parol evidence to the effect that a note was to be paid out of a particular fund is
inadmissible to deny liability on an unconditional promise. McArthur v Johnson, 216
Cal 580, 15 P2d 151.
As to the showing of fraud, accident, or mistake, see 673.
Footnote 26. Chemical Bank v 2440 Amsterdam Associates (Sup) 119 Misc 2d 460, 463
NYS2d 153.
Footnote 27. International Firearms Co. v Kingston Trust Co., 6 NY2d 406, 189 NYS2d
911, 160 NE2d 656.
Delivery is upon a condition precedent if the parties agree that the contract is not to
create a binding obligation until some event occurs. Fleming v August, 48 Wash 2d 131,
291 P2d 639.
Footnote 28. Chemical Bank v 2440 Amsterdam Associates (Sup) 119 Misc 2d 460, 463
NYS2d 153.
Footnote 29. Herzog Contracting Corp. v McGowen Corp. (CA7 Ind) 976 F2d 1062, 23
FR Serv 3d 765, 18 UCCRS2d 1170 (criticized on other grounds in Airlines Reporting
Corp. v S & N Travel (CA2 NY) 58 F3d 857); Chera v The Shores, 145 NJ Super 19, 366
A2d 994, 20 UCCRS 698; Labar v Cox (Tex App Corpus Christi) 635 SW2d 801, 33
UCCRS 1397, writ ref n r e (Nov 3, 1982) and (criticized on other grounds by Joseph v
Joseph (Tex App Houston (14th Dist)) 731 SW2d 597).
In an action brought by the payee of a note against the maker, evidence of a parol
condition that the note was to be a guaranty for an indebtedness was properly admitted.
Nawas v Holmes (Tex Civ App Waco) 541 SW2d 283, 20 UCCRS 133.
As to delivery of an instrument for a special purpose, see 189.
673 Showing of fraud, accident, or mistake
View Entire Section

Under an exception to the parol evidence rule, extrinsic evidence may be admitted to
show fraud in the inducement of a negotiable instrument, such as a promissory note. 30
For such evidence to be admissible, however, there must be a showing that some type of
device, trickery, or artifice was employed by the payee of the note other than a mere
representation the maker would not be held liable on the instrument. 31 Parol evidence
also is admissible, as between the parties to an instrument, to show that it was executed
due to a mistake 32 or accident. 33
Footnotes
Footnote 30. Scafidi v Johnson (La App 4th Cir) 409 So 2d 316, affd (La) 420 So 2d
1113, 35 UCCRS 167; Town North Nat'l Bank v Broaddus (Tex) 569 SW2d 489, 24
UCCRS 924.
Parol evidence was admissible to contradict the written terms of a promissory note,
where the evidence showed that the parties had a fraudulent intent to deceive the state
bank examiner. Cosmopolitan Fin. Corp. v Runnels, 2 Hawaii App 33, 625 P2d 390, 31
UCCRS 146, cert den 63 Hawaii 675.
Fraud in the inducement may be raised as a defense in an action on a note brought by one
who is not a holder in due course. Berry v Abilene Sav. Asso. (Tex Civ App Eastland)
513 SW2d 872, writ ref n r e (Nov 27, 1974) and rehg of writ of error overr (Jan 29,
1975).
But see American Bank & Trust Co. v Vinson (La App 2d Cir) 528 So 2d 693 (noting
cases in which parol evidence was not allowed for such purpose).
Footnote 31. Lindeburg v Gulfway Nat'l Bank (Tex App Corpus Christi) 624 SW2d 278,
writ ref n r e (Feb 3, 1982).
Footnote 32. Sapin v Security First Nat'l Bank (2nd Dist) 243 Cal App 2d 201, 52 Cal
Rptr 254; Scafidi v Johnson (La App 4th Cir) 409 So 2d 316, affd (La) 420 So 2d 1113,
35 UCCRS 167.
A note may be set aside or reformed on the ground that the promisor made a mistake of
law which was induced by the promisee's inequitable conduct. In re Henderson (BC WD
Tenn) 112 BR 231, 23 CBC2d 163.
But see American Bank & Trust Co. v Vinson (La App 2d Cir) 528 So 2d 693 (noting
that some cases have not permitted the use of parol evidence for this purpose).
Footnote 33. Seth v Lew Hing, 125 Cal App 729, 14 P2d 537, reh den 125 Cal App 738,
15 P2d 190; Stebens v Wilkinson, 249 Iowa 365, 87 NW2d 16, 71 ALR2d 277.
674 Showing of lack, failure, or illegality of consideration
View Entire Section

In a suit brought on a note or other negotiable instrument, parol evidence may not be
introduced to show an agreement which was part of the consideration for the instrument,
if that evidence contradicts or varies the terms of the note. 34 However, the defenses of
lack of consideration 35 and failure of consideration 36 may be shown by parol
evidence. Parol evidence, likewise, may be introduced to establish that the consideration
given for a negotiable instrument was illegal, even if that evidence contradicts the
instrument. 37
Footnotes
Footnote 34. Regional Agricultural Credit Corp. v Hendley, 251 Ala 261, 37 So 2d 97.
Footnote 35. Laspopoulos v Earl (La App 4th Cir) 376 So 2d 965.
As between the original maker and the original payee of a note, evidence outside the four
corners of the instrument can be considered in support of the defenses of lack of
consideration, release, waiver, and estoppel. Wagner v Bonucelli (Fla App D4) 239 So
2d 619.
Footnote 36. Houck v Martin (4th Dist) 82 Ill App 3d 205, 37 Ill Dec 531, 402 NE2d
421; Scafidi v Johnson (La App 4th Cir) 409 So 2d 316, affd (La) 420 So 2d 1113, 35
UCCRS 167.
In an action to enforce a promissory note to which the defendant raises the defense of
failure of consideration, parol evidence of the defendant's understanding that the note was
to be individually paid by another shareholder of the corporate obligor is improperly
admitted; a unilateral belief by one shareholder that another will pay the note furnishes
no defense. Aldredge v East Colonial Refuse Service, Inc. (Fla App D5) 452 So 2d 939,
review den (Fla) 456 So 2d 1181.
In an action by the payee against the maker of a note, the maker was entitled to show by
parol evidence that the consideration for the note had failed, allegedly because of the
payee's failure to fulfill obligations created by a business agreement entered into with the
maker. Ralph Stachon & Associates, Inc. v Greenville Broadcasting Co., 35 NC App
540, 241 SE2d 884.
But see American Bank & Trust Co. v Vinson (La App 2d Cir) 528 So 2d 693 (noting a
conflict of authority as to the admissibility of parol evidence).
Footnote 37. Consumers Credit Service, Inc. v Craig (Mun Ct App Dist Col) 75 A2d 525
(stating that there is an exception to the parol evidence rule when the suit is between the
original parties to the instrument and there is a claim of usury or a violation of a statute).
Where an instrument was executed as part of an illegal transaction or contract, it is

competent to show all the facts and circumstances surrounding the transaction by parol
evidence. Liberty Mut. Ins. Co. v Gilreath, 191 SC 244, 4 SE2d 126, 129 ALR 1148.

675 Showing of accommodation status
View Entire Section

Under the pre-1990 version of the Uniform Commercial Code, oral proof of an
accommodation is not admissible as against a holder in due course, so as to give the
accommodation party the benefit of discharges which are dependent upon his or her
character, as such. 38 In other cases, however, the accommodation character may be
shown by oral proof. 39 Thus, where the payee of a note knows that the comakers were,
in fact, accommodation parties, oral evidence as to that status is properly admitted; to be
a holder in due course against whom such evidence could not be offered, the payee
cannot have notice of the accommodation. 40
Footnotes
Footnote 38. UCC 3-415(3) [1952].
As to discharge of accommodation parties, see 417 et seq.
Footnote 39. UCC 3-415(3) [1952].
Footnote 40. Lee Federal Credit Union v Gussie (CA4 Va) 542 F2d 887, 19 UCCRS 630.
An individual was entitled to introduce extrinsic evidence of his alleged accommodation

status in an action brought by a bank which did not qualify as a holder in due course.
First NH Bank v Lawlor (Me) 600 A2d 1120, 17 UCCRS2d 538.
2. Weight and Sufficiency [676, 677]
676 Generally
View Entire Section

Under the Uniform Commercial Code, the burden of establishing a fact is the burden of
persuading the triers of fact that the existence of the fact is more probable than its
nonexistence. 41 Thus, the party who has the burden of proof in an action brought on a
negotiable instrument, generally, must prove the facts upon which the case or affirmative
defense depends by a preponderance of the evidence. 42

Footnotes
Footnote 41. 658.
Footnote 42. Lampe v Franklin American Trust Co., 339 Mo 361, 96 SW2d 710, 107
ALR 465; Benjamin v Blake, 121 NJL 10, 1 A2d 263.
677 Production of instrument; effect of nonproduction
View Entire Section

When the signatures on an instrument are admitted or established, production of the

instrument entitles a holder to recover on it, unless the defendant establishes a defense.
43 Where the defendant does not specifically deny the validity of the signature on the
instrument, a plaintiff who brings an action on a promissory note establishes a prima
facie case by producing the note and testifying that it was delivered to him or her by the
defendant. 44 However, where a party who claims to be the holder of a note or other
negotiable instrument does not produce it, that party does not have the benefit of the
presumption that the signatures on the note are valid. 45
Where the negotiable instrument sued upon is in the possession of the plaintiff, the
original of the document, normally, must be produced since it is the best evidence of the
obligation. 46 However, nonproduction of the original instrument is excused, and
secondary evidence of the execution and contents thereof is admissible, where the
instrument has been lost or destroyed 47 and the plaintiff has satisfied the statutory
requirements for recovery on such an instrument. 48 Thus, an individual who
establishes ownership of a lost note, presents evidence as to the terms thereof, and
accounts for the instrument's absence is entitled to recover, despite the fact that the note
itself cannot be produced. 49
Footnotes
Footnote 43. 660.
Footnote 44. Bentz v Mullins (Hamilton Co) 24 Ohio App 2d 137, 53 Ohio Ops 2d 344,
265 NE2d 317, 8 UCCRS 726.
The production of two notes on which the signatures were admitted was sufficient
evidence to establish the amount of the defendant's liability. Smith v Weindrop (Colo
App) 833 P2d 856.
If the answer admits the making of the note, the consideration is clearly shown, and there
is no dispute as to the fact that the note in question is in the hands of the payee, the only
issue to be determined is whether payment has been made on the note. Masser v Johnson
(Franklin Co) 108 Ohio App 419, 9 Ohio Ops 2d 382, 80 Ohio L Abs 61, 157 NE2d 364.

The defendant in an action on an allegedly forged promissory note was required to
present sufficient evidence in support of the contention that the signature on the
instrument was not genuine; forgery or an unauthorized signature may not be shown by a
defendant merely by relying upon the plaintiff's lack of evidence concerning the issue.
Virginia Nat'l Bank v Holt, 216 Va 500, 219 SE2d 881, 18 UCCRS 440.
As to the presumption of the validity of signatures on an instrument in the absence of a

specific denial, see 659.
Footnote 46. Vandergriff v Vandergriff, 211 Ark 848, 202 SW2d 967; Helmer v
Callaway (La App 4th Cir) 342 So 2d 254.
Footnote 47. Hach v Anderson, 240 Iowa 792, 38 NW2d 94, 9 ALR2d 968.
Footnote 48. Pecora v Szabo (2d Dist) 94 Ill App 3d 57, 49 Ill Dec 577, 418 NE2d 431,
appeal after remand (2d Dist) 109 Ill App 3d 824, 65 Ill Dec 447, 441 NE2d 360 and
(criticized on other grounds by J & B Steel Contractors v C. Iber & Sons (3d Dist) 246 Ill
App 3d 523, 187 Ill Dec 197, 617 NE2d 405); Kraft v Sommer (4th Dept) 54 App Div
2d 598, 387 NYS2d 318, 20 UCCRS 475.
As to recovery on lost, stolen, or destroyed instruments, see 303.
Footnote 49. Good v Good, 72 NC App 312, 324 SE2d 43, 40 UCCRS 1786, review den
313 NC 600, 330 SE2d 609.
G. Findings, Verdict, and Judgment [678-684]
Research References
UCC 3-303 [1952]
ALR Digest: Trial 242 et seq., 473 et seq.
5 Am Jur Pl & Pr Forms (Rev), Bills and Notes, Forms 84-86
6A Anderson, Uniform Commercial Code 3d [Rev] 3-303:5
678 Summary judgment, generally
View Entire Section

A motion for summary judgment may be filed in an action brought on a negotiable

instrument, 50 since the statutes and rules applicable to actions on contracts, generally,
pertain as well in actions on such instruments. 51 Statutes providing for summary
judgments on a debt or liquidated demand may be found to include obligations on
promissory notes, even though the notes provide for payment of attorney's fees. 52

A motion for summary judgment may be filed even before the completion of discovery.
53 However, where the facts needed to oppose such a motion are peculiarly within the
knowledge of the moving party, the motion will not be granted without affording the
nonmoving party an opportunity to complete discovery. 54
Footnotes
Footnote 50. Yslas v D. K. Guenther Builders, Inc. (Fla App D2) 342 So 2d 859; Credit
Industrial Co. v Happel, Inc., 252 Iowa 213, 106 NW2d 667; Norwood Morris Plan Co. v
McCarthy, 295 Mass 597, 4 NE2d 450, 107 ALR 1215 (stating that the summary
judgment procedure expedites the collection of debts where there is no real defense).
Since it is drastic in nature, the summary judgment procedure is to be used sparingly in

order to preserve the rights of the litigants. Kimber v Jones, 122 Cal App 2d 914, 265
P2d 922.
As to summary judgment, generally, see 73 Am Jur 2d, Summary Judgment 1 et seq.
Footnote 51. Credit Industrial Co. v Happel, Inc., 252 Iowa 213, 106 NW2d 667.
Forms: Affidavit in support of motion for summary judgmentAgainst maker. 5 Am

Footnote 52. Norwood Morris Plan Co. v McCarthy, 295 Mass 597, 4 NE2d 450, 107
ALR 1215.
Footnote 53. Federal Deposit Ins. Corp. v Hyer (2d Dept) 66 App Div 2d 521, 413
NYS2d 939, app dismd without op 47 NY2d 951.
As to treatment of a motion to dismiss or a motion for judgment on the pleadings as a

motion for summary judgment, see 73 Am Jur 2d, Summary Judgment 13.
Footnote 54. Five Towns College v Citibank, N.A. (2d Dept) 108 App Div 2d 420, 489
NYS2d 338, 41 UCCRS 503.
679 --Determination as to existence of triable issues
View Entire Section

The function of the trial court in passing on a motion for summary judgment in an action
on a negotiable instrument is to determine whether there are genuine issues of material
fact, and not to determine any issue of fact. 55 If the court determines that there are
substantial triable issues of fact, a grant of summary judgment in favor of the moving
party is precluded. 56 For example, summary judgment is properly denied in an action
to recover the balance due on four promissory notes signed by the defendant's former
managing partners, where there are material issues of fact concerning, among other
things, the exact extent of the former partners' authority. 57 On the other hand, a grant
of summary judgment in favor of an individual who has purchased a note is proper,
notwithstanding a contention by the maker of the note that he was fraudulently induced to
enter into the transaction, where the purchaser is a holder in due course who has taken the
note free of the asserted defense. 58
Comments: Fraud in factum, such as that which occurs when a maker is tricked into
signing a note without knowledge of its essential terms, may be asserted against a
holder in due course; 59 however, a holder in due course is not subject to a defense of
fraud in the inducement. 60
In an action to recover on a promissory note, the plaintiff is entitled to summary

judgment where:
(1) the plaintiff has submitted the original note containing a recital that it has been given
for value received, as well as a later letter from the defendant indicating that the note was
given for consideration;
(2) the defendant does not deny either making the note or failing to make payments
thereunder; and
(3) the defendant has simply alleged, without proof or explanation, that the note has been
executed without consideration. 61
Footnotes
Footnote 55. GTE Automatic Electric, Inc. v Martin's, Inc. (1st Dept) 127 App Div 2d
545, 512 NYS2d 107.
As to the rules and principles governing summary judgment determinations, see 73 Am

Jur 2d, Summary Judgment 26 et seq.
Footnote 56. Sakow v 633 Seafood Restaurant, Inc. (1st Dept) 186 App Div 2d 31, 587
NYS2d 338 (action by creditors for repayment of loan).
As to questions for the jury, see 680.
Footnote 57. Marine Midland Bank, N. A. v Fairwood Associates (3d Dept) 122 App
Div 2d 316, 503 NYS2d 920.
Footnote 58. Schuster v CIC-Union Europeenne Int'l, 208 Ga App 646, 431 SE2d 378, 93
Fulton County D R 1511.
3-305 [1990 Rev].

Footnote 61. Vernon v Winikoff (2d Dept) 182 App Div 2d 753, 582 NYS2d 758.
680 Determination of questions of law and fact at trial
View Entire Section

In cases tried by a jury, it is the province of the court to determine and decide questions
of law presented at the trial, and it is the province of the jury to decide or determine the
facts of the case from the evidence adduced. 62 Where there is no factual dispute as to a
particular issue, and there is, thus, no fact-finding function to be performed, the issue is
not submissible to a jury. 63 In such a case, where the outcome of an action on a bill or
note depends entirely upon the resolution of a question of law, the court may properly
direct a verdict in accordance with its determination of that question. 64
Whether an instrument is negotiable is a question of law to be determined by the court

solely from the face of the instrument, without reference to the intention of the parties. 65
Likewise, the question of whether a notation on a check requiring the payee to prove
clear title to the material sold makes the check conditional is a law question properly
addressed by the trial court. 66
On the other hand, whether a signatory of a note, such as a comaker, is an

accommodation party is a question of fact. 67 The question whether or not an
instrument is a forgery also, is one of fact for the jury, 68 as is the question of whether
there has been a ratification of a forged signature. 69 Likewise, whether the parties have
orally agreed to modify the terms of a promissory note, is a question for the jury, 70
since the resolution of the issue depends upon whether or not there has been a meeting of
the minds of the parties as to the terms of the alleged modification. 71
The amount due on the instrument normally is a question for the jury. 72 However, the
principal and interest owing on a note may be determined by the court as a matter of law
where:
(1) there is no dispute as to the amount of principal which is due;
(2) the amount of prematurity interest can readily be ascertained from the face of the
instrument; and
(3) postmaturity interest can be calculated under pertinent statutory provisions. 73
Footnotes
Footnote 62. 75A Am Jur 2d, Trial 714.
Footnote 63. Coupounas v Madden, 401 Mass 125, 514 NE2d 1316.

Footnote 64. 681.

710 F Supp 737, 9 UCCRS2d 145.
Footnote 66. Western Bank v Ra Dec Constr. Co. (SD) 382 NW2d 406, 42 UCCRS 1340.
Footnote 67. Harrington v United States (DC Del) 605 F Supp 53, 85-1 USTC P 9336, 55
AFTR 2d 85-769; Williams v Lafayette Production Credit Asso. (Ind App) 508 NE2d
579, 4 UCCRS2d 1489.
The evidence in a suit on a promissory note raised a fact question as to whether a

comaker of the instrument was an accommodation indorser entitled to be discharged for
impairment of collateral. Riceville Bank v Armstrong (Tenn App) 741 SW2d 331.
As to the burden of proving accommodation status, see 667.
Footnote 68. Buck v Coblentz (App, Montgomery Co) 18 Ohio L Abs 1, motion overr.
Footnote 69. Cook v Great W. Bank & Trust (App) 141 Ariz 80, 685 P2d 145, 39
UCCRS 214.
Footnote 70. South Carolina Nat'l Bank v Silks (App) 295 SC 107, 367 SE2d 421.
Footnote 71. Davidson v Citizens & Southern Nat'l Bank, 158 Ga App 868, 282 SE2d
355, 32 UCCRS 208.
Footnote 72. Gans v Georgia Federal Sav. & Loan Asso., 179 Ga App 660, 347 SE2d
615; Little v Rees (App, Summit Co) 23 Ohio L Abs 461.
Footnote 73. 683.
681 --Direction of verdict; judgment notwithstanding verdict
View Entire Section

Where the outcome of an action on a bill or note depends entirely upon the resolution of a
question of law, the court may properly direct a verdict in accordance with its
determination of that question. 74 A verdict may be directed in favor of the plaintiff in
the absence of evidence supporting a defense. 75 Thus, a payee is entitled to a directed
verdict in a suit on promissory notes in which it has made a prima facie case by
production of the instruments and by introducing testimony that they were unpaid, where
the makers have not denied their signatures on the notes and have failed to establish any
defenses. 76 However, if the plaintiff has failed to prove some essential element of his
or her case, a verdict for the defendant may be directed. 77 For example, where there is
insufficient competent evidence to enable the jury to calculate the amount owed on a note
with reasonable certainty, direction of a verdict against the creditor is warranted. 78
A motion for judgment notwithstanding the verdict, like a motion for a directed verdict,
challenges whether the evidence presented at trial is legally sufficient to go to the jury;
such a motion should be granted only if the evidence, when viewed in the light which
most strongly favors the party against whom the motion is directed, supports but one
reasonable conclusion and that conclusion contradicts the jury's verdict. 79 For
example, where the makers of a promissory note have proved that they were induced by
fraud to execute the note, but are unable to offer any proof that the plaintiff had actual
knowledge of facts and circumstances which amounted to bad faith, the plaintiff is a
holder in due course who takes free of fraud which is not grounded on a
misrepresentation as to the type of document which has been signed; the plaintiff
therefore is entitled to judgment notwithstanding a verdict in favor of the defendants. 80
Footnotes
Footnote 74. Steele v Vanderslice, 90 Ariz 277, 367 P2d 636 (holding that the question of
whether checks given in payment of a note constituted a discharge was one of law for the
court).
Footnote 75. National City Bank v Erskine & Sons, Inc. (App, Mahoning Co) 65 Ohio L
Abs 51, 110 NE2d 593, affd 158 Ohio St 450, 49 Ohio Ops 395, 110 NE2d 598.
Footnote 76. Bank of Brookfield-Purdin, N.A. v Burns (Mo App) 724 SW2d 262.
If no issue is raised as to the amount due on the bill or note in suit, and the ascertainment
of the amount of interest is only a matter of mathematical computation, the court may
direct the jury as to the amount of their verdict. Steele v Vanderslice, 90 Ariz 277, 367
P2d 636.
Testimony by a defendant that he had neither authorized a codefendant to borrow money

from the plaintiff nor to execute a promissory note in his behalf, and that he had not
signed the note introduced into evidence, precluded a determination that the defendant
was liable as a matter of law. Smith v Allen, 180 Ga App 624, 349 SE2d 548.
Footnote 77. Yates v Bates (App, Montgomery Co) 34 Ohio L Abs 378, 37 NE2d 395.
As in other civil actions, a judgment of nonsuit is proper if, after all the evidence is in, it
is found that the evidence, as a matter of law, is insufficient to support a judgment for the
plaintiff. MacDonald v Jackson, 117 Cal App 2d 598, 256 P2d 591.
Footnote 78. First Nat'l Bank v Damil, Inc., 171 Ga App 237, 319 SE2d 54.
Footnote 79. 75A Am Jur 2d, Trial 862.
As to the factors common to the determination of motions for directed verdict and
judgment notwithstanding the verdict, see 75A Am Jur 2d, Trial 863.
Footnote 80. Favors v Yaffe (Tex Civ App Houston (14th Dist)) 605 SW2d 342, 31
UCCRS 154, writ ref n r e (Mar 11, 1981).

The jury was not justified in returning a verdict for the defendant in an action on a
promissory note where the defense was payment and the evidence showed that the note in
question had been renewed several times after the claimed payment. L. K. Smith Co. v
Livingston (App, Darke Co) 44 Ohio L Abs 337, 65 NE2d 73.
As to proof of holder-in-due-course status, see 665.
As to the use of parol evidence to show fraud, see 673.
682 Judgment and effect thereof
View Entire Section

The rules concerning findings of fact and conclusions of law which govern in civil
actions, generally, are applicable in actions on bills and notes. 81 Thus, the judgment
entered on a bill or note must conform to the pleadings, as well as to the verdict or to the
judge's findings of fact and conclusions of law. 82 The judgment also must be supported
by the evidence. 83
As in other cases, the verdict rendered in an action on a bill or note may cure a defect in
the pleadings. 84 In addition, the rule that a judgment merges the cause of action on
which the suit resulting in the judgment was brought generally applies to judgments on
negotiable instruments; as a result, there is a discharge of the paper when a judgment is
entered on it, and subsequent suits on the instrument are barred. 85
Footnotes
Footnote 81. Gleason v Thayer, 87 Conn 248, 87 A 790.
Footnote 82. Edmondson v First State Bank (Tex App Corpus Christi) 819 SW2d 605.
Footnote 83. Derbigny v Bank One (Tex App Houston (14th Dist)) 809 SW2d 292.
Forms: Judgment or decreeBy default against maker. 5 Am Jur Pl & Pr Forms (Rev),
Judgment or decreeOn note containing warrant of attorney (cognovit note). 5 Am Jur

Footnote 84. Bjelde v Dolan, 248 Wis 153, 21 NW2d 258.
Footnote 85. 409.
683 Measure and amount of recovery

View Entire Section
The amount of the recovery on a negotiable instrument normally will be the face amount
of the instrument, with interest and the amount of stipulated attorney's fees, if reasonable.
86 The principal and interest owing on a note may be determined by the court as a
matter of law where:
(1) there is no dispute as to the amount of principal which is due;
(2) the amount of prematurity interest can readily be ascertained from the face of the
instrument; and
(3) postmaturity interest can be calculated under pertinent statutory provisions. 87

When the evidence clearly shows the amount of the maker's indebtedness on a note, any
verdict less than the proven amount is erroneous. 88
Observation: If an instrument provides for interest but the rate of interest payable
cannot be ascertained from the description used, interest is payable at the judgment rate
in effect at the place of payment of the instrument at the time interest first accrues. 89
A holder in due course is entitled to collect the full amount of a note from the maker
rather than the amount paid for the note. 90 However, a holder takes the instrument for
value only to the extent that the agreed consideration has been performed. 91 As a
result, the taker is a holder in due course only as to a fraction of the face amount of the
instrument, which fraction is equal to the value of the partial performance divided by the
value of the total performance. 92 Moreover, since the pledgee of an instrument is a
holder for value only to the extent of the amount of the debt for which a note or other
instrument is pledged as security, the pledgee cannot recover anything in excess of that
amount in an action against the obligor of the note if the defendant has a defense against
the pledgor. 93
Comment: A purchaser of a limited interest in an instrument, such as a pledgee in a

security transaction, may enforce the instrument only to the extent of his or her interest.
94
Footnotes
Footnote 86. National Bank of North America v Around Clock Truck Service, Inc., 58
Misc 2d 660, 296 NYS2d 606; Coastal Shutters & Insulation, Inc. v Derr (Tex App
Houston (14th Dist)) 809 SW2d 916.
In a suit against an accommodation indorser of a note, prejudgment interest can be

awarded only from the date on which the indorser received notice of dishonor of the
instrument. Gaffin v Heymann (RI) 428 A2d 1066, 32 UCCRS 176.
As to limitations on the recovery of attorney's fees, see 684.

Footnote 87. Henty Constr. Co. v Hall (Mo App) 783 SW2d 412.
Once a jury found for the payees on a note, their damages in the form of principal,
interest, and attorney's fees followed as a matter of law, and the court could calculate
those amounts and enter judgment, even though the jury did not award any damages.
Campbell v Kelley (Mo) 719 SW2d 769.
Annotation: Right of holder of commercial paper to interest or finance charges

applicable to period after acceleration of maturity of obligation, because of debtor's
default, 63 ALR3d 10.
Time from which interest is recoverable on demand note or like demand instrument
containing no provision as to interest, 45 ALR2d 1202.
Rate of interest after maturity on obligation which fixes rate of interest expressly until
maturity, 16 ALR2d 902.
Footnote 88. Kaiser Invest., Inc. v Linn Agriprises, Inc. (Miss) 538 So 2d 409.
Footnote 89. 118.
Footnote 90. Progressive Finance Corp. v Vining, 115 Cal App 423, 1 P2d 1004.
Footnote 91. UCC 3-303(a) [1952].
Footnote 93. 644.
Footnote 94. Official Code Comment 4 to UCC 3-302 [1952].
684 --Limitations on the recovery of attorney's fees
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In the absence of proof of an obligation to pay, attorney's fees are not authorized merely
by a provision in a note therefor. 95 Thus, if the contract fails by reason of lack of
consideration, there can be no allowance of attorney's fees. 96 Similarly, there can be no
recovery of such fees in an action on a demand note in the absence of a showing that
demand for payment has been made, since there can be no default under the terms of such
a note until demand has been made. 97
The amount of any attorney's fee awarded in an action on a promissory note must be
reasonable. 98 In a suit to collect on a promissory note the trial court acts properly in
limiting an award of attorney's fees to the 10 percent stipulated in the note, rather than
awarding a greater amount alleged by the plaintiff to be reasonable. 99
Footnotes
Footnote 95. Waterman v Sullivan, 156 Colo 195, 397 P2d 739.
Annotation: Excessiveness or inadequacy of attorney's fees in matters involving

commercial and general business activities, 23 ALR5th 241.
Footnote 96. Garland v Smith, 131 Cal App 517, 21 P2d 688.
Footnote 97. Green v Carlstrom (4th Dist) 212 Cal App 2d 240, 27 Cal Rptr 850.
As to the maturity of demand instruments, see 190.
Footnote 98. F. R. Hernandez Constr. & Supply Co. v National Bank of Commerce (Tex)
578 SW2d 675, rehg of cause overr (Apr 18, 1979) and (not followed on other grounds
by Stokley v Hanratty (Tex App Houston (14th Dist)) 809 SW2d 924).
Annotation: Necessity of introducing evidence to show reasonableness of attorneys'

fees where promissory note provides for such fees, 18 ALR3d 733.
Footnote 99. Coastal Shutters & Insulation, Inc. v Derr (Tex App Houston (14th Dist))
809 SW2d 916 (also holding that the limitation of attorney's fees to the amount stipulated
in the note was not a matter of affirmative defense which the defendants were required to
plead).

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BILLS AND NOTES

Copyright 1998, West Group

Copyright 1998, West Group

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A. In General; Origin and Development of the Law; Scope of UCC Article 3;

1. Definitions; Nature of Commercial Paper [1, 2]

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Commercial paper is governed by the provisions of Article 3 of the Uniform Commercial

Copyright 1998, West Group

Footnote 3. Ballentine's Law Dictionary 3d.

Forms: Terms used in commercial paper; Types of negotiable instruments. 19 Am Jur

2 Contractual nature of negotiable instruments

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Nonnegotiable instruments are governed by the rules of law applicable to ordinary

Footnote 6. 17A Am Jur 2d, Contracts 1 et seq.

As between the immediate parties, a negotiable instrument is merely a contract. Official

If an acceleration term in an instrument is uncertain it may fail on ordinary contract

Footnote 10. Weissman v Banque De Bruxelles, 254 NY 488, 173 NE 835.

Footnote 14. 5 et seq.

Footnote 15. 21.

Footnote 16. As to consideration, generally, see 141 et seq.

As to want, failure, or illegality of consideration as a defense, see 557 et seq.

As to the burden of proof regarding want, failure, or illegality of consideration, see

Footnote 18. UCC 3-102(a) [1990 Rev].

2. Origin and Development of Law [3-12]

Copyright 1998, West Group

3 Generally; the law merchant

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Footnote 22. Commercial Bank of Kentucky v Varnum, 49 NY 269.

Copyright 1998, West Group

Footnote 24. Commercial Bank of Kentucky v Varnum, 49 NY 269.

Footnote 26. Weissman v Banque De Bruxelles, 254 NY 488, 173 NE 835.

Footnote 29. Hibbs v Brown, 190 NY 167, 82 NE 1108.

Footnote 30. Chauncey v Arnold, 24 NY 330.

Footnote 33. UCC 1-103.

Footnote 34. Official Comment 3 to UCC 1-103.

4 Uniform Negotiable Instruments Act

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Footnote 40. Official Comment to UCC 3-101 [1952].

b. The Uniform Commercial Code [5-12]

(1). In General [5-9]

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Footnote 41. 1 Anderson, Uniform Commercial Code 3d 1-101:2.

Footnote 42. 15A Am Jur 2d, Commercial Code 2.

Footnote 43. UCC 1-101.

Footnote 44. 15A Am Jur 2d, Commercial Code 20.

Footnote 45. 1 Anderson, Uniform Commercial Code 3d 1-102:36.

6 Purpose of adoption; repeal of inconsistent laws

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Footnote 47. UCC 1-102(2).

Footnote 48. UCC 10-103.

Footnote 49. UCC 10-102.

Footnote 50. UCC 10-102.

Footnote 51. UCC 10-102.

Footnote 52. UCC 10-104.

7 Application where United States is a party

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As to preemption by federal law, see 8.

Footnote 55. Official Comment 4 to UCC 3-102 [1990 Rev].

8 Preemption by federal or international law

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In 1989, the United Nations Commission on International Trade Law completed a

Footnote 57. Official Comment 3 to UCC 3-102 [1990 Rev].

Footnote 58. Official Comment 3 to UCC 3-102 [1990 Rev].