Relates to the revision of articles 3 and 4 of the uniform commercial code; repealer

Summary of provisions

Section 1 of the bill repeals existing Article 3 of the UCC ("Commercial Paper") and enacts a new Article 3, entitled "Negotiable Instruments."

Section 2 repeals existing Article 4 of the UCC and enacts a new Article 4 ("Bank Deposits and Collections").

Section 3 provides for an effective date of July 1, 2015, and clarifies and specifies the applicability of the amendments.

Justification

In 2014, the Legislature passed a bill which updated Articles 1,7 and 9 of the Uniform Commercial Code (Chapter 505 of 2014). This bill would modernize two additional articles of the UCC and bring New York up to date with comparable revisions enacted in other states. Every state except New York has already enacted the 1990 revisions to Articles 3 and 4 of the UCC. In most states, these laws have been in place for about 20 years.

Article 3 governs negotiable instruments, i.e. checks and some notes. Article 4 governs bank deposits and collections, and establishes the legal framework for a customer's dealings with a bank. Together these Articles comprise a unit that governs instruments (and the resulting debits and credits) from the time they are issued until the time when final payment is made or the instrument is dishonored. Revised Article 3 treats additional types of instruments as "negotiable," and therefore subject to the Article 3 rules. Included in the new definition are notes with variable rates of interest (such as variable rate mortgage notes), as well as checks that are not expressly made payable to order or to bearer. Because there are no legal rules covering non-negotiable instruments (except as courts may apply Article 3 by analogy), the revisions provide clarification of the rules that govern such instruments.

Likewise, Article 4 expands the definition of "bank" to include financial institutions other than commercial banks.

Many negotiable instruments are endorsed not by a writing on the back of the instrument, but by a writing on a separate piece of paper known as an "allonge." The revisions clarify the status of such writings,

permitting them to qualify as endorsements even if not pasted or stapled to the instrument and even if there is ample space on the instrument itself for an endorsement.

The revisions eliminate wasteful circular litigation in instances in which a check is stolen and the payee endorsement is forged. They clarify that the intended payee, having never received the check, retains its right to be paid by the drawer, although it cannot sue for conversion. The drawer retains its right to be recredited by its bank for unauthorized payment of the check, although it likewise cannot sue for conversion. The drawer's bank recovers against the bank that dealt with the thief, thus, the loss falls on the bank that was best able to prevent it.

The revisions expressly state that a cashier's check and a teller's check are within the definition of "check," and provide some new rules to protect payees of such checks from the bank's unjustified refusal to pay such instruments at the behest of a customer who originally instructed the bank to issue the instrument, but has now decided to abort the payment. The revised rules discourage dishonor by making the bank liable for the damages caused to the payee, including, if advance notice has been given, the payee's consequential damages.

New York law on accord and satisfaction - the practice of endorsing a check in payment of a disputed amount with the words "in full satisfaction" - is altered by the revisions. The revisions permit a debtor to discharge its debt by making a payment that conspicuously states that it is in full satisfaction of the debt, but offers protection to an organizational creditor by enabling it to avoid inadvertent discharge by notifying its debtors to send payment of such disputed amounts to a specific location other than the location at which payments are normally received. (A non-organizational creditor that inadvertently cashes such a check can reverse the discharge by returning the funds to the debtor.)

Automated processing is recognized in a number of places in the amendments. First, because most checks are not manually inspected, it is the customer's obligation, upon issuing a postdated check, to inform its bank of that fact so that it is not inadvertently paid. Likewise, a customer that wishes to stop its check must describe the item with reasonable certainty so that the check can be flagged electronically.

Current Article 4 establishes the time when a stop order, legal process, or other instruction is received too late to affect payment of an instrument as the moment the check is "posted," a term that contemplates a manual clerical process that is inconsistent with electronic processing. The revisions permit a bank to establish a cut-off time and date, within prescribed parameters.

The revisions provide for electronic presentment of checks and for retention of check images when checks are truncated. The rules governing electronic collection of checks and funds availability, however, have increasingly been federalized, largely as a result of New York's longstanding failure to enact the revisions.

Finally, the revisions establish a comparative negligence standard in an instance in which both the bank and its customer were negligent with respect to a loss arising from an unauthorized signature or alteration of a check. Although this standard may have been novel when the revisions were first drafted, it is substantially identical to the Federal Reserve's Regulation CC (governing check collection), which currently provides that: "(c) Comparative negligence. If a person, including a bank fails to exercise ordinary care or act in good faith under this subpart in endorsing a check (§ 229.35), accepting a returned check or notice of nonpayment (§§ 229.32(a) and 229.33(c)), or otherwise, the damages incurred by that person under § 229.38(a) shall be diminished in proportion to the amount of negligence or bad faith attributable to that person "(12 C.F.R. 229.38(c)).

In 1962, when New York's current versions of Articles 3 and 4 were enacted, payments were paper-based, check processing was in its infancy, and banks were limited in their ability to open branch offices within New York State, much less nationally. Today, these transactions are electronic, processing may be virtually instantaneous, and banks operate across state and national lines. Yet New York currently remains governed by an antiquated set of commercial laws that is no longer even taught to law students. These laws-present a trap for the unwary advisor, who is likely to consult the uniform version of these Articles, not realizing that New York is the only state that has failed to enact the 1990 amendments.

Additionally, they present troublesome choice of law problems for practitioners when part of a transaction takes place in a "new statute" jurisdiction, and part in New York, resulting in a lack of predictability as to outcome.

The result of the failure to enact the revisions has been to render New York law increasingly irrelevant, as parties to banking transactions have sought to elect the law of another jurisdiction, whenever possible, and to resolve risk allocation issues governed by these Articles by contract or system rule. Additionally, federal agencies are now addressing by regulation payment issues that fall within the scope of Article 4, on the assumption that New York will not enact such revisions if they become part of the Uniform Commercial Code. Enactment of the revisions cannot erase the damage done, but will prevent the further erosion of New York's payments law.

New York is under increasing competition to maintain its rank as a leading commercial jurisdiction. Today, significant commercial transactions may be domiciled in a U.S. jurisdiction that has modernized its law, or in a foreign locale that has a mature legal system. Keeping New York's commercial law as modern as any in the nation is important for maintaining New York's status as a preeminent commercial jurisdiction.

Fiscal implications

None.

Effective date

The bill provides for an effective date of July 1, 2015, and clarifies and specifies the applicability of such amendments.